QAV 516 Club

Cameron  00:07

Welcome back to QAV. This is episode 516, we’re recording this on the, I think it’s the 26th of, I think it’s April, today. I think it’s 2022. I have no idea what’s going on, but what else is new? How are you, TK?

Tony  00:28

Yeah, we’ve had a great time. We’ve had lots of people staying with us. We had Jenny’s sister and her daughter, we had Ruddy, people coming around to watch the races. It’s just been a great time. But they’ve all gone back now. Although, Alex’s boyfriend Sean comes in tonight. He’s working in Sydney for a few days and staying with us, but he won’t be a problem.

Cameron  00:50

No, he’s a nice guy. Lovely guy.

Tony  00:52

He’s a lovely guy, yeah.

Cameron  00:53

Good stuff. We do have a special guest on the line, but before we get to him… well, I’ll welcome him: Chairman Map from the Australian Shareholders Association. The Chairman Mao of the Australian Shareholders Association, Chairman Steven Mabb. Welcome back to QAV, Chairman Mabb.

Steven  01:09

Thank you very much, honoured to be back. And yeah, looking forward to having a quick chat today before you guys get on to more important things.

Cameron  01:17

You can tell us about the long march that you’ve been doing with the ASA. Well, the big news that we have to cover obviously, this week, I’m sure everyone’s heard this by now is that Elon Musk is buying out QAV. It’s been a bit of a tense negotiation over the last couple of weeks, he upped his bid 60 odd billion dollars, I think, was the last I heard and we’d like to welcome Elon as our new Overlord and Master.

Tony  01:47

Well, he had to sell out eventually, I mean, he wants to control everything. He didn’t like us pointing out that growth stocks to the moon will never work out in the long term. And hey, Netflix is down again this week as well, so kind of all playing out there for people to watch.

Cameron  02:03

Well, he hasn’t bought that yet. When he buys that he’ll turn that around as well. Steven Mabb, I think you’ve been on the show since you’ve been chairman. How long have you been chairman now, is it since the beginning of this year or was it last year? I can’t even remember?

Steven  02:16

No, only since March officially. So, I don’t think I had been on the show since then. But yeah, appreciate the invite back and obviously been following lots of what our regular QAV members and subscribers are posting in the chat and on the forums and all that kind of stuff, and there are a few things popping up there that I thought might be, you know, helpful to have a quick chat about today. So yeah, appreciate the invite.

Cameron  02:40

So, specifically, you wanted to talk about why it’s important that we don’t be like Tony and blow off AGMs — why we should vote in the AGMs. Because, for those listeners who are new, Tony’s position over the last few years of doing this show on voting in AGMs is he rarely bothers to get involved unless it’s a big issue, like something that particularly grabs your attention, your vote, but generally speaking you don’t tend to vote, Tony. Steven seems to think that’s a big mistake — big, huge — and he’s gonna, you guys are gonna… two men enter, one man leaves in the QAV dome.

Steven  03:27

Absolutely. No, I think the first thing I’d say is while TK is an extraordinary man, this is pretty ordinary or usual behaviour. Most shareholders don’t vote at GMs and don’t bother. So, with that in mind, I just thought it might be worth mentioning what ASA, or the Shareholders Association, does there to help out if you are not that inclined to vote yourself or to bother with it all. So, maybe kind of stepping back a second. If you’re a shareholder, obviously, you get the right to vote at each of your shares at an annual general meeting on the various resolutions that the company’s putting up for shareholders to vote on. And as I said, most people probably don’t vote it seems. But it’s a bit like, maybe it’s a bit like democracy; if no one votes, you know, you kind of don’t really get a say. So, yeah, what ASA does is all volunteers, but we have a team of volunteers across the country that are what we call company monitors, and those folks are just, you know, regular shareholders like all of us that are really interested in the companies and the governance of the companies and the way that they’re, kind of, treating and respecting their shareholders. So, they’ll go along to the AGMs and they will vote their own and/or any other shareholders or members of ASA’s proxies if they would like us to. And what they’ll do is they’ll have a look at the annual report when the company puts it out, and then ideally, they’ll go and have a meeting with the company before the Annual General Meeting. And that’s something that, again, as a regular shareholder you don’t really get a chance to do most of the time, you know, individual shareholders rarely get access to particularly bigger company management and boards. So, the ASA monitor will. They normally meet with the Chair of the company, maybe the head of the remuneration committee from the board, maybe the company secretary, and they’ll just talk through what it is that the company’s proposing to have their shareholders vote on, talk through the pros and cons of that, make sure they’ve got a really clear understanding and then from there write up a report and they’ll put that report on our website where anyone that’s a member can go and read what it is that the monitor has, kind of, determined from that meeting and from what the company is doing, and recommend how you should vote. And again, if you’re not the kind of person that likes to vote, or you couldn’t be bothered — and I wasn’t, you know, I’d throw those letters in the mail when I first started getting them as well. You can allocate your votes to ASA and that ASA monitor will go and vote them on your behalf. It’s all anonymous, we don’t know who you are and how many shares you own and anything like that, the registry controls that all. So, computer share or link or those various different people that you get, or companies that you get the letters from, they’ll just aggregate all that together and tell us on the day of the meeting, “here you are ASA monitor, you’ve got this many votes to vote on the day.” So, you know, broadly speaking that’s kind of how the process works. If you’re interested I can, kind of, talk through a few of the hot issues, I suppose, that the monitors really focus on.

Tony  06:20

Yeah, Steve, maybe you could just take us through some of the mechanics of voting at AGMs. I mean, what putting a proxy in means when you give it to ASA, how do you do that and/or give it to the chairperson of the board? What’s the difference? Just walk us through that process. How do I do that?

Steven  06:37

Yeah, absolutely. So, the process itself normally is you’ll get a letter or an email from the registry, or sometimes the company if they’re not using a registry, with notice of the meeting and what the resolutions are, and then asking you for your votes. And if you don’t vote, generally what happens is your votes will just be allocated to the chair of the meeting or the chair of the board, and typically, the chair of the board is going to vote for whatever it is that they want to do. They’re not going to think about each and every shareholder, they’re just going to think through, you know, what it is that as the head of the board they think should happens. So, when you get those letters or those emails you have the option to actually look at it all and go in and vote on each resolution, or you can just write in a proxy. So, that’s where you can put in the chair of the meeting, which is the default option normally, or you could write in Australian Shareholders Association, for example, and not have to worry about all the issues. The Australian Shareholders monitor would then, based on what we think is in the best interests of retail shareholders, vote on each of those issues on your behalf. So, it’s pretty simple, you just write that in either on the email that you get or online, or the paper form. There is another way you can do it too, so if you don’t want to do that each and every time you can do what’s called a standing proxy where you fill out a form for all the companies you own and you send it off to the registry and say “here’s the twenty companies,” for example, “that I own with your registry, I’d like to nominate the Shareholders Association as my standing proxy so that I don’t even have to bother each time I get the form, they’ll just go and do that.” Now, if you buy and sell a company you have to update it because it’s not default for you as a shareholder, it’s based on the companies that you nominate with the registry when you fill that form out. So, it’s a bit clunky, we’d love it to be a lot easier. The registries on the ASX at the moment don’t allow us to make it any easier. We are hoping when the new clearing system comes in, the current system being Chess that most people know about, the ASX are trying to or planning to update that system. And once that’s up and running, they’ve told us that it shouldn’t be a lot easier just to make this a simple process and just to have a standing proxy all the time that you can do online that covers everything. So, hopefully down the track it’ll get a bit easier. But in the meantime, either fill out that form and send it the registries, or you do it for each and every company each time they send you the voting form or the notice of meeting.

Tony  08:55

So, take us through an average company if you can. How much of the vote would the ASA proxies control at an AGM?

