QAV 517 Club

Cameron  00:07

Well, here we are again, Tony. This is episode 517 of QAV. We’re recording this on Tuesday, the 3rd of May, 2:06 pm Eastern Standard Time in Australia. How are you, TK?

Tony  00:25

Yeah, good thanks, Cam. How are you?

Cameron  00:28

I’m good. I am great. It’s been a bit of a choppy few days in the market, Tony, I don’t know if you’ve noticed.

Tony  00:37

I have.

Cameron  00:38

Had to sell anything out of your portfolio?

Tony  00:41

I did. I sold Credit Corp yesterday.

Cameron  00:44

I sold it like a week ago. What, did you hold on for an extra week, did you?

Tony  00:48

Yeah, well, I got the notice at night, and the next day it opened and went up above it sell line again — which it has today. Like, I sold it yesterday and it’s back above its sell line today. But, you know, that’s how it goes. I had a good run with it, made some money out of it, which is great. So, I’m happy to sell and if it goes back above the sell line, good luck to the people who bought it from me. And I bought Beach Energy which has done well, too, in the last day or so.

Tony  01:09

Which energy?

Tony  01:13

Beach.

Cameron  01:13

Oh, Beach. Good old Beach Energy. I was a little bit sad to sell CCP last week, it had done really well. I was really, I was quite proud of how it had done, but anyway. Rules is rules. Berkshire Hathaway’s annual shareholder meeting was on over the weekend our time. Did you watch it?

Tony  01:32

Well, I tuned in the next day and looked at the YouTube clips that Yahoo Finance provided.

Cameron  01:37

Good stuff. Insanely entertaining, those two together. I was gonna say they should sell tickets, but I guess they do. They’re just a couple of $100,000 a ticket to get there.

Tony  01:49

Oh, well you can get a baby Berkshire share.

Cameron  01:53

Some of the highlights for me: Warren’s joke about Alzheimer’s. For the people who didn’t hear it, basically the story was they had a guy who’d been running one of their businesses for many years — and Charlie would go and visit him from time to time — and then they found out one day that he’d had Alzheimer’s for quite a long time and they didn’t know about it. But, the business had been doing really, really well nonetheless. So, Warren said, “so, that’s our goal now; to buy businesses that can be run really, really well by somebody with Alzheimer’s. That’s a good investment.”

Tony  02:32

What did Warren say? He thought he might walk past the office door and see the guy cutting out paper dolls.

Cameron  02:39

He said, “maybe we should check on our managers every now and again more often in case they’re cutting out paper dolls.” Yeah.

Tony  02:45

That’s the corollary of a famous Buffett’s saying. He said, “we like to buy businesses that can be run by idiots, because someday they will be.”

Cameron  02:51

Well, yeah. He talked about Berkshire as a painting, which I liked. It’s a big canvas, the world’s a big canvas, and he’s just seeing what he can paint. Everything that they do, it’s like that’s his art; Berkshire Hathaway is his art project, his and Charlie’s art project. I love that. I thought that was a, that’s a real… it’s an insight into Warren’s way of thinking about things, I guess. Obviously, he doesn’t do it for the money. He’s not really doing it for the power. He does it because it’s an art project for him.

Tony  03:25

Yeah, no, exactly. It’s a game, it’s his creative outlet. And he’s gonna give all his money away, either before he dies or soon afterwards. So, it’s not about building an empire. Yeah, painting a picture is a really good analogy, it’s his creative drive.

Cameron  03:39

For me, it resonates more than it being a game, because a game sounds a little bit shallow, a little bit flimsy, little bit competitive or something. And I’m sure it is all of those things, but an art project — reminds me of a great old line from David Lee Roth, circa 1985. He put it in a lyric, I think, in one of his solo albums: “I’d rather be an art project than just weasel out and where one.” Make your life an art project, make it mean something, do something creative with your life. And that’s what Warren’s done. So, I like that. He had this great bit about, “if you came to me and you told me that you own 100% of American railroads, and you offered me 1% for $25 billion, I’d write you a check right now. If you came and said you own 100% of American agriculture and you wanted to sell me 1% for $25 billion, I’d write you a check right now. But, if you came to me and said you own 100% of Bitcoin, I wouldn’t buy the entire thing off you for $25.”

Tony  04:44

Be a good deal if you could.

Cameron  04:46

Yes, I know. Well, yeah. Probably not, because if he bought all of it then who’s he going to sell it. But, and he made the point which he’s made many times before, and I think it’s the same point he makes about things like gold, is it produces… if I bought railways I know that they would transport things. If I buy agriculture, I know that it’s going to feed people. If I buy bitcoin, it does nothing, it produces nothing. It puts out nothing. It’s worth nothing. It’s just, you know, it’s like gold, I guess, it’s a thing that people…

Tony  05:19

Yeah, a store of value. And he’s made the same analogy about gold in the past as well. But, he said, I mean, the other quote he said which I picked up on was, “if I bought the $25 billion of Bitcoin, I would have to sell it back to you to make any money.”

Cameron  05:32

Yeah.

Tony  05:33

And that was the insight for me, that’s the whole thing about all these things, right? If you buy something which you can’t value, which applies to Afterpay and tech stocks and all that kind of stuff, you’re buying it because you hope to sell it back to someone

Cameron  05:46

it’s the “bigger fool” school of gambling-speculation, right? I mean, I guess realistically if you bought all of Bitcoin he could probably use it to buy things with, because you can buy things with Bitcoin now.

Tony  05:59

Really? Like drugs and guns?

Cameron  06:04

No, you can buy Tesla with Bitcoin I believe.

Tony  06:07

True, that’s right. Actually, did Musk rescind that?

Cameron  06:11

I think, I don’t know. I wonder if Musk is buying Twitter with Bitcoin?

Tony  06:19

That would be an irony If he did. I’m not sure what the value is of either. Just on Bitcoin, I love Charlie’s quote on Bitcoin: “we’re a lot dumber than the Chinese Communist Party leader in China. He banned Bitcoin.”

Cameron  06:34

That’s right. And Charlie’s other comment that I really liked when he was talking about how Robin Hood, which is the cheap or free stock platform — stock broking app over there –equivalent to a self-wealth or a Superhero, maybe. They floated last year on the back of all of the…

Tony  06:54

Meme stocks.

Cameron  06:55

Yeah. What was it? GameSpot.

Tony  06:57

Yep.

Cameron  06:58

GameSpot and there was another one. Oh, AMC — no?

Tony  07:01

Yes, there was AMC. Yep.

Cameron  07:02

Was it? No, it was a block wasn’t it? AMC is a television network. Wasn’t it a Blockbuster or something?

Tony  07:07

I thought AMC was a cinema chain.

Cameron  07:09

Oh, okay, yeah. Well, who’s the network? Maybe it’s the same people. Anyway, yeah, he was talking about how that’s collapsed now. Robin Hood’s laying off, people their share price has crashed, their revenues have slowed down, missing their forecasts, all that kind of stuff. And then Warren tried to sort of shut him down a little bit. He goes, “I don’t know if we should be criticising people,” and Charlie said something like, “I know I shouldn’t criticise people, but I just can’t help it.” So, there you go. It’s okay to criticise people. Only if you can’t help it. That’s the Munger rule. Anyway, it was a lot of fun. If you haven’t watched it, like, their combined age is, I think, Warren said is 200?

Cameron  07:16

  1. 92 and 98.

Cameron  07:58

Amazing. They’re just so funny and erudite and humble, I guess. They always just talk about all the mistakes they’ve made, particularly Warren, he loves talking about all the things that he’s screwed up and missed and got wrong. It’s fantastic. It’s really funny and inspiring.

Tony  08:19

And lots of good insights. I mean, there’s plenty of other stuff they spoke about. You know, someone asked him a question about, does he take political stances? And he said, “well, I didn’t put my citizenship in a blind trust when I became CEO, but I learned the hard way that if I take a political stance then there’s going to be someone out there who’s offended, and they’re gonna attack one of my businesses, so I don’t do it these days.” So, good words of experience. I remember back to those days, like, going back into the 90s when Warren began a gift giving — like a dividend. Berkshire Hathaway doesn’t pay a dividend, but he started a dividend and you could tell him where you wanted your dividend sent and it went to a charity. Right? And then, some reporter got on to it, worked out that there was a large amount going to Planned Parenthood, and then all of the anti-abortionists and the right to lifers in the states started picketing the Berkshire Hathaway companies. And, they’d just acquired one called Fruit of the Loom, which is a big, like, the Bonds underwear chain of Australia but it’s the US version. They make underwear and T shirts in the main. And their sales were really suffering, and the CEO up and said, “hey, this is not a great idea. My staff are getting eggs thrown at them, maybe you want to rethink.” And so, Warren shut down the programme.

Cameron  09:33

He was cancel cultured.

Tony  09:35

Before there was cancel culture. Apart from what they were saying, I mean, Berkshire bought a large stake in Chevron in the first quarter which was announced. So, before they have their AGM they release their quarterly numbers, which they have to do, to the market. And it turns out they boughta really big stake in Chevron. So, that’s important for two reasons; one, because Warren’s buying again, so he bought a… increased his stake in Occidental Petroleum, another big oil company in North America. He’s just revealed a big stake in Chevron. So, he’s following our sort of trend, I guess, of buying undervalued oil companies and, you know, waiting for the reversion to the mean.

Cameron  10:13

And under valued gaming companies, too. He said he’d been buying more Activision.

Cameron  10:17

It’s not guaranteed. He actually pointed out that, you know, the acquisition could fall through. Something could happen. You could get stuck.

Tony  10:17

Well, that was a different situation. So, that was an interesting discussion he had. So, Activision Blizzard is under takeover from Microsoft, and one of Warren’s two fund managers independently had already bought a stake in it six months ago. But then, when Microsoft launched the takeover bid, there was an arbitrage available so Warren doubled down into Activision Blizzard. Someone asked him, “oh, now you’re buying game stocks, Warren, and why are you doing that for?” It was a really interesting discussion. He said, “way back when we first started Berkshire Hathaway, Charlie and I used to engage a lot in arbitrage and takeover situations,” and he said, “it’s not for everyone. We’ll make a few pennies, but we’ll do it quickly and that’s guaranteed. And, you know, if you do it enough times, it adds up.”

Tony  10:47

True. Sorry, I shouldn’t say it’s guaranteed. It’s highly likely, yeah.

Cameron  10:51

Then he said, you know, there’s a bit of a risk there, but.

Tony  11:14

Given that Microsoft’s the acquirer and Bill Gates sits on his board…

Cameron  11:18

I think-didn’t Bill leave? I think, didn’t Bill leave his board? Oh no, he left the Gates Foundation Board when Bill got into a lot of hot water last year with the divorce.

Tony  11:28

No Bill was, Bill may not be on the board anymore, but he was there at the Berkshire Hathaway AGM.

Cameron  11:33

As was Bill Murray.

Tony  11:34

As was Bill Murray, yes. As was Jamie Dimon, the head of Citygroup.

Cameron  11:38

Oh really?

Tony  11:38

Yeah. So, it’s the last time there’s going to be a charity auction for lunch with Warren.

Cameron  11:45

How much are you bidding?

Tony  11:46

I think it’s gonna be a million dollars plus to get it. I think the last one went for like 4.25 million US, so I won’t be bidding.

Cameron  11:55

Come on, its your last chance.

Tony  11:57

Twenty years ago I thought about it when it was cheap. It was, like, the first one I think was like 20 grand or something, so I thought really hard about it.

Cameron  12:05

Yeha, but 20 grand to your net worth twenty years ago is probably 4.5 million is to your net worth now. So, what’s the difference?

Tony  12:13

Well, the difference is, what am I going to say? I mean, I get to meet Warren. I get to share a meal with him. We talk shop, but what’s the benefit?

Cameron  12:22

You get a photo is the benefit.

Tony  12:23

I’ve got a photo with Warren.

Cameron  12:27

Do you?

Tony  12:28

Yeah.

Cameron  12:28

You’re in the background, though, are you?

Tony  12:29

Not with Warren. He’s in the background. When he was doing his paper toss contests before the AGM.

Cameron  12:36

I’ve seen that one, yeah. You could get him to sign the hat that I bought you, the “Warren-the-Whip Buffett” hat.

Tony  12:45

You can bid the 4 million dollars then.

Cameron  12:48

I could bid it, I wouldn’t be able to pay for it, but I could bid it.

Tony  12:53

So, you turn up at the lunch and go, “oh, sorry. Left my wallet at home.”

Cameron  12:57

“Can I pay for this with Bitcoin?” I don’t have any of that either, but.

Tony  13:04

Anyway, that’s all I got.