Steven  09:02

Yeah, so that’s a good question. I mean, across the whole market we generally vote around $4 billion worth of proxies a year. So, it’s a pretty big number. And for a lot of the companies the ASA proxies will be in the top twenty. So, as an individual shareholder you don’t have a lot of clout normally, but collectively when all of the ASA members and other retail shareholders give us their proxies, we typically end up somewhere in that top twenty list of shares being voted. So, you know, well, I wouldn’t say it’s enough to move the needle on every issue, there’s times where the vote can be really close and 1 or 2% might be enough to move the outcome one way or the other. Particularly on things like remuneration, where if you’re not familiar, each year there’s what’s called a non-binding vote on remuneration. So, that’s kind of the incentive plan and the salary plan for the management team etc., and the company puts that to shareholders each year. It’s not binding in the sense of how it’s voted on doesn’t necessarily mean the company has to change the plan, but what does have some teeth is a provision that was brought in a few years back which essentially is called a strike. So, if at least 25% of the shareholders vote against the remuneration plan because they’re unhappy with how the management or the board’s been rewarded, or, you know, how misaligned it might be with shareholders, all those kinds of issues, if at least 25% of shareholders vote against it and they get a first strike, that’s recorded. And then the following year, if the same thing happens again and there’s a second strike against remuneration report, the board or a number of board members can be spilled or a resolution can be put forward to spill the board. So, it does have some teeth. There’s this new way, if you like, that, you know, didn’t exist twenty/thirty years ago for shareholders to have their say when they’re really unhappy with how management’s being incentivised, rewarded, performing, etc. And it’s, you know, it’s very complex, it’s the most difficult part of an annual report to read, I find, is the Rem report. It’s not consistent across companies, and, you know, as an individual shareholder you’re probably not that inclined to read through these for all the companies you own. And again, that’s where ASA can help. The monitor that covers that company — and most monitors will only cover one or two companies a year because it is pretty hard and complex and time consuming — they’ll dig into all that detail for you and make a judgement call on whether the remuneration plan this year is fair and reasonable and looks after you as a small shareholder. So, that’s an issue where, you know, 1 or 2% of the vote that ASA might vote, for example, can have a meaningful difference on whether the remuneration plan records a strike or not. The other thing is directors. So, I think the other major thing you want to have your say on as a shareholder is whether the directors or the board members that have been put forward for election or re-election are a good fit for you as a shareholder in the company in general. So, while the bars a lot higher there, you know, you only have to get 50% plus of the vote, I think, to be elected. Most of the time, most of those directors get in with 98/99% in favour. When you see a significant against vote, 10-20% of shareholders voting against the director, that’s normally a warning shot for the chair to say shareholders are really not supportive or not happy about this person and you may want to consider future director nominations — and whether this person stands again in the future, for example. So, even a few percent there can sway the longer term thinking of the board and the chair around whether this director is a good fit, for example, for this company.

Steven  09:02

I think probably the only times I’ve ever voted in AGMs have been for the Rem report, if I haven’t, if I’ve taken a dislike to the board in general. I think that’s an important distinction to make: a Rem report, perhaps I’ll be mischievous and say even deliberately is difficult to read. I can be less mischievous and say that putting together a Rem incentive plan for a CEO can be a little complicated, but you know, it shouldn’t be. Should just be get the share price up and that’s it, get your bonus. But they do make it more complicated than that… I think these days people view the Rem report firstly to say whether it’s a vote in favour or not of the board, and secondly, it’s a vote in favour or not of the Rem report. So, the first one is probably the one that we all focuse on. So, yes, the very few times I voted… and of course the ultimate vote is just selling shares if you don’t like what the board’s doing, right? You don’t have to sit around and, you know, patiently try to sway their minds, just sell your shares and move on. There’s plenty of other companies. So, the Rem report I think is important. The other one which I just want to highlight which is important too is mergers, acquisitions, and takeovers. So, take us through the mechanics of that. They often also have that 75% rule and it’s also a little bit more complicated, because sometimes it’s 75% of the people who were there or the votes cast at the time. So, that’s the other one where I’ve voted in the past. I think the most recent time I’ve voted and probably the only time that I can recall was when Alacer Gold was proposing to merge with SSR mining in the US and it looked close and I thought, okay, maybe my vote will help it get over the line when I put it in. But there are some special rules around that often too, aren’t there?

Steven  14:05

Exactly. Yeah, so, again when that comes up, you know, that’s normally outside AGM season, it might come up at some other point during the year. Then, the ASA monitor and our policy and advocacy people will take a look at it and then write a, you know, a thorough review of the situation for regular shareholders to read and make your decisions from. And, I guess a segue there is capital raisings in general. So, that’s something else the monitors really focused on with the company, to make sure that when a company does raise capital and issues new shares, that retail shareholders are getting a fair deal; they’re getting the same deal as the big guys do, for example. And surprisingly, sometimes that doesn’t happen. You would think that they would, but there’s — particularly below the, you know, the ASX 50 — there’s times where companies will raise capital and not give their retail or their small shareholders a chance at all to participate. So, you’re just instantly getting diluted when that happens, for example. It happened quite a bit during the COVID cough, where some companies got into pretty quick financial trouble and had to raise capital quickly. And obviously, it’s a lot easier for them to go to Macquarie or someone and, you know, get a big institution to buy in than it is for the more time-consuming process to send out paperwork and letters and all that kind of stuff to their smaller shareholder. So, if it’s really a matter of survival and life and death for the company and they had to act incredibly urgently, the ASA wouldn’t normally ding them for that. But outside of that where you’re just raising capital for acquisitions, balance sheet strengthening, all the things that the companies use it for, we expect that the retail shareholders get at least the same opportunity to participate and the same kind of discount as the bigger shareholders do. And when that doesn’t happen, again, that’s a time where we’d consider voting against the directors when they’re up for re-election, because they haven’t acted in the best interest of their shareholders. And remember, the job of particularly the independent directors is to represent all shareholders, it’s not to look after management. So, if you’re an independent director on an ASX listed board, your small shareholders are just as important to you as the management of the company — or they should be, and I’m not going to say that’s always the way they think, but that’s how they’re supposed to think. They’re supposed to be representing all shareholders and all stakeholders equally, not just the management of the company.

Tony  16:21

So, does that mean that you should be running for ASX boards as our independent director nominee, Steve, look after us?

Steven  16:27

I’m far too smart for that, mate. No, look, I don’t have any… personally, I don’t have any aspirations to do that. I think it is a pretty tough job; there’s a lot of pressure and, you know, a lot of eyeballs and a lot of media scrutiny on you. So, it’s not something I’m personally that motivated by. I mean, ASA’s a volunteer organisation, so I’m doing all this, you know, with my spare time and because I think it’s a good cause. And like you, it concerns me when smaller retail mom and dad shareholders aren’t getting a fair deal or are getting overcharged or, you know, paying too much in fees, all those kinds of things. So, that’s the reason I personally got pretty active within ASA to try and help out a little bit there, if I could. But yeah, I do think just as people who have been posting about voting in AGMs, I get it. It’s not something that everyone’s going to dig into and read every report and vote on every issue. So, the next best option, I think, is to either find someone that you trust that does do it or if not then look to the ASA as someone that could go and vote on your behalf at the companies we cover. We don’t cover every company because we don’t have enough people, but we try and cover the top 200 plus companies. So, all those companies with higher average daily trade on the QAV list, they’re normally the companies that someone from ASA is going to be monitoring and voting on. And you can see all of the policies on our website, so if you want to make sure that you’re happy with them and you think we’re representing you fairly all that stuff is really clearly spelled out on the website around how we vote and what our policies are. And you can change it at any time. So, if you decide you don’t like it or you want to vote differently for one company or the other, you can do that, too. It’s not something that you can’t change. You can change it, you know, right up to a minute before the meeting kind of thing if you choose.

Tony  18:03

You said before that the ASA reps can meet with the board or the chair of the subcommittee’s beforehand. What kind of reception do you get? Do they take you seriously or are you just a bother?