Cameron  13:05

All right. One of our very patient US listeners, Luke, who is still waiting for us to launch our US version of the show — which we are going to get to one day, Luke, and our other American listeners, we’re working towards it slowly. And we talked to some guys yesterday from Toronto, value investors from Toronto, that might be useful for us in getting closer to that. Anyway, he sent me this article about the 2021 performance of active fund managers in the United States versus the S&P, just the index, and it’s astounding. And we’ve talked about this sort of stuff before, but I never get tired. It never stops really, just, flooring me, blowing my mind when I read these stories. I really can’t get my head around it or make sense of it at all. It says that the S&P 500 gained 28.7% in 2021, which is an impressive year, “capping an impressive 100.4% cumulative advance over the last three years.” That’s crazy. Talk about pretty money, that was during COVID, right? During COVID! The world was supposed to shut down and its grown 100%. Then it goes on to say, “the positive market performance translated into good absolute returns back to fund managers, although relative performance continued to disappoint. 79.6% of domestic equity funds lagged the S&P composite 1500 in 2021.” 80%. 80%! Four fifths of them didn’t match the S&P. “In sixteen of the eighteen categories tracking US equities focused funds, more than half the funds underperformed their benchmark. Particularly noteworthy, within 98.6% of large cap growth funds that failed to beat the S&P 500 growth, not only the worst performing category in 2021, but the worst performing of any US equities category in the past twenty one years. Large-cap funds continued their underperformance for the twelfth consecutive calendar year…” twelve consecutive years! “as 85% of active large-cap funds trailed the S&P 500. Mid-cap (62%) and small-cap (71%) funds acquitted themselves slightly better relative to the S&P mid-cap 400 and S&P small-cap 600, but still often scant reason to celebrate.” And it goes on and on and on and on and on.

Cameron  13:05

Scant reason to pay fees. That’s the big takeaway, isn’t it?

Cameron  14:10

Yeah, I mean… and then, sorry, then I read another article like the same day from Australia. This is by Graham Hand from — where’s Graham from he — he’s editor at large at First Links, firstlinks.com.au, a Morningstar site. He says, “selecting an active fund manager who can outperform the market over time is even more difficult than picking stocks. A talented and skillful team may utilise a style which goes out of favour for many years, making the fund managers look below average. Investors may become frustrated with poor performance and leave at the worst time, attracted to last year’s successes.” And then he goes on to say that most of them aren’t doing very well. Consider the performance of the Lazard Select Australian equity fund since 2019 shown below. Its highly regarded and experienced investment team carries a strong silver rating from Morningstar, yet in both 2019 and 2020 it was in the bottom percentile of its category of Australian equity large value, and value also underperformed growth almost last among over a hundred managers, surely tested the resolve of investors and analysts alike. It recovered somewhat over 2021, and in 2022 year to date, the fund is in first place as well as in the top few over twelve months. Going from last to first in a year or two says a lot about the fortunes of fund managers. Their 2019 return was 12.43%, 2020 was -10.75%. In 2021 it was 17.21%.” So, I don’t know, man, every time I read about these fund managers that can’t beat the index consistently, I’m like, “why do these people still have jobs?”

Tony  17:43

Yeah, I agree.

Cameron  17:44

But you have a wife who was in the banking industry for thirty years, right? You know these people. You’ve had dinner, lunch, you’ve played golf with these people? What do they say when you go, “how do you keep your job? You suck.”

Tony  18:01

Well, they don’t see it that way. They’re like, “no, we’re in the top quartile this quarter,” or whatever, they have their own ways of justifying it. But, us as end-users find it hard to justify. But look, you know, what you’ve just read out, there’s a couple of points to make there. The first article you read out resonates really strongly, about how fund managers over time, the majority of them can’t beat the index — and Buffett’s been saying that forever. And that’s why passive funds are becoming so big. Index ETFs and index funds before them, an index LIC’s are attracting so much money now that, you know, really these guys, their jobs are under threat, the active managers. So, eventually the wheel will turn and they will lose their jobs. The second article, I think, I’m a little less sympathetic for because if I had my money in a managed fund and it went from being the top performer last year to the bottom performer this year, I’d probably ignore that and I’d always focus on the long-term returns. Because, you know, even in my fund there’s some years when I’ve underperformed the index, but over time you get a twice index return but there’s volatility. So, I have more sympathy for the fund that’s gone good last year and bad this year, provided that over time it’s been doing well. But there are all sorts of things going on in the funds management industry. I mean, and these are sort of structural problems which no one seems to have solved, and I think one of the reasons why no one seems to solve them is because the people who operate these funds are fairly subjective. Even though they’re value investors, as far as I know they don’t have a system written down somewhere that if the key investor falls off his perch or her perch or gets hit by a bus, the next person along doesn’t pick up the checklist and keep running things as usual. It’s fairly subjective, and they do that on purpose to build up their value on their worth, and they can charge more for it. But eventually, if someone’s getting paid a lot of money over ten years they’re gonna probably retire, they’re not gonna stick around. They’re gonna go off and enjoy it, and the person who picks up the baton may not have the same way of doing things that the last person had and the returns take a nosedive. So, there’s key person issues. There’s what I’ll call pigeonholing issues. So, if you’re setting up a fund, the market wants to know what type of fund it is; is it big-cap, small-cap micro-cap? Is it local shares, is it overseas shares, is it value, is it growth? All these kinds of things pigeonhole the fund manager which means that they do have periods of going in and out of style. The funds that tend to, or, the companies that tend to, or, the investors that tend to do well are the ones like the Berkshire Hathaway’s and people like ourselves, where, yes, we’re broadly value investors, but that’s not the only thing we look at. We look at when to buy and sell using our three-point trendlines and we put a quality overlay on it, all that kind of stuff. So, and you know, Berkshire Hathaway, yes, it’s a value investor, but it also owns operating companies. And so, it’s the fact that we’re not pigeonholed, I think, which gives us an advantage over fund managers, at least in Australia. Fees obviously have a huge impact in the returns, and I’ve said for ages I think the two and twenty model is broken. When you take those fees off anyone’s performance… if you took 20% off the QAV performance, you’re knocking off, you know, it could become a 16% return over time rather than a 19.5% return over time or there about, which is a huge difference in returns, huge difference. We’re still outperforming the market, but it’s a much smaller return for someone when they compound for a long period of time than taking the full share. So, that has to play a part in it. And I guess the last thing which I should acknowledge is that, and Buffett’s been saying this for years as well, it gets harder and harder to beat the index the bigger and bigger you get. So, one of the issues for these funds is that they are managing billions of dollars worth of investments.

Cameron  21:43

Well, let’s go back to Lazard Select Australian Equity Fund, the one that I just mentioned in that article. They’ve been going for twenty years; this fund has been going for twenty years. Its fund assets under management is $59.2 million. That’s it for that fund. How does that compare with the Kynaston fund?

Tony  22:05

I’m not going to say. Reasonably well,

Cameron  22:09

It compares reasonably well? So, it’s been going twenty years, their performance since inception annualised is 9.24%.

Tony  22:19

So, why would you pay them any money at all? And that’s why there’s still $59 million under management after ten years.

Cameron  22:25

And the ASX 200 over the same period is up, annualised is up 9.07%. So, they have tactically beaten the index over twenty years by 0.17%. And I like this in their fine print under their graph that says “investments can go up and down. Past performance is not necessarily indicative of future performance.” And you go, “well, I bloody hope not.” You normally say that when your performance is really good and you want to dampen expectations. In this case I’d be like, “yeah? Well, you can hope it’s gonna get better than that.” So yeah, they’re not dealing with billions here, Tony, they’re dealing with Kynaston level funds.

Tony  23:11

They’re a little bit above, but anyway, yeah.

Cameron  23:12

Little bit less. No, a little bit above. Okay.

Tony  23:15

No, you’re right. So, it is what it is. It’s inexcusable for us as retail investors to give them our money given that performance.

Cameron  23:23

So, why do people do that? They just don’t know any better? They’re just put into these things by financial advisors?

Tony  23:28

Yeah, have you heard of the Hayne Royal Commission?

Cameron  23:28

Yeah.

Tony  23:28

So, fund manager A — and I won’t name any — goes out to a wealth management network, company B — and I won’t name them either — and says, “if you push our fund, you get a trailing commission of. you know, 1%, or whatever.” So, that straightaway is a fee that comes off the top of the management fees, but their fund gets preferred by the employees in that company B and in the wealth management network. And so, if Mum and Dad rock up and say, “where should I invest?” They say, “well, this one’s pretty good. Here’s twelve, and they all have similar sorts of returns.” “Oh, well, which one should I pick?” “Oh, pick this car. It’s the best,” because it’s the one that the wealth manager gets a kickback from.

Cameron  24:10

But people on TikTok can’t talk about things. Can’t talk about investing. Yeah, they’re the problem. People on TikTok are the problem. The twenty-two-year-old girls on TikTok, they’re screwing up people’s financial futures.

Tony  24:12

Phil Muscatello is on shares for beginners, or we are on QAV, so we have to get licenced. Yeah, it’s ridiculous. And in fact, the Hayne Royal Commission never addressed the issue of what’s called “vertical integration” in the wealth management industry. So, if you’re a company that sets up these funds and you also have the financial planner network working for you and that company, you can still recommend your own fund. That wasn’t addressed by the Hayne Commission, but that’s the number one problem in the fund management industry.

Cameron  24:25

It’s all a big scam.

Tony  24:26

Well, it pretty much is. I mean, there’s a whole range of issues here, not the least of which is what’s called the “weight of money” issue, which is basically every year, 10% of people’s salaries goes into the superannuation fund and that money has to go somewhere. So, even if the superannuation managers have wised up to the fund management industry, and I’m sure they have, there’s still going to be a little bit that gets put into these underperforming funds, right? Because of the latest performance figures, or, you know, because their members are saying, “hey, how come this fund has just been rated number one in Australia by Morningstar and we’re not investing in it?” That kind of thing.

Cameron  25:27

Or maybe Greg Hunt is friends with one of them, and he wrote them a letter of recommendation.

Tony  25:32

Who’s Greg hunt? The health minister?

Cameron  25:35

Yeah, have you been following that story?

Tony  25:37

No, sorry.

Cameron  25:38

Okay. That’s a whole other story at the moment. Some company got, like, $100 million of government funding to do something over COVID that had never done anything before like that, just because the guy who runs it is good friends with Greg Hunt, apparently.

Tony  25:53

We mix in the wrong circles. And the last point I want to make on all this, and this is for people out there who do have their money with fund managers and who do make their own choices, maybe through an SMSF that they run or something like that: one of the big traps out of all this is to take money away from a losing fund manager and give it to a winning fund manager, because you’re always backing the last race, not the next race. And you can really get bad returns in doing that, because as we spoke about before, the sort of regression to the mean often means, like the dogs of the Dow effect, that last year’s losers are this year’s winners, right? So, if you’re giving it to the last year’s winner it’s probably going to come last this year, and you just keep compounding loss after loss.

Cameron  26:35

Deary me, well, what else have we got? Oh, yes. Another Queensland construction firm went under yesterday, owing more than $4 million. Probably not that huge in the scheme of things, $4 million dollars, but this is, I think, the third — maybe fourth — construction company that we’ve seen go under in recent weeks.

Tony  26:54

You could buy your lunch with Buffett, 4 million bucks. And why Queensland? What is it with the people up there? Not paying your bills?

Cameron  27:05

Well, I’m just, I’m reading the Queensland news. There could be more, I don’t know. I took this up in the Courier Mail, which, sad, I have a subscription to. Alright, what else do you want to talk about? Navexa?

Tony  27:19

Yeah, so our monthly performance is out. It’s, what is it? The third of May today. So, the report got sent through to me a couple of days ago. So, for the month of April our QAV portfolio was up 4.32% versus the market, which was up 0.52%. So, a really good month for us. And, the three top movers were Yancoal which was up 36%.

Cameron  27:42

For a month?

Tony  27:43

Yep, for the month.

Cameron  27:44

30? Holy crap.

Tony  27:46

FEX, which I think is Fenix from memory — Fenix, the iron ore company, resources — up 24.5%, and Grange Resources, GRR, up 21.6% for the month of April.

Cameron  27:57

Good stuff. And you’re gonna do a pulled pork for us today, TK?

Tony  28:02

I am. Well, I’ve got a couple backed up, there was some requests over the last week or so. But, I’m going to start with AMP because someone requested it. And AMP, just to give it… I mean, people who listen to this would know who AMP is; it’s a wealth management company, just speaking of wealth managed for companies which I wouldn’t name before. So, people can join their own dots, I’ll just lay them out for you. They are a wealth management company. I have to declare that my wife used to work there in a senior role. She joined AMP, we came back from Canada, she was recruited. She joined AMP, like, a month or two before the Hayne Commission, and then everything went to shit. And you know, I said to her, you should resign because this is gonna stick with you on your CV. But she decided to stick it out for a year or two and try and help right the ship, which I think she did.

Cameron  28:52

She told me one of the reasons she joined was she really liked a woman who was the chairman there and thought they’d get along well, and that woman lasted a month or something. Didn’t she fall on her1had to fall on her sword?