Steven  18:12

I have to say, very high level of respect from 95%+ of the companies, I’d say, that we cover. Most of the companies do really want a positive relationship with their small shareholders, it’s a PR nightmare for them if their small shareholders are being quoted in the press or the ASA’s quoting them in the press. So, most of the companies do really respect that conversation and give us the time to work through those things. Where you see, I guess, the opposite may be is where you’ve got boards or founders that don’t really believe in good governance in general and they’re going to do it their way. And as you said, Tony, that’s fine. If you know that going in and you’re happy with someone running the company that way, buy the shares; if you’re not, don’t buy the shares. You know, that’s my pragmatic approach to that kind of board or that kind of company. But also, when companies come in to the ASX 200 or 300, that’s often a time where ASA can really help them shape better governance and better respect for their smaller shareholders. Because a lot of the time those smaller companies just haven’t had the contact or haven’t had to worry about what their smaller shareholders think. And when they get to the big leagues, if you like, a lot of the time those first few meetings with those boards can be really helpful to them. They’re like, “what are you guys looking for? And why do you look for that? And,” you know, “how do we do that?” And there’s a few companies that I’ve monitored up in Queensland that after the first year of monitoring them, in the subsequent couple of years, they have really improved how easy it is to read their report; how well they communicate, how they, you know, have incentivize their management. So, sometimes I think it may not be wilful, it’s just they haven’t ever really had to worry about really transparent or super clear governance until they get to the big leagues. And there’s a company I’ll talk about briefly, one called EML which is Brisbane based. It’s an ASX 200 company and I owned this company prior to my QAV conversion. This was a Motley Fool recommendation that I had bought, and the story had been great. We weren’t covering them, so I volunteered to cover them and I went and met with the board prior to the AGM. And they said a couple of things that kind of irked me a little bit, but they also — this was the COVID year, 2020 — they decided to use discretion to pay out a bunch of management bonuses when they hadn’t hit the numbers using the COVID disruption as the excuse: “wasn’t our management’s fault that COVID happened, and as a result they’ve worked really hard and we’re gonna pay them their full bonuses anyway.” Now at that point in time, shareholders were down 40% for the year. So, if you’d had of held the shares for that full financial year you were down a lot, and yet they were going to use discretion as a board to pay out management bonuses in full. And they were acquiring a business in Ireland called PFS which they had renegotiated the deal after the COVID crash happened to buy it cheaper, and that was part of the justification they were using to pay out bonuses in full, too, because management did such a good job with this renegotiation. Anyway, at the AGM that came up they didn’t get a strike, ut there was a significant vote against the Rem report, and I asked the question of the Chair “why did you feel it was appropriate?” And he basically said, “look, not only did we use discretion, but we’d use it again if we have to. We’re in a competitive marketplace to people.” So, he was really saying “we don’t have an incentive plan. We’re just going to pay out bonuses in full,” I think, “regardless of whether we hit the numbers or not.” And then subsequently, a couple of months later, the Irish Central Bank announces an investigation into PFS for alleged money laundering. So, the share price created because of this acquisition that they’d made that was supposed to be, you know, one of the key reasons management deserved a bigger bonus was now a very questionable purchasing. The share price has bounced up and down a little bit since then, but it hasn’t really recovered. So, I’ve only mentioned that story to say if I hadn’t have gone in and monitored them and then written up that report, I’m not sure some of that would have come out for small shareholders at the AGM and in the report afterwards. And some people did read that and it did change their minds, I think on whether EML was a good investment at that point in time. Now, who knows, they might go gangbusters from here. I’m not casting any aspersions on them, just using it as an example of that access to management and that deeper review of their Rem structure and why they were using discretion to pay bonuses, for example. So, that’s an example I guess of something you get out of the monitoring process that you don’t necessarily read anywhere else.

Cameron  22:25

Steve, I forgot to tell you we’re live streaming this to the market.

Steven  22:30


Cameron  22:34

EML won’t be happy, because I just checked their share price. They’re down 38% today. 38% today!

Steven  22:45

I don’t know what the news is today, but they went down 40% when the ICB announced, the Irish Central Bank announced the investigation. It was up 40% that day a year or so ago as well.

Cameron  22:55


Steven  22:56

Yeah. It’s not a good day. I don’t know what’s happened to them. I don’t hold them anymore. I mean, I sold them after the chair said that, right. Once I heard the chair of the board was saying “we’ll use discretion to pay bonuses whenever we have to,” for me, that was a yellow flag if you’d like to say. Well, that’s not really the kind of incentive structure and management style that I want as a shareholder. So, again, each have their own and some people, you know, might love their prospects and might love them as a company and not worry about that stuff. That’s fine. You need different views to make the market, obviously. But yeah, just as an example of how the monitors at times dig into these things and find out these things from firsthand access to the company and then can report on it back to members and retail shareholders

Tony  23:37

What are the hot button issues this AGM? What are the three things that we should focus on, which three companies, what three issues? Because, you know, I’m an ASA subscriber and I get the reports, but they can be very detailed and bland — as much as the company announcements about the AGM detail them bland — but take the eyes out of it for us and tell us what to focus on.

Steven  23:57

Yeah, so look, our focus issues for this year as always remuneration. So, you know, that’ll probably always be one; just honing in on the remuneration and making sure it’s fair and reasonable. Directors as always is the other one. And then this year we’ve added in ESG for the first time, so this will be the first time the ASA starts reporting to members on, well, particularly the ENX. I mean, “G”, the governance part of ESG, that’s something ASA already does, that’s what all this is really about. But the environmental and the social side of it, that’s obviously become a really big trend and topic in the investment industry and up until now ASA hasn’t really had a position or a policy around that. So, what we’re going to start doing is asking the companies questions on what it is that they’re measuring and reporting around their environmental and their social numbers. And as the industry standards emerge, there isn’t necessarily a lot of great standards that the whole industry is using like GAP accounting principles, for example, that’s really easy — not easy, but it’s the standard, if you know what I mean. On ENS there’s less of a standard, so there’s some things emerging.  Whatever emerges as the default position or the gold position, ASA will report to members in our annual company reports on what the company is saying and doing. We’re not going to tell you you should or shouldn’t buy a coal company or an oil company, which is great news for QAV subscribers, obviously, so it won’t be about is this a good investment? It’ll just be, what’s Beach Energy saying about their carbon impact and their carbon plans, and any stranded assets, and really, you know, whatever the company is reporting, and then how’s that measuring up against the standard? So, you’ll start to get that going forward, this will be the first year so it’s a first step, I’m sure it won’t be perfect. Our monitors are not going to be experts on everything to do with environmental and social standards, but they are going to start to report on what the companies are saying and doing around it. And I think that’s important because I was at the director summit earlier this year down in Melbourne and Joe Longo, who’s the new head of ASIC, was there and he gave an hour-long keynote to the audience that was the same day they were announcing that they weren’t going to prosecute Crown directors, which was interesting. And I think James Shipton who was the previous ASIC chair, one of his philosophies I believe was, you know, why not litigate? So, they were very litigious previously, ASIC would be happy to take you to court and try and win a case against you. And Longo basically said, and I’m paraphrasing here, but “we’re going to be a bit less litigious. We’re not taking the Crown directors to court, not because we don’t think they did anything wrong, but because we don’t think we’re necessarily going to win the case. And it’s,” you know, “taxpayers money taking these cases to court. If we don’t win them, then that’s a waste of taxpayers’ money, essentially.” So, they look like they’re going to be a bit more consultative was my takeaway, but what he did say was there’s “two things we’re turning our attention to: whistleblowing policies, which are you know, do they have teeth? Are they actually genuine whistleblowing policies? Can people within the company genuinely raise an issue without fear, and does the policy work? And the second thing is greenwashing. And I thought, well, that’s really interesting that the ASIC chair is calling out that they are turning their attention to greenwashing, which is essentially all companies and especially listed companies making out that they’re doing a lot better job in these areas than maybe they are. And listening to a lot of the presentations at that same summit from ASX chairs and CEOs, they were all presenting very positive or optimistic or polished stories around what progress or what they were doing to reduce their climate impacts and make the world a better place. And I’ve got no idea whether each of them was true or not, but it seems to me that Joe Longo and ASIC have decided or have an inkling that maybe some of its exaggerated or some of its a little bit of spin and they’re going to turn their attention to it, which I think is a great thing. If they’re going to hold companies more accountable and keep them more honest, that’s a good thing for all of us as smaller shareholders, probably. So, they’re probably the big things that we’re going to focus on this year.

Tony  27:54

Yeah, I mean, I’m not a big fan of greenwashing. I mean, the obvious one that gets up my nose is when a big company like a Rio or BHP sell off their coal mines and say, “see, we’re carbon neutral now.” You know, all they’ve done is sell it to somebody else, the mine still operates, the world’s still suffering from the emissions that mine makes but they claim themselves to be ESG heroes. It’s just rubbish.

Steven  28:16

Exactly what Ken Mackenzie, the BHP chair, he was at that same meeting, and he gave a keynote as well and that question came up. “Why did you divest your thermal coal assets?” I think it was, and/or the oil assets. And he said, “it was purely an economic decision. We just didn’t think we were going to get the returns in those assets going forward. But, we’ve kept our coking coal because we believe that’s critical to decarbonisation, the world’s going to need more steel. Without the coking coal to go with the iron ore, we can’t make the steel to decarbonize. So, that was his explanation around that. But I think if you, you know, as we all know, if you’ve seen the price of oil and coal lately it was a questionable economic decision if you’re using that as the basis for it as well. Anyway, who knows what’ll happen from here?

Tony  29:00

Well, that’s good. Well, thanks, Steve. People should consider writing Australian Shareholders Association on their proxy forms. I’m going to call you guys the Milky Bar Kids from now on; you’re out there fighting the good fight. You’re the front line for us retail shareholders, so well done.

Steven  29:15

Trying our best, trying our best, thank you. And one thing we are going to do which Cam will send out some info, I’m sure, on is all QAV subscribers, we’re happy to offer a complimentary twelve-month membership. So, anyone that is interested, I’m sure Cam will send some details out to you in the next week or two on how you can take up that offer and you can try ASA risk free for twelve months and, you know, kind of get these reports and read the magazine and all that kind of stuff and see if you find any of it helpful or not. Nothing in conflict with QAV of course, but if anyone is interested you’ll get that offer soon and feel free to give us a try.

Tony  29:50

Yeah, great. Thank you.

Steven  29:51

No problems.

Cameron  29:53

Before you go, Steve, I did go on Facebook a few days ago and ask if anyone had any questions for you. I’ve only got one question, this is from somebody called “AnonymousCEO”: “what is the official amount of unmarked bills in a brown paper bag required to encourage an ASA monitor to vote correctly? I heard it was 10,000, but my monitor keeps coming back for more. I’d appreciate your guidance on this matter, because my new yacht isn’t going to by itself. Please advise your account number in the Cayman Islands. Thanks.”

Steven  30:31

Well, that monitor obviously wasn’t me, because my fee is much higher than that. No, look, everyone, it’s a good question. We do disclose on the report whether the monitor owns any shares in the company or not, because that’s important, right? So, some of the monitors do hold shares in the companies that they cover, they’ve got an interest, and that’s disclosed on the voting form. But we have a quality process where our policy and advocacy manager and our state chairs read every report before it gets published. So, even if you, you know, you might have been a little biased or you particularly liked the company, if you write up a report that doesn’t match the guidelines and the standards of ASA it’s very unlikely that it’s going to get through and get published. So, I’m not saying we never make a mistake and that everything’s black and white, there’s grey areas at times, but for the most part, yeah, there’s a pretty good quality check process there before anything gets published that may not be accurate or fair.

Steven  30:32

Well, Tony and I are excited to announce the launch of QAV ASA Watch. Its a new service that we’re launching where we’re going to monitor the monitors…

Cameron  31:35

… Of the ASA, and just go through their bank accounts and look at their lifestyle and try and make sure, “hey, where did they get that Porsche from? Where did that come from exactly.”

Steven  31:35


Steven  31:49

I think you might be talking about the Austrian Shareholders Association because I don’t think the Australian Shareholder monitors have Porsches.

Cameron  32:00

Okay, well, good luck with the cultural revolution at the ASA, Steven, I hope it all goes very well for you and the proletariat does well out of it.

Steven  32:12

Fingers crossed, and look, much appreciated. Appreciate the time and the chat and, and more importantly, appreciate all of the great investing wisdom you guys are passing on every week. I know I certainly appreciate it and I’m sure everyone else does too. So, keep up the good work and thanks very much from me.

Cameron  32:27

And our next lunch is on the ASA, obviously.

Steven  32:31

Thanks, guys.

Cameron  32:32


Tony  32:33

Thanks, Steve.

Cameron  32:34

That was fun. Well, Tony, we’ve got a tonne of questions but there’s some news that I think you should get into before we get into the Q&A.

Tony  32:44

Yeah, just some quick stuff. So, wanted to let people know that the Berkshire Hathaway AGM is this weekend, which is Christmas in May — it’s usually the first weekend in May. It will be live streamed. I haven’t looked up the details, but it’s usually Monday morning our time I think, maybe Sunday morning, I’m sorry. Yahoo Finance are gonna live stream it, so that might be of interest to people. I was going to do a pulled pork on Prosper Group this week which was, I think, one of our stocks of the week but I’ll leave that for later. But the only reason I wanted to do that was because it’s not often, if at all, that we get a so called “growth stock” on the QAV buy list, and Prosper Group is probably the first of those in a long time that comes on the buy list. It’s a, I think they call them a neobank or a FinTech bank, so they’re a non-bank lender. They were meant to do it all in a new way of doing it, interactively and digitally and away from branches and big banks and all that kind of thing. They floated at a high multiple and crashed pretty soon after that, but they’ve been chugging along in an hour on our buy list. So, the reason why I was going to highlight it was because this reminds me of what happened after the dotcom crash when all those high-flying valuations came back to Earth. And, perhaps this could be the Amazon of 2001 when it was trading for about 10 bucks US and, you know, was still able to be bought at a good price and obviously continued on to be a great company. So, Prosper may be in that kind of realm. If it’s on our buy list it probably is generating income, at least on the operating cashflow level. And… you’re shaking your head you, Cam.

Cameron  34:20

I went through its financials yesterday. We picked it as a stock of the week.

Tony  34:24


Cameron  34:25

It’s not making money, that’s for sure. But, I’m interested in your drill down to see why it hasn’t. I mean, there’s very high board ownership of the stock, but yeah, it’s not making money, but it’s on the buy list.

Tony  34:41

I’ll do a pulled pork on it at some stage in the future, I haven’t done it today because I knew we’re pressed for time. But yeah, so it’s back on, it’s on our buy list. It was a bit of a surprise to me, but people might want to have a look at it if that kind of thing suits them. We often get people asking us, “why aren’t we buying some of these growth stocks?” Well, now one has crashed out but it’s back on our buy list to take a look. So, that’s Prosper. I wanted to do a shout out to rugby42!?6, who gave us a good review. Thank you very much for that, rugby42. I’m not sure what the numbers and letters mean, but thanks very much for that. I said before, Netflix is still declining. So, that was on the theme of our experience with some of these high-flying stocks, they’re coming back to Earth now. And I think it dropped again last night when they did their quarterly report. So, watch out for those. I think the last thing to say is that China is in lockdown with COVID, and I think that’s now happening in Beijing. And so, iron ore and oil took a tumble last night, the market was down on Friday, it’s down again today. This happens, but the one thing I would say about this kind of market is keep an eye on your commodity three point sells and also go back and look at your alerts, at your three-point trendline sells and your rule 1 sells, because the market is down at the moment.

Cameron  35:56

Oh, sorry, I was just going to comment on the Netflix thing. I had no appreciation for how far it’s fallen; like, in November, six or seven months ago, it was trading around $700 a share. It’s currently at $209 a share. Wow.

Tony  36:14

So, three quarters of its valuation is gone in six months.

Cameron  36:18

And yet, like, I know it’s losing subscribers, which is interesting. So, I guess that’s what’s behind it, but yeah, fascinating.

Tony  36:27

Well, I guess the learning point for us is this is what’s gonna happen with all of these growth stocks, right? So, everyone buys them thinking that they’re going to just keep soaking up subscribers, keep generating new sales, etc., etc., forever and ever and ever, like in the BNPL space. Eventually, they’re going to become a mature company and they can’t keep doing that. So, Netflix is showing signs of becoming a mature company. So, after it can’t keep growing and getting new eyeballs, or new subscribers, it’s going to have to be judged based on its business model, and that’s when these companies go from heroes to zeros which Netflix has done. And, that is in the future of every high-flying growth stock. I’ve seen it all happen before, and it will happen again. And, I mean, people out there know what we’re talking about, the BNPL’s, all the high-flying growth stocks, I’ll even go out there on a limb and say companies like Zero. Eventually they’re going to stop growing and start having to be a profitable business. May not be now, may not be for fifty years, but it’s going to happen. And when it does, this is what happens to their share price.

Cameron  37:25

The last time Netflix was around the $210 mark was January 2018. Four years of growth has been wiped out in the last six months. Wow.

Tony  37:39

Yes. It is, yeah. And it happens. At least grow stocks are a bit like, you know, musical chairs when you’re a kid. Just imagine… their crowded trades, right? Everyone’s playing musical chairs thinking that they can be faster than all the other kids to get out and grab that seat. So, this is like when it’s getting down to a couple of chairs and then ten new kids turn up to the party, which is just like coming into Netflix a couple of months ago, and saying, “yeah, take my money. I’m going to be able to sell out before it stops,” and the music stopped and everyone’s been caught out, and the price drops. And, it’s exactly like ten new kids turning up to the party late in their musical chairs game; instead of having to find there’s only one chair that goes missing there’s now, sort of, twenty kids trying to get into nineteen chairs, there’s now thirty kids trying to get into nineteen chair. It’s always going to come a cropper for most people.

Cameron  38:29

And they’re all farting on the chairs every time they sit down one, so it’s cumulative farts, is what you’re getting there. I mean, it’s shocking but it’s also good to see this play out in this era. Because, whenever we’ve had guests on and you’ve talked about, you know, the dotcom crash, and you’ve talked about the global financial crisis, the commentary I think we’ve got a lot of the time from a lot of the tech evangelist type guests we’ve had on is “well, that was then, but it’s different now. This time, it’s different. Low interest rates. We didn’t have iPhones then, Tony, and we didn’t have, you know, hundred megabit Wi Fi everywhere, Tony. And we didn’t have this, Tony…” and yeah, “everything is different.”