Tony  29:01

Katherine Brenner, the chair. That’s right. So, yeah, so Jenny worked there, I’ll decelar that.  She’s not there anymore. She did resign eventually. That’s by the by. It’s worth talking through what’s happening in the market with AMP at the moment, which I think is behind their recent run in share price. They’ve sort of jumped from about 98 cents to $1.18 in the last week or so, largely because they’ve sold off the remainder of their infrastructure business. So, AMP consists of AMP Capital and AMP Bank, and an AMP wealth management business. It did have a life insurance arm but that was sold a couple of years ago. In AMP Capital, which was kind of the jewel in the crown for AMP because it was like a mini Macquarie Bank, doing lots of funds management work and investing in infrastructure for large institutions. They’ve decided, AMP decided to sell off the infrastructure arm of AMP Capital, and they recently completed the last, I think, of three transactions to do that. Anyway, the total transaction for all the bits that have been sold generated 2.5 billion Australian for AMP, and they’ve announced that they’re going to pay down some debt and do a big capital return. So, that’s the reason why AMP shares have gone up. So, as we know from other shares that have done divestments, or sales, and made capital returns, the share price takes it into account and then when the capital comes back it deducts it, so just gonna highlight that for people. I don’t know the ins and outs of this process, because it hasn’t been announced yet. They just announced the sale that’s gone through. They haven’t told us when they’re going to return capital or how much, but just be aware of that if you’re a shareholder and if you’re thinking of buying it, you will get a sizable check at some stage but it may come off the share price too. So, after that sold, there’s still parts of AMP Capital left. There’s the bank, there’s the wealth management in Australia and New Zealand. Yeah, pretty much it. So, well, the businesses has been absolutely terrible since day one in terms of shareholder value. It was a life insurance business, and it’s been around for a very, very long time and had a great name in the past and basically pioneered life insurance in Australia. So, there was a few companies I remember when I was a kid that the life insurance person would come around to the house and talk about policies and collect the premiums and that kind of stuff through a big sales force. And that’s obviously been replaced with technology over the years, and now AMP’s sold off the life insurance business — as has all the major banks and other players in Australia. There’s not many… I don’t think there’s any local life insurance businesses in Australia now, they’re all multinationals who need economies of scale to make that business work. But anyway, so AMP had a good name over the years by providing life insurance, they morphed that into wealth management, again had a good name for a long time. But the Hayne Royal Commission kind of put an end to that good name, at least in terms of wealth management. And it didn’t just single out AMP, it singled out other players in the industry. And since then, all the major banks have sold off their wealth management arms as a way of of getting over the the Hayne Royal Commission baggage. AMP has kept theirs as has what was called IOOF, but they’ve changed their name post-Hayne, again to distance themselves, I guess, from the findings. But the secret to wealth management and the secret to AMP going forward is going to be how does it make wealth management work economically and for customers post-Hayne. And so, the problems are mounting up and work against them at this stage to do that, seemingly, but I’m sure they’ll come up with some kind of solution. One of the problems, of course, is now that to get advice from a wealth management you need to get a personal statement done for you, and that’s a fairly costly process. So, every new customer to a company like AMP is, you know, 2 or $3,000 worth of costs, which they should pass on to their customers. A lot of customers can afford to buy that. So, a lot of work is being done on what’s called Robo advice, so being able to use technology to roll out cookie cutter type advice to, not low income people, but below the sort of premium net wealth or high net worth customer entering the market. And AMP haven’t told us yet how they’re going to do that. So, again, I draw people’s attention to that if you’re thinking of buying into it. I have no inside knowledge of what they’re doing. They will find a solution to it, whether it’s the best solution to it or whether it’s the optimal solution to it, I don’t know. And I also know that they’ve been working on it now for a couple of years and they still haven’t announced what that solution is. So, that’s the $64 million question for AMP, is how do they solve wealth management and continue to do it profitably. Otherwise, the company is a breakup play, and when I go through the numbers you’ll see that it trades around about its net tangible asset value. So, it’s kind of being valued as a breakup play by the market as well. So, I would think if you invest as in AMP at worst you’ll get your money back if someone takes it over or they keep selling off bits or pieces of the business, and if they do happen to nut out the wealth management business and make it profitable, then there’s upside from there. So, that’s kind of the business case summary for AMP in a nutshell. In terms of QAV, the numbers. It’s a large market cap stock, it’s ADT is over $10 million, so it will suit all of us who want to buy into it. I’m doing these numbers on the share price of $1.16, which was the share price at the start of the week. I think it’s now maybe $1.18, but still pretty close to that. Stock Doctor gives this company a financial health rating of Early Warning, so we don’t give it a point in our checklist for that. But, it has been steady so we give you the point for that. This is definitely a value play rather than a quality play, by the way. It’s price to operating cash flow is as low as 2.24, and the PE is only 4.9, so on either metric it is very cheap. The IV1 and IV2 for this stock is $1.21 for IV1, and $1.34 for IV2. So, it’s trading pretty close to IV1. But, I guess I highlight this because of the different methodologies of calculating the intrinsic value in the first way, and intrinsic value based on the forecast EPS in the second way, most often we’ll see a big gap between those two IVs. In this case, the gap is quite small. And I digged into that and had a look, and the reason for it is because there is a big fall in the forecast earnings per share coming next year for this company. I suspect that’s because they’ve sold off this infrastructure business from AMP Capital, so it would have been a fairly profitable part of their business. And that’s why they were able to sell it for a good price, but thats going to effect the EPS next year. That’s also built into the share price, so, you know, the PE will go up next year when the earnings fall even though the company is still essentially the same. But, it does mean that we can’t score it on things like growth, so the forecast growth over the PE is negative, and so we give it a negative score in our checklist for that. The net equity per share is $1.22, so it’s share price is less than that and definitely less than 30% plus book plus 30, so it gets two points for that. The company isn’t paying a dividend, which I think is the right thing to do at the moment while it restructures itself. So, no scores for that. Even though it’s only trading on a PE of 4.9 it’s not the lowest PE in the last three years, so it doesn’t score for that in our manually entered data section. And all in all, it has a fairly low quality score of 50% but it has a QAV score of 0.22, and that’s largely because of how cheap it is. So, we spoke yesterday with these people in Toronto who focus on turnaround stories. So, this might be the kind of stock that they would focus on, it’s definitely a turnaround story. And if they can get the restructuring right, and if they can get the wealth management issues right, then it will be solved and the PE will rerate. So, there’s definitely upside in this, but it comes with risks.

Cameron  36:55

And I want to point out that it’s only barely above a sell line. So, if it drops a little bit, it’ll be a sell pretty quickly, too. Really tough looking for stocks this week, because nearly everything’s a Josephine. Really, really tough week. And I just want to maybe say a few words, get you to say a few words for people that are new. It’s one of those periods where people might be having to rule 1 a lot of stuff that they’ve bought in the last couple of weeks because everything’s tanking at the moment. You know, what do we normally say? Just, yeah, hang in there.

Tony  37:35

Yeah, hang in there. But this is how the system is meant to work, right? It’s telling us when we should be selling and going to cash. So, the fact that it’s hard to find… I mean, I found Beach Energy yesterday, it’s still going up. So, there are stocks on the buy list that are available — there aren’t many. Beach Energy might be the only one, I think maybe Santos if it’s still there would be in the same boat. But yeah, if you’re forced to sell something because of a rule 1 or a three-point trendline sell like Credit Corp was for me and you can’t find something that’s not a Josephine, then stay in cash. The system’s telling us to do that.