Tony  39:15

This time it’s different, Tony, TTID.

Cameron  39:17

I don’t want to get, I don’t want to get distracted, but it’s like whenever I get into an argument with our friend J. David over this invasion or that invasion, or… then I go, well, “yeah, it’s like the Russian invasion of Ukraine is illegal. Yeah. It’s like when America invaded Iraq, that was illegal, invaded Vietnam, that was illegal, invaded,” blah blah. And he always says, “well, that’s not exactly the same thing.” I’m like, “no, no things are ever exactly the same thing. If it was exactly the same thing, it would be exactly that. I’m not saying it’s exactly the same thing. I’m saying thematically, on a level of principles and themes, it’s the same kind of process that we’re talking about here.” So, of course, nothing’s ever exactly the same. Except in… even in Groundhog Day, it wasn’t exactly the same. He had a different day every time. Anyway.

Tony  40:10

History doesn’t repeat, it rhymes. Again, one last comment I’ll make on the news and along this theme is that there was a very interesting and provocative article written by Christopher Joy in the weekend Financial Review. I’d recommend people have a look at it. I liked the way it was phrased. So, he is saying that the deal the Solomon Islands government has done with China has, I think he said, a 40% chance of leading to conflict with China. And he laid out a case where, based on his evidence, was that the Spratly Islands were turned into military bases very quickly. His theory is that the Solomon Islands will very quickly get a Chinese base, that Chinese base could be used to knock out the five eyes, including Pine Gap in Australia, either through single jamming or through physical means, and that that will provide the coverage or the darkness to allow China to invade Taiwan. So, interesting article, I guess I’m calling it out now as a way of saying we’re in interesting times, both with Ukraine, with inflation, now with this, and the market doesn’t like certainty. So, I’m not…

Cameron  41:13

Doesn’t like uncertainty. Uncertainty.

Tony  41:16

Uncertainty, sorry, doesn’t like uncertainty. So, I’m not seeing any sort of… I’m seeing the choppy market continuing for us going forward, I guess. That’s a prediction. I know I’m not good at predictions, but interesting article.

Cameron  41:27

When you predict you make a dict out of yourself.

Tony  41:31


Cameron  41:32

I love the Solomon Islands news coverage, because for the previous two months it has been “Ukraine has the right to do whatever they want. If they want to join NATO, they should be able to join NATO. Where does Russia get off telling them they can’t do stuff? They should be able to do whatever they want? Oh, hold on a second, the Solomon Islands wants to do a deal with China. What? No, I don’t think so, Solomon Islands. No, no, no, no, I don’t think so. We’re gonna sit down and we’re gonna have a chat about that. You can’t, you don’t get to make your own decisions about what alliances you make. What boat did you just get off of?”

Tony  42:09

That’s it from me for the news. We’re in interesting times, I think, and I probably can’t recall when there’s been so much going on in the world that could affect us.

Cameron  42:16

Well, the markets obviously having a rough day, had a rough day on, I think it was, Friday. Was the market open on Friday, Good Friday?

Tony  42:25

It was, yeah.

Cameron  42:26

It was, yeah? Rough day on Friday, rough day today when it opened again. But as I’ve seen people posting on the Facebook group, thank God we have a system.

Tony  42:35

Correct. Well, I’ve seen this and much worse all before and it’s a system that saves us. We can speculate all we like on the Solomon Islands or Beijing being in lockdown, but we really don’t need to; the system will take care of us.

Cameron  42:49

Yeah, it’ll tell us what to do, when we need to do it. It’s a beautiful thing. It’s like having a wife. Tell you what you need to do and when you need to do it. You don’t need to think.

Tony  43:01

It is a beautiful thing.

Cameron  43:06

All right, you ready to get into some questions?

Tony  43:08

Yeah, I think we should.

Cameron  43:09

I’ll get myself into trouble. We had a couple of questions about BHP and WPL, there was another one in the group earlier today, I think, or a day or two ago. But this one’s from Jeremy: he says, “BHP and WPL, Woodside Petroleum, has released a heap of documentation about the proposed demerger of BHPs oil and gas assets to Woodside. It all looks rather complicated to me. How will this merger affect existing BHP and WPL shareholders? I’m worried about how this demerger will affect the QAV approach. I currently hold BHP, do I need to calculate a new buy price for my BHP shares once I get paid WPL shares for my rule 1, or do I stick with my original buy price just like we do with a regular dividend? Do I use the WPL share price on the day I get those shares as my buy price for rule 1? Please explain.”

Tony  44:06

I think we’ve covered demergers and this kind of thing, and mergers, before. There’s two levels of operating here. One is, they have provided enough information for us to go and do a pro forma on what the demerged BHP looks like and what the WPL new business looks like. And just in summary, BHP is divesting itself of its petroleum assets, is creating a new company which is going to be bought very quickly by Woodside Petroleum, and that money is going back to BHP. And then, that will be given the shareholders as a special dividend which I think is going to be paid as Woodside Petroleum shares. All up, if you’re paying attention to the demerged BHP and the enhanced Woodside Petroleum there would be enough information in the pro forma detail to be able to go through and plug the numbers into our checklist and decide whether both were on the buy list — and Woodside Petroleum is on the buy list at the moment. So, it’s nice to see that BHP shareholders will be getting a stake in a company which is on our buy list. So, that’s one way to do it. That’s pretty hard to do — not hard to do, it’s time consuming to do. The way I normally approach these things is to use the three-point trendline. So, I’ll use sentiment to tell me what to do. So, the BHP share price will continue to have its three-point trend lines and rule 1s in place, it will pay us a special dividend — I’m not a shareholder, but it will pay the shareholders a special dividend. And we’ll treat that the way we treat dividends. So, we’ll add it back to the share price until we actually get the physical shares transferred to us, which, I’m not sure how long that will take, it will take a couple of days at least if not weeks, and then I’ll back it out again. So, the BHP three-point trend lines will stay in place and the rule 1s will stay in place. And Jeremy’s right, Woodside Petroleum will become a new share for us and it’s rule 1 will be the price it was when it became a new share to us as if we had a bought it with a dividend. So, imagine that BHP paid a cash dividend and then we use that cash to buy Woodside Petroleum shares. So, that sets our rule 1, and then everything trades as normal from there. If BHP drops because of the sale, then if it breaches the line its a sell. If Woodside drops soon after the demerger and it goes below rule 1, its a sell — or, 10% below rule 1. So, if the rule one is 10% below the initial price for Woodside it becomes a sell. They all stick with their trend lines going forward.

Cameron  46:36

Okay, so let me just repeat that back and see if I understood it. So, if you were an owner of BHP today, you would continue to use the three-point trendline to work out your sell line for BHP but you have to factor back the special dividend that you’ll be getting. With the WPL shares that you would get, you would use the price on the day that you get them to calculate your rule 1. Even though you’re not handing over money for it, you still have a theoretical rule 1 buy price — a theoretical buy price. And then, after you have them you will just use the three-point trendline of Woodside Petroleum going forwards to determine your sell line.

Tony  47:18

Correct, for both BHP and for Woodside, yeah.

Cameron  47:20

I do own WPL I think, in my super fund, and it hasn’t reacted well to this merger acquisition or whatever… the announcement. Share price is down about 30%.

Tony  47:34

Yeah, I really can’t comment. I haven’t followed it. I also know that we’re in quarterly reporting season for some of these resource companies and their shares are bouncing around with that. And, you know, with the, like I said, the oil price dropping overnight in reaction to China’s lockdowns. There’s a lot going on, but the framework for using the sentiment is still in place for all those things: demergers, dividends, new share purchases.

Cameron  47:56

I don’t think I’ve written anything about that for the Bible, so I should get some wording around that and put it in.