Cameron  38:06

Yeah, and the other point is just, y’know, it can be demoralising. Little bit frustrating for people, particularly early on, if they’re just starting their portfolio and they’ve bought some stuff, they’ve gone over that psychological and emotional hurdle: “right, I’m going to put real money into this stupid QAV thing.” And then, they buy stuff and they start losing money because its going backwards and they have to sell, and then they buy something else. And then they have to rule 1 it a few days later. And I know it’s something… we’ve all been there, it can be demoralising. But what I told people on the Zoom call that we had last week is “yeah, after six months, after a year of doing it, you won’t even think about it anymore. You’ll just feel it’s, like, you know, clipping your toenails or brushing your teeth in the morning. Is it a pain in the ass? Yes. Do you do it without thinking about it? Yes, because that’s just how it works, right? You do it. And eventually, some of the stocks that you buy will stick and will grow and they’ll be fine for a long time.”

Tony  39:05

And they’ll recover all that, any sort of short-term losses and pain you have now as well. The additional point to make is that these sell rules are there as insurance policies. So, yes, I did sell Credit Corp, and yet its above its sell line again today. So, you know, the insurance premium was paid and it didn’t pay off, but it could easily fall down again tomorrow and drop quite suddenly. And, if you look at the Credit Corp graph it has dropped quite suddenly and quickly. So, that’s what we’re trying to guard against. So, yes, if you, sort of, have a stuttering start be patient, the system’s telling you that it’s not the best time to invest, right? So, just keep following it and it’ll work it out.

Cameron  39:42

But you have to invest anyway.

Tony  39:43

You do. Well, because you don’t know… the system will tell you when it’s a good time to invest. But if you’re not part of the system, you won’t know, right? Because you can’t see unless you’ve got money in the market and its telling you what to do with it.

Cameron  39:55

Yeah, so be patient. Don’t believe us, jump into one of our seventy-three different social channels now, jump on the Facebook group and you know, just ask people what their experience was because everybody has been through the same thing. And everyone will tell you exactly the same thing: “yeah, it was annoying and frustrating and demoralising and choppy at the beginning, but then it balanced out, and now it’s doing great.” Everyone has exactly the same story. If you are disciplined and you follow the rules, because that’s the other mistake that people always tell me they made: “oh yeah, in the first six months I thought I’m not going to do this bit, and I’m not gonna do that bit, and I might shortcuts this bit.” And then they always come back in six months and go, “well, that didn’t work.”

Tony  40:46

Yeah, and the chocolate cake that we’re baking looks like a pikelet.

Cameron  40:49

Yeah.

Tony  40:50

It didn’t work. That’s a good point, too, stick with the rules. Yeah. And look, and also to put it in perspective, even if you buy ten stocks and they all rule 1, that’s only 10% of your portfolio that you’ve lost. It’s gonna take you a lot of time and a lot of problems before you can have a significant hit to your portfolio that will be hard to recover from quickly.

Cameron  41:11

And keep in mind, the returns that we talk about that Tony has achieved over thirty years, the 19.5% average compounded, etc., etc., that’s taking into account Tony’s rule 1s. They’re factored into that, and his 3PTLs and all that kind of stuff. So, they’re all factored, that’s after those things have been taken into account. So, what I’m saying is that if you follow the rules and you’re disciplined, as Tony said, you’ll lose 10% here or there, but you’ll get it back and then some very, very quickly.

Tony  41:49

Yeah, and look, don’t think that this as a one-off event. I mean, it was only two years ago that we were going to cash during COVID. So, this is, you know, situation normal for the market; to stutter around until it finds its feet. You know, it’ll either say “oh, inflation is really big” and it’ll crash, or it will say “what inflation?” And it’ll go up 100%. So, unless you’re in the market you don’t get the upside, unless you follow the rules you get caught by the downside. So, that’s why the system is there.

Cameron  42:14

Like, I don’t know if the last three years that we’ve been doing this has been unusual or not from your perspective. But to me, it’s not stuttering, the market seems to lurch from crisis to crisis. And, it’s like, there’s a crisis just around the corner. Every six months, there’s another crisis and everyone’s throwing their hands in the air and running for the exits. And then it seems like a week later everyone’s popping champagne corks and snorting lines of coke. I mean, it’s like everything’s either exuberant, irrationally exuberant, or they’re in crisis mode. It just seems to flick between the two.

Tony  42:55

That’s Mr Market, right? He’s your bipolar business partner, as Ben Graham used to say.

Cameron  42:59

Really bipolar, like, do you think the last few years — I mean, obviously COVID is unusual from a global health crisis perspective, but from a market perspective, has the last three years been abnormal for you? Or is it just business as usual, right?

Tony  43:14

Just business as usual, yeah. It is driven by events, I agree. Market doesn’t like uncertainty. It’s driven by fear and greed, obviously, and every other human emotion as well. But yeah, I mean, I could, I think I have read a lot in the past, in all the crisis that I’ve been through over thirty years, you know, and some people don’t even remember. Like, long-term capital management collapse, Asian Financial Crisis, Gulf War One, Gulf War Two, it’s like every couple of years is another major world crisis and no one can work out what’s going to happen. So, the market has a conniption. And you take all the minor things into account, like when’s the Reserve Bank going to raise interest rates, and there’s always, you know, it’s like the news media is built on, “hey, look at this car crash. They all survived. Here’s another one. Oh, they all survived.” Yeah.

Cameron  43:58

The flip side of that, too, is what you’ve been saying for the last couple of years about tech stocks; is, yeah, they’ll look great for a while and then this thing will happen and they won’t look great. I had lunch yesterday with Dale Prescott, you were on his investing podcast a couple of weeks ago, the Money and Investing Show. Dale’s Brisbane based, he’s, like, in his mid-30s, and we were having lunch and we were talking about tech stocks, etc., etc. — Bitcoin — and I was talking about the dotcom days, like the late 90s. And I was like, “do you remember the dotcom?” And he’s like, “dude, I was like, ten.” Yeah, no, you don’t, because he wasn’t around — in a different generation, right? But I remember some of the bullshit that was being sold to us during the dotcom days.

Tony  44:47

Absolutely, and I think the thing that I remember most vividly is that Amazon survived, Google might have come along a bit later, Microsoft survived, but you could count the number of companies on one hand that survived the dotcom crash. And yet, before that there were a thousand companies that were available.

Cameron  45:04

100 billion-dollar valuations, every one of them.

Tony  45:06

Yeah, that’s gonna be what is happening now. But out of all the high-flying SAS stocks and high flying growth stocks, there’ll be two or three of them left in five years’ time.

Cameron  45:18

And it is nearly impossible, well, certainly impossible for me to pick which ones will survive and which ones won’t. All right. Should we get into some questions?

Tony  45:30

Go for it.

Cameron  45:31

Edward posted on Facebook last week that the news about the Reject Shop CEO stepping down, the statement that they put out contained this line: “Mr Reich will receive a payment from the company in lieu of serving his six months’ notice period together with any statutory entitlements. Any performance rights held by Mr Reich have been lapsed.” Is that normal? Edward wanted to know, that kind of a statement, because it sounds a little bit dicey.

Tony  46:04

It’s normal for a red flag. That CEO resignation was a classic example of a red flag.

Cameron  46:11

Yeah, right. But the company’s done — like the share price, anyway, did so well over the last couple of years. It was my first big win. I think I got, like, an 80% return on TRS. Remember, Eddie was telling me that I was an idiot and I should sell it, and I hung in there and it did great. Eddie had to eat his socks. But yeah, the market hasn’t responded well to the news about the CEO.

Tony  46:35

Share price has collapsed. So, yes, that’s a classic example of a red flag sell. Now, whether you could get out quickly; the share price is down, but you would have had a chance to get out of the higher price if you’d sold off on the day that the first announcement came out from what Edwards talking about. But that’s the classic example of a red flag sell: CEOs gone, they’re not telling you why, he’s not being paid out.

Cameron  46:57

Not serving out is notice period of three months, or six months.

Tony  47:01

Yep. They don’t have someone lined up to replace them straightaway. So, yeah, it’s a really bad sign.

Cameron  47:07

And I imagine if he quit because he had another job to go to, he wouldn’t have got his exit payment. But, if you’re pushing him out the door, you’ll pay the exit payment, right?

Tony  47:20

Unless he’s done a really bad job and doesn’t deserve it. That’s what I’m reading into it. I could be wrong, but that’s what I’m reading into that statement.

Cameron  47:26

Well, he’s getting paid out, though, as he walks out the door.

Tony  47:29

He gets six months in lieu of notice, which is probably required by law, but he’s not getting any performance rights.

Cameron  47:36

Oh, they said, “with any statutory entitlements.”

Tony  47:39

Yeah. So, if he’s got untaken long service leave, or untaken sick leave, or whatever.

Cameron  47:45

Oh, yeah, “any performance rights have been lapsed?”

Tony  47:48

Yeah, that’s pretty brutal.

Cameron  47:50

That’s shocking, because I thought they were a bit of a superstar there for a while.

Tony  47:54

I agree. So, something’s really gone wrong. There’s been a big clash, and it’s a definite red flag.

Cameron  48:00

The share price in May of 2020, 5th of May two years ago was at $3.33, whereby the third of July it was trading at $8.28, and now it’s back down to $3.80. So, that’s a red flag. That’s what a red flag looks like. People always ask it, “is this a red flag? Is this a red flag? Is this a red flag?” That’s a red flag.

Tony  48:24

That’s a red flag. Yeah, when a key management person or a keyboard director resigns or is pushed unexpectedly, no reasons are given. Like, in this particular case, they didn’t even trot out the old standards, like family reasons. “I wanted to spend more time with my wife and kids,” or whatever.

Cameron  48:41

If you want to paint a visual of this one, this was Bud Spencer picking him up by the pants and the collar of his shirt and throwing him out the double doors, out the saloon doors, like “boom”, out into the street.

Tony  48:55

That’s a “they call me Trinity” reference for anyone who’s under fifty. Under sixty.

Cameron  49:00

Keep up, people. We’ve talked about them in the last couple of months. Hopefully, people went and watched all the Trinity films. Okay, yeah, so thank you for picking that up, Edward, that’s definitely a red flag. Sue asks, or says, bit of both, “I’m trying to skill myself up on sensitive announcements of businesses,” well, that was one, Sue. “TK’s knowledge of financials that has been shared has been so valuable, for example, PE and IV, etc. I’m still very naive about some announcements that come through, such as acquisitions, mergers, sales, etc., and how these impact businesses and sentiment. For example, CCP plunged 9.5% yesterday and I can figure out why after the announcement of an acquisition of collection house. I’m wondering if TK has any insight into this, and furthermore advice on types of sensitive announcements businesses make and which to look out for, good and bad, etc.”

Tony  49:55

Yeah, well, I mean, I had a look at CCP yesterday when it breached its sell line. I’m not sure if that’s a typo in Sue’s comment, there. She’s saying, “for example, CCP plunged 9.5% yesterday,” which was last week, and “I can figure out why.” I think, when I read that, she meant I can’t figure out why. But anyway, maybe she has. But I had a look and I sold it yesterday, and part of my sell process is to do, you know, a check of the announcements and see if there’s a reason for it, because that could influence me, I guess, to sell quickly or to give it a bit of a breather and see if it rebounds or whatever. For a few hours, at least, anyway. I can tell you why I think the share price has come down. I don’t think it’s related to the collection house issue. So, there’s two things in the most recent announcements which could have an impact on price. We spoke about this a while ago, Collection Corp bought one of the part of the, well, the debt for collection house, which is one of its competitors. And that was part of the collection house doing a big company restructure. And you know, I think that it was good for both companies. So, I don’t think buying that debt was seen as a negative for Credit Corp. However, their latest results came out and the share price took a leg down, and I did read somewhere — and it’s worthwhile telling Sue if she doesn’t know why a stock has dropped by 9.5% in one day, just do a Google search: “Why has credit Corp dropped today?” Or something like that. And you may not get the answer, but there will be opinions out there.

Cameron  51:24

You’re gonna get a Motley Fool blog post saying “Scott Phillips has three hot stocks that he wants you to seriously look at this week.”

Tony  51:33

And you’re gonna get hotcopper, and you’ll go down the rabbit hole on that. Or you’re gonna get a Reddit post, which you’ll go down the rabbit hole on. But you might get a relevant announcement, and you might also, particularly in the news section of Google, if you click on the News tab, get an AFR article or some other reporter telling you why. When I did that Google search for CCP, I did get articles saying that the analysts hadn’t been enamoured by the annual results that came out in March. So, that’s contributing to the downturn. But I did notice in the announcement sections on Stock Doctor they did some kind of strategy day in the last couple of days, or a market update day, which I haven’t had a chance to go through and research myself. But, I’m guessing that that has also caused people to mark down what they think Credit Corp is worth. I, just, as I first read through it, it was reaffirming guidance. So, perhaps the analysts were thinking that they expected the guidance to increase. So, I don’t know for sure, but that would be my suspicion in this case. So, that’s the Credit Corp issue. But all those things, Sue, they’re important, and it’s good to understand it and reassure yourself that you understand that and you have the background, but I still use the three-point trendline process to make a decision as to whether to sell or not, and I sold Credit Corp yesterday. And it might turn around again, I won’t look at it for a while after I sold it. And I bought Beach, and I’m happy with that. In terms of Sue’s general question about insights into, I guess, announcements businesses can make, the kind of ones that I would look at which can be very sensitive are profit guidance ones. So, if a company comes out and says, “we’re taking a write down on an asset,” that’s obviously bad. If they come out… they’ll dance around the word, so they’ll say things like, “we’ve become aware that analysts in the market have this price target or have this EPS guidance, which we will not confirm,” or words to that effect which is a way of saying, you know, you’re getting a bit bullish out there, guys, tone it down a bit. They’re generally negative. But again, to me, they’re not red flags enough to sell the company, we’ll use the three-point trendline for that. And I guess there are inverses of those. So, you can get profit upgrades which are always good to have. You can get, particularly in the resource space, you’ll get announcements telling people that they’ve just done a new drill and they can write a bigger reserve into their assets. They think they’re gonna get a longer mine life, or they’ve found more oil reserves, those kinds of things are positive. But yeah, I mean, it’s just experience, Sue. After, you know, a number of years doing this you’ll spot the good and the bad quite quickly. And I guess the other comment to make is that they’re often not direct; they’re indirect. It’s very rare that you’ll find, particularly with bad news, that the CEO will come out and tell you, “well, folks, you gave me your money, and I fucked up.” They’ll say things like, perhaps like Credit Corp does — as I said, I haven’t analysed it in detail — they have a strategic update, and on the bottom of page ten in the fine print, you know, they’ve revised their guidance or something like that. So, that’s how they do it.

Cameron  54:35

Yeah. Or “good news, everybody. Things are going great.”

Tony  54:41

Yeah. “Good news, everybody. We have all the faith in the world in our CEO.”

Cameron  54:48

Yeah, I find it very difficult. Like, when you’re reading a financial report or a statement from the company, Barry and Stan have been all over this thing. They’re always PR announcements. It’s never transparent. You know, “we said we were going to do this, we failed. We did this instead. Here’s why we screwed up. This was a bad decision.” It’s rarely like that. It’s always “oh no, it’s going great, fantastic. Ah, greatest time ever we’re having. It’s brilliant.” Unless they can blame it on somebody else. But it’s very frustrating to read a lot of these things I find.

Tony  55:26

Yeah. And they also, they’ll use lingo, which you just kind of look at and go, “did you mean something else?” Like, the classic one I remember is when a CEO came out and said, “well, our plan this year is to have a profit pause.”

Cameron  55:42

Weasel words.

Tony  55:43

Yeah, you mean you’re not gonna make any money this year? “No, its a profit pause.”

Cameron  55:50

Well there’s the title for this episode, profit pause.

Tony  55:55

Last point I’ll make, Sue, is I don’t know if you’re a Stock Doctor subscriber, is probably also in the ASX announcements section. But, if you are a Stock Doctor subscriber, they do highlight which announcements are price sensitive, and they’ll tell you how much it’s affected the share price. So, that’s a good place to start your research on what’s affecting the share price for the company.

Cameron  56:15

Sue had another question. She says, “the episodes where Tony talks about his average annual returns, does he include dividends in that?”

Tony  56:24

Yes.

Cameron  56:25

“I’ve signed up to Navexa, and using the cool CAGR method, I see capital gain and total return. Which does Tony use as his metric performance?”

Tony  56:34

Total return, which is capital plus dividends, yeah. And in fact, in my long-term performance, there’s, you know, all sorts of things going on in there; there’s tax being paid, there’s interest coming off mortgages, there’s purchases of racehorses, and all sorts of things in there as well, ins and outs. But I do point to the fact that we’ve had a self-managed Superfund for a long time, which doesn’t have those. It still has taxes, but it doesn’t have racehorses and golf course memberships and things in there, and that’s been getting a similar return over time as well. So, without additional contributions being made.

Cameron  57:08

Thank you, Sue. Kim says, “Hi Cam, wondering if TK uses linear or log charts for 3PTL. The general consensus in my studies and research is that log charts are better for very volatile stocks, or when analysing over long timeframes like we do for the 3PTL, to remove the skewness towards large values. And secondly, to show percent change versus linear change.”

Tony  57:38

I don’t, I use linear. A log chart is like the charts we use, but instead of having the share price up the axis it has the percentage change in share price. So, I take the point that that might be better, Kim’s point, but I just haven’t used them. And, you know, I recall doing a little bit of research on it, and I couldn’t tell much difference between a log chart and a linear chart when looking at share prices. But maybe I was looking at stable companies, and as Kim says it might work better on highly volatile ones. But look, I’d be interested in Kim’s feedback if they’ve found a better way of doing it or they get better results. So, I’m happy to look at it, but I’m happy with linear charts at the moment.

Cameron  58:17

Thank you, Kim, for the question. Next one is from Reg. “Hi Cam, firstly mate, thanks again so much for everything that you and Tony do.” Oh, thank you, Reg.

Cameron  58:26

Thanks Reg.

Cameron  58:26

“QAV has been a real revelation for me.” That’s why our next book after the QAV Bible is the QAV Book of Revelations. The Four Horsemen of the Apocalypse; crypto, tech stocks,

Tony  58:48

Buy now, pay later.

Cameron  58:49

Yeah, generally speaking, yeah. “Secondly, I have no doubt that this has been asked before, but you’re used to that now. So, a question for the show. Take CIA as an example. Friday it closed at $7.32 unless I’ve stuffed it up. The Brettelator says the sell price, barring other things of course, bad news, commodity sell, etc., is $1.22. That’s an awful lot to give up if it drops. I know Tony is familiar with Colin Nicholson’s work. He’d set the stop loss at around $6.25 which is where I’ve set mine. I bought it for $5, by the way. Am I missing something? Could Tony comment, please?”

Tony  59:28

Yeah, well, we have covered this before, and there’s a couple of points to make. I am familiar with Colin Nicholson’s work and was a subscriber, and have a great deal of respect for him. I didn’t ever use his stop losses, though. When I, sort of. had a look at it, it just made my investing a little bit more volatile. Because, you know, if you’re in CIA and it drops from $7.32 to $6.25 — which it could easily do, that’s not a big drop — you’d get out and then you’d need to get back in again if it turns around quickly. Whereas, with a lower sell line you’d stay in and ride it through. And we’ve seen, particularly in the resource sector with all these stocks, they do have pullbacks and peaks and troughs along the way. The line doesn’t just go from bottom left to top right, it has all sorts of zigzags. So, a low sell line can help us in that respect. And, you know, I’m thinking of Fortescue Metals, I’m thinking of Perseus Mining, those kinds of stocks. If people want to have a look at their graphs, they would have been stop lost out using a method like Colin Nicholson recommended. I have the greatest respect for Collins work, if Reg wants to use that, that’s fine, I don’t have a problem with it. In fact, Reg, go ahead and use it and tell us what your returns are like from using it and what you find from the experience