Tony  48:01

And, I think the other thing, too, that’s interesting, and you know, people may come back and ask questions later on, the sentiment is important to me. Because, let’s take a pro forma case, let’s just say BHP is divesting a company which has a real high operating cash flow and what’s left of BHP has a real low operating cash flow. And so, if we do the pro forma calculations or we wait until the next six-monthly results come out, BHP drops off our buy list. I would still hold BHP as long as the sentiment hadn’t dropped below a three-point trendline, right, because there are other reasons why people are buying BHP shares. One of the most obvious ones is what we were talking about before with Steve, is that BHP is kind of burnishing its ESG profile here. It’s selling its oil and gas business, and it’s going to turn around to all the carbon activists and say, “hey, you can buy BHP shares,” right, because there are a lot of superannuation funds out there and fund managers out there who’re saying we’d love to buy BHP shares, but we can’t because our members or our own shareholders won’t let us do it because you have this oil and gas exposure. So, BHP could be a worse business after the divestment in terms of how it looks on our checklist, but its share price might go up because people who couldn’t buy it before are now buying it. So, that’s the reason why I’m using sentiment to guide me on these things and not using pro forma numbers to do it.

Cameron  49:24

Thank you, Jeremy. Next question is from Samuel. Bonjour, Samuel. “Cameron, I’m looking at the China situation. And, although there is no particular reason to do anything about it until the share prices move in a direction or another, or in other words, sell lines are crossed or rule 1 applies, given China is the largest client for most of the resource companies in my portfolio I’m a little worried about overexposure to China and resources both at the same time. All the commodities prices are high, and although this is not QAV vocabulary, it feels like it could drop. I think it was mentioned before that some shares, when they’ve done very well, become a much larger holding than those who have not grown so much. Perhaps levelling the biggest values can be one way to keep up with the principle of QAV by seeking to have twenty shares with a relatively even weight. Thoughts, please, TK.”

Tony  50:16

Yeah, so I think the key words here are “it feels like it could drop.” So, I completely understand Samuels feelings and it’s good analysis, Samuel, but the whole reason for having a system like QAV is to guide us when we get these feelings that, you know, the world’s going to hell in a handbasket. China’s going to slow its growth down, there may be conflicts going forward around the world, all those things will be dealt with by our system, and we don’t act until we we get those three-point trendline sells or rule 1 sells, or probably more importantly in the case of China, three-point trendline sells for the underlying commodities. And even though oil and iron ore have been sold off in the last few days because of slowdowns in China, they’re still well above their sell lines. I think coal would be in the same boat too. So, as much as I feel unsettled by all these things that are going on, I’m not going to take action until the commodities become sells or the shares become sells. I’m not saying that can’t happen, it may well happen. I mean, I think, Samuel, you’re probably right on the button here to be nervous, but the feel ain’t real, as they say, when they teach you how to play golf. I feel like I’m hitting the ball properly, but you look at the ball and its going to the right in a big slice. The feel ain’t real, and it’s the same with the share market. We can feel all these sorts of things. It’s human nature. It’s good to have a framework and a system to help us. As to your second point, Samuel, about rebalancing — that’s what you’re suggesting that we do — in other words, periodically sell down our top holdings and put the money into our lower holdings. I’m not a fan of rebalancing. I’ve certainly done some testing on it. Dylan is a fan of rebalancing. He’s run some share market trials which suggest that we should be rotating out of our best stock each month and buying our worst stock.

Cameron  51:58

Dylan, for new listeners, is Tony’s intern.

Tony  52:01

Yeah. And so I took that to the next stage and ran a dummy portfolio for about six months and it didn’t work for me during that test. So, I’ve dropped it. But I’m always guided by Warren the Wizards words on rebalancing. He says, “if I own Michael Jordan, why on Earth would I bench him?” And it’s the same thing with me with my investments. If I own a stock that’s been a runaway success, why on earth would I sell it and put it into something which hasn’t been a runaway success? So, I’m not a fan of rebalancing.

Cameron  52:28

Well, you don’t know.

Tony  52:29

And you don’t know, yeah. Every time you sell a stock you’ve got a 60/40 chance of buying one that goes up, right? So why take that risk?

Cameron  52:36

Well, to sum it all up Samuel, when you predict, you make a dict out of yourself.

Tony  52:42

Annd you may be right, Samuel, I understand why you’re unsettled, and I can fully understand if you decide to sell some of those shares yourself. But I won’t be.

Cameron  52:44

All right. Thank you, Samuel. Caroline asks, “I understand the rules as to when to sell a stock, but what about those stocks in your portfolio that basically have sat there and done nothing or are at a slight loss since you bought them? Sell and instead buy something that is higher up in the buy list that will hopefully give a better result, or just hang on to the slow stocks and wait to sell when/ if a proper sell signal occurs just in case it eventually heads upwards? The culprit in my portfolio is WGX, Westgold Resources. It’s been in my portfolio for a while now and still just sitting at a loss. Very tempting to sell it even though it hasn’t breached its three-point sell line, and replace it with something higher up the buy list. Everything else I own is in positive territory, currently. Wondering what TK might do in this instance, and apologies if this has already been covered multiple times.”

Tony  53:46

No, well thanks Caroline, I don’t think it has. And perhaps Caroline should talk to Samuel, because Samuel wants us to sell out of our best stock and buy Westgold — buy a stock and slow it down on the performance run. Caroline, I think every portfolio is going to have a stock like Westgold, mine does. For me, it’s ASX. It’s gone sideways since I bought it, but I can pretty much guarantee that the day I sell ASX it’ll shoot up. That’s capitulation in the market, right? We’ve been patient, been patient, been patient, and then we go “crap,” and then we sell it and it bounces up soon after that. So, look, every portfolio is going to have a Westgold, it’s going to have a stock which isn’t shooting the lights out. That’s just the nature of the game. I’m happy to hold those, one; because in the case of the ASX its providing dividends, so I’m still getting an income which is better than cash for that particular share. I’m not sure about Westgold, it may or may not pay dividends. But certainly, the hardest part about being a share investor is getting the timing right. So, if Westgold is still ticking all the boxes, which I believe it is, and it hasn’t crossed any the three-point trendline sells then I would still hold it because, you know, it’s gonna have its day at some stage.

Cameron  54:57

Yeah, the one I had like that in the last year I know is IGL. I held IGL for four, five months, and it did nothing and even went backwards. It came close to a rule 1 sell a couple of times, but didn’t quite make it. So, I held on to it and then it shot up by 50% eventually, quickly.

Tony  55:18

Yeah. And that’s what tends to happen. Regression to the mean is the game we’re playing, and sometimes it needs a catalyst. And that catalyst may take months and months and months, if not even longer to come along. Yeah, I remember years ago, the classic one for me was David Jones’ shares, which, you know, sort of fitted the bill for a value investor. This is kind of pre-QAV checklist times. And then there was a takeover bid from Woolworths, I think, in South Africa, they bought the shares. And Solomon Lew had been a shareholder for a long time and he wouldn’t sell out his last blocking stake in the company. So, it was listed on the ASX still because Woolworths couldn’t mop it up, they were patient, they weren’t prepared to pay his price. He waited for something like ten years and the share price went sideways, and then suddenly Woolworths decided to capitulate and pay shares and the share price jumped three, four, five times in a day as they mopped up the retail shareholders. So, it can be worth, it can be very well worthwhile being patient. And don’t forget, we’re looking to get 20% on average per year. That can be 0% for five years and 100% in the fifth year, right, and that’s an average of 20% for five years. So, that’s just the way this game works.

Cameron  56:28

You know, I know with the IGL example, when it shot up for me was in February this year after its report came out –its half year report. It was tracking along, you know, doing nothing, and then it’s December report came out in February and it went up by 50% in the next couple of weeks. And of course, you know, we’re buying stocks that we think are undervalued, but we’ve looked at their financials and we know that it’s a solid business that’s heading in the right direction; generating cash, lots of positive growth happening, etc., etc. Its up high on our buy list, usually, and we’re just waiting for the rest of the market to wake up to that, or somebody in the market to wake up to that, right?

Tony  57:16

Exactly. And in the case of small companies like IGL, they’re not getting a broker coverage or any analyst coverage because they’re small, right? So, as they grow they start to attract more analysis and that’s when they can often take off.

Cameron  57:29

Or, you know, a competitor decides to take them out or something like that. So, you hang in there is the answer, Tony?

Tony  57:38


Cameron  57:39

Dance with the girl who brought you — or the man who brought you, I don’t want to be sexist about it. The person of nondescript gender bias that brought you. Glenn has a question.

Tony  57:49

Dance with one you brought.

Cameron  57:51

That’ll do. Glen: “hi, Cameron. In a recent podcast, Tony mentioned that if he was unable to manage his portfolio for an extended period, i.e. due to ill health for example, he’d just give you all the money and let you take care of it.” Yeah, Tony did say that. That was off air, though, Glen.

Tony  58:09

Note to Alex in the transcript, just cross that one.

Cameron  58:11

Alex just had a heart attack writing the transcript. “He’s gonna what!”… “He said his QAV shares would be sold and moved to a low cost LIC, such as Australian foundation Investment. Wondering Tony’s thoughts on why an LIC over an ETF? Would there be any other considerations or instructions? I was just thinking about some of the QAV guides, for example, not buying more than 20% of the average daily trade, three-point trendlines, not buying above the NAV. Sorry about the nature of the ill health question and obviously wishing Tony and all QAVers good health, it’s just a process I’d like to think about now rather when it may be too late. PS. really enjoyed Tony’s summary of bonds on a recent podcast. If anyone has found,” I don’t think he means your summary of the last Bond film, which we agreed was a complete urgh, well, I’ll tell you about that in after hours.

Tony  59:06

Please, Live and Let Please Die.

Cameron  59:09

Third time to wrtie a script, James Bond. “If anyone has found the paper or link to the material Tony mentioned from Philip Lowe that explains it further, would appreciate where they found it.” That’s from Glen.

Tony  59:20

Yeah. Thanks, Glen. Hope its not Glen who used to run the RBA. Anyway, I’ll post Philip Lowe’s, I’ll link to Philip Lowe’s paper in our Facebook group. I can do that. A couple of things in that. I think you’ve raised a good point, Glen, and this is probably relevant to everyone out there: you should be thinking, having the conversation with your spouse or your kids, and documenting what’s going to happen should you become financially incapacitated so that they can decide and take over what you’re doing now. For me, the conversation I had with Jenny was to call the stockbroker and have all the shares sold and the money put into the top three listed investment companies on the ASX. But it’s worthwhile people doing that, and don’t think it won’t happen to you because it will at some stage, so get it down on paper now. And even put it into your will now in case it goes even further south than just your health. So, that’s the first thing people should be thinking about and taking action on. The question about LIC is why do I prefer an LIC over an ETF? The big reason is that an LIC is what’s called a “closed ended” fund; an ETF is an open-ended fund. And what that means is that if I sell my shares in a Listed Investment Company, the underlying stocks owned by that LIC don’t need to be sold to pay my money out. My shares are being bought by another investor who becomes a shareholder of the LIC, but the underlying fund is intact. Whereas if it’s an ETF, if I sell my shares then the ETF manager has to sell shares on the market at the time to pay me out. There’s no change of the shareholder, my shareholding to another shareholder, it’s straight redemption. And the problem I have with that is that most people, unfortunately, who aren’t very sophisticated with share markets will try and sell out when the share market is down. It’s human nature, the share market’s not the place to be, I’m gonna sell my shares. A Listed Investment Company has its capital intact, except for what’s dropped because of the share market dropping, and if they decide to they can be a buyer in that market. Whereas, the ETF is a seller in that market, and they have to sell at the bottom to pay out my shares as I redeem and leave. And I think that’s not a great way to invest. That’s the main reason. A couple of other reasons; ETFs are a bit of a black box to me. Look, I think if you’re buying a large well-known ETF that’s tracking an index like the ASX 200, or even the All Ordinaries, and it has a low expense fee — and that’s something else to watch out for with ETFs, not all ETFs have a low expense fee, and not all LICs do too, so pay attention to fees. If you’re in a large ETF, you’re probably going to be okay. There are all sorts of different types of ETFs, though, just as there are with Listed Investment Companies. The big things I would watch out for are what’s called synthetic ETFs. And again, I’m not saying that these aren’t worth buying, but do your homework. So, what I mean by that is particularly in the commodity space, if I’m buying into a gold ETF, I may not actually be telling the fund manager to go off and buy another bar of gold. They, if it’s a synthetic ETF, might just be buying options and futures contracts on the gold index — on the stock market that tracks the gold index — to try and make the ETF share price mimic the share price to the gold price, if that makes sense. So, the trade in futures and use options to do that rather than buying the physical commodity, and 99.9% of the time that will work fine. But, there have been cases where there’ve been flash crashes where the markets misbehaved and, you know, fallen dramatically only to recover dramatically, very quickly, because of the fact that the, you know, high frequency trading or whatever has gotten into that market and there’s a fair bit of turmoil. So, just be careful of synthetics. Again, they’ll work mostly, but there could be times when they let you down. And probably the last thing I’ll talk about with ETFs is probably a comment around passive investing in general. Certainly, the business case behind index investing has been proven now, and it started off being managed funds that tracked indexes, then it became Listed Investment Companies that tracked indexes, then it became ETFs that tracked indexes. ETFs seem to have gained all the traction, but I think that they do, as they become bigger and bigger plays in the stock market — and the same rule applies for managed funds as well — they can have an amplifying effect on the stock market. So, if there’s a crash tomorrow and people head for the doors, the fact that managed funds that track the indexes and ETFs are forced sellers to pay for those redemptions means that they’re in the market selling as well, that’s the multiplying effect that happens on the down leg. It’s happening on the upleg too, of course, as more and more money comes into the stock market through these passive funds. They’re out there buying BHP and Rio and Commonwealth Bank, which is helping to support their price, but they’re doing it gradually. Whereas, when a crash happens everything happens on day one, and they’re selling of those stocks which have already dropped is just forcing those stocks to go lower. Whereas, if you’re in a Listed Investment Company, it’s up to the manager whether they’re selling or not. So, my comments on ETS versus LIC, I think the last comment I’ll make on ETFs is I still don’t fully understand how they work. So, when I drill down into them, this process of me buying shares in the ETF and in the ETF going out and buying shares underlying companies and having it all come out in the wash so that the ETF still mimics the index is more complicated than people think. At the heart of it is a black box called a market maker. So, there is someone in there who is trying to keep everything balanced, and I suspect that again, that’s another, I guess, potential weakness in the model; that if things really do get out of control, and things move fast and are volatile, the ETF that’s meant to be tracking the index might lose pace with an index for a short period of time. So, that might become unsettling for people and cause them to sell, which just perpetuates that whole, that whole problem. So, they’re the differences. Glen asked some questions about how do we buy the LICs? Are we still applying the QAV rules about ADT and net asset values? I think if I was to fall suddenly ill my wife wouldn’t worry about those, Jenny would go out and buy the top three LICs by market cap on the Australian market. I would think that they’re big enough to easily accommodate our investments. 20% of the ADT probably won’t be a problem, she’s not going to worry about three-point trendline, she’s going to go out and buy them and we’ll take the index from there — or she’ll take the index from there. And the last point about whether they’re trading above or below the net asset value, again, won’t bother her, she will just go out and buy. And I guess that’s the last point to just quickly make, is that Listed Investment Companies can trade above or below the value of their portfolios, the underlying portfolio, and I have from time to time traded LIC’s on that basis. So, if they dropped to 10 or 20% below the net asset value they’re a buy, and if they climb to above their NAVs by 10 or 20%, they’re a sell. Again, you know, in this difficult situation where things are happening quickly and Jenny’s trying to right the ship, she’s not going to worry about the asset value. She’ll just buy the top three LIC’s in the market.

Cameron  1:06:32

Yeah, just throw the money into a holding pattern.

Tony  1:06:36

Yeah, and get the index performance going forward.

Cameron  1:06:38

All right. Hope that helps, Glen. By the end of this show, not this episode, but by the end of QAV as a series, my goal is to make sure that Tony will just hand it all over to me to look after. But, ya know, I’ve got a little while to go yet and prove myself.

Tony  1:06:56

Hand the show over to you or hand my money over to you?

Cameron  1:06:59

The money. Can’t do the show without you, just the money. I want you to keep doing the work, just give me the money. If I had the money I wouldn’t need to do the show. I don’t care, I’m out. I’m Rich. Hey, get to start raising racehorses, playing golf.

Tony  1:07:18

If you have my money you can leave the show, but I have my own money I have to stay. Okay.

Cameron  1:07:22

You got it! You worked it out. Only took you three years. Mark asks, “TK touched on earnings share per growth this week for PRU. Can you expand on why this is important in the checklist, at what level does it become important, and how to read it in Stock Doctor?” Earnings per share growth.

Tony  1:07:48

We always want to be investing in companies that are growing, that’s the basic rule of investing; you want companies to keep growing. They can be stagnant for a while I guess, but ideally you want them to keep growing. In our checklist, we focus on earnings per share growth and then we look for companies which have EPS over PE of 1.5 or greater than 1.5. And just to explain that concept, this was a concept introduced, I think, by Peter Lynch many years ago. And what it does is it says that even if we’re a value investor, we have to acknowledge the fact that we’re paying for a company which is going to keep growing and how do we factor that back into the price we’re paying now. And if you think about it in extreme circumstances, if I buy a company today that’s trading at a PE of 20 times but it’s growing 100% each year, next year the PE is going to be 10 times based on my share purchase price from this year, and the year after that it’s going to be trading on a PE of five. So, if it keeps growing we’ll get low PE numbers into the future which is attractive to us as value investors, right? We’re paying a small amount given the fact this company is growing so quickly. So, how do we find a way of tying that up neatly into something we can put in the checklist, and Peter Lynch came up with it. He said, you know, it’s a ratio between the growth of EPs and the PE. So, if something’s growing fast, the optimal solution is high growth and low PE. That gives us a big number when we put the growth over the PE and we try and set a threshold for that, which is 1.5. So, if something is growing reasonably and the PE is reasonable it’ll probably score on our checklist. It’s a way of trying to find a value investors way of valuing growth, and that’s why it’s important to us. In terms of where you find it in Stock Doctor, its right there on the front page. Stock Doctor has the little boxes and number three is outlook, and if I go down four lines the EPS growth percentage for BHP is predicted to be 36.8% as of when they produce their June ’22 annual results, which will be in a few months’ time. But in June ’23 when they get to the stage of producing those results, analysts are forecasting that they’ll have a-the EPS will go down by 17.4%. Now, I don’t often pay much attention to that EPS forecast going out into the future past the next results, because it’s much harder to forecast things going out into the future. And that downgrade could just be the fact that analysts are saying that iron ore prices are going to regress back to the mean again. They might have, like, a $50 iron ore price in their spreadsheets. And that may well prove to be accurate or not going forward, and that number will be changed over time. But certainly, at the moment the growth in EPS is forecast to be 36.8% when BHP produce their Jun ’22 numbers, and that’s only a few months away so it’s going to be more accurate than the one going out. That’s where it’s available in Stock Doctor.

Cameron  1:10:46

Very good. Thank you, Tony. Thanks for the question, Mark. Here’s 73 Questions from Dave from Newcastle. He says “hi Cam, hope you’re well. Questions for the pod, if I may. Feel free to spread them,” **E/N Cam says something not worth repeating.** “Number one, could Tony do a pulled pork on PTL. Full disclosure, I already hold, would be keen to hear his summary of the numbers.”

Tony  1:11:18

Can I do that next week?

Cameron  1:11:20

No, you’re doing PGL next week, I think, aren’t you?  Prosper.

Tony  1:11:24

Yeah. Well, okay, I can do PTL on the fly now if you like but it will take some time.

Cameron  1:11:29

No, not now. One day, I’m saying you don’t have to do it next week, but one day. Yeah, one day.

Tony  1:11:35


Cameron  1:11:35

“Two: I think this has been asked before and I think I already know the official QAV answer, but I’m going to ask again. Is there a limit to how long to hold a stock if its not moving?” We’ve just answered this question for somebody else, Dave, so I hope that helped. “Three,” see, we’re getting through your questions so quickly, Dave. “Could Tony talk through the differences between ROIC and ROE? I’ve read up and I think I get it but I enjoy his nut shell summaries.” Just wanted to read that carefully.

Tony  1:12:08

Yeah. Yeah, sure, Dave, ROI stands for Return on Invested Capital, ROE’s obviously Return on Equity. They are slightly different. In a lot of cases, they’re the same. So, equity in the company is assets minus liabilities and invested capital is when the company makes a profit, how well are they doing in terms of the money they reinvest back in the company? Now, over time that’s going to create a lot of assets, and so assets minus liabilities give equity is going to in some cases going to be fairly similar to ROE but they are both different concepts. So, ROIC is how well management are allocating capital. And to just explain that a bit further, you know, when I was working at Coles Myer there were all sorts of businesses vying for capital and projects and investment by the board, and the board would have to say, “well, okay, we’re going to favour and invest this investment over that investment.” So, then they’d do, you know, a hurdle rate discounted cash flow calculation and say, “if I open up ten new supermarkets for Cole’s I’ll get this kind of return, and if I buy another online business for Myer direct, I’ll get this kind of return.” And they will weigh them up and make a choice. And so, that’s an example of ROIC. So, eventually after they’ve made a lot of choices like that the analysts can start to say, “hey, Coles Myer board, you’re good or bad at allocating the… making investment decisions and allocating capital,” and that’s measured by looking at the capital that they reinvest in the company. ROE’s slightly different. That’s saying that, looking at the equity that’s available for Coles Myer, what’s the return like on equity? One sort of feeds into the other, obviously you’ll have a bad ROE if you make lots of bad investment capital choices, you’ll have a good one if you make good ones. But ROE, don’t forget, can also be manipulated by how much debt you have. Because assets minus liabilities affects equity, if you shrink your equity by borrowing more and get the same returns in the business, your ROE goes up and looks good. So, they both have their pitfalls, but they both can be useful. I guess, let me put it in terms that listeners might understand a bit better. Looking at our portfolios that we measure using Navexa or Sharesight or Excel or Stock Doctor or whatever, if I put $100,000 into the market and thats my portfolio, and that makes a 20% return, that return is the return on equity. If I then go out and borrow another $100,000 and put $200,000 into the market and get a 20% return, my equity hasn’t changed; I still have $100,000 of equity. But 20% on $200,000 in the market means I’ve made $40,000, and if I look at the ROE, that $40,000 over the $100,000 of equity suddenly becomes a 40% ROE. So, ROE can be manipulated like that. And then, ROIC is when I take that 20% return, what do I do with it? And if I just judge, if I set up a new portfolio and put that 20% into the market and I look at the return on that, that’s my ROIC. If I decide to take some of that return and pay myself a dividend or buy a car or take a holiday, ROIC goes down, because not all of it goes into the market. So, that’s basically what ROIC does. And over time, those investment decisions on, you know, on how I’ve reinvested my capital are important and they do affect ROE because the portfolio grows based on what I put my money back into, or take it out, or what new shares I invest in. And so ROIC and ROE can start to merge, but that’s the difference in them. One is how I’ve invested my profits and one is how I’ve invested my original portfolio, and gearing comes into play on the ROE calculation.

Cameron  1:15:58

All right. I think I understood some of that.

Tony  1:16:03

I can go a lot deeper, Cam, I mean, ROIC is often linked to another concept called Weighted Average Capital, Cost of Capital, WACC. But don’t get me started on that. That’s, you know, some of these things are invented by Harvard Business School to turn out Harvard graduates that can say smart things to CEOs, but they really don’t have much application in the real world, I don’t think.

Cameron  1:16:24

Alright, hope that helps, Dave. Last question, again from Caroline: “It looks like AMP has recently just popped above its three-point buy signal. Would be interesting to hear Tony do a pulled pork on AMP and also his opinion on the auditor’s report in the last annual report. I’m still trying to work out whether a qualified opinion is something to be concerned about or not. I’m thinking not, but just wanting this confirmed. If it’s still too early to look at AMP as it’s only just above its buy line then I’m happy to wait for a better time in the future.” Well, we love things that are just above their buy line, don’t we?

Tony  1:17:00

We love all things which are above our buy lines, whether it’s just above or a long way. Another company that I will do a pulled pork on, we’ll do lots of pulled porks over the next few weeks. I’ll certainly do one on AMP. Look, Caroline raises a really good question, and I did look at the audit report for AMP today prepping for the show, and AMP does have a qualified audit opinion. Looking at it in detail, what the auditors of AMP are saying is that there was one section of AMP investments in some kind of China Fund that hadn’t been audited yet, and therefore they couldn’t include it in their overall audit of the P&L for AMP. And so, their qualifying their audit, they’re calling it out and saying everything looks kosher in AMP but we can’t give an opinion on this particular investment of there’s, the China Impact Fund or whatever it’s called. In this case, a qualified opinion, I think, is fine. They’re not saying that AMP is going to face a material going concern problem, or any other sort of material concern, they’re just qualifying the audit and saying it’s not complete. So, Caroline raises a good point and it’s probably my fault for the terminology I’ve used in the past for calling out qualified audits as a red flag. It’s really audits that have a material opinion or a going concern issue, a material matter or going concern issue, which are the ones that we’re focused on. It’s still worthwhile looking at qualified opinions, but in this case, I think it’s fine. They’re just saying that they haven’t got the audit from this particular investment yet.

Cameron  1:18:33

Isn’t AMP just one big going concern?

Tony  1:18:35

A questionable going concern?

Cameron  1:18:39

Yeah. All right. Thank you, Caroline. Thank you, Tony. That’s all the questions for this week. Sorry if we didn’t get to your questions, we’ll get to them next week. Do we have time for after hours?…

Cameron  1:18:55

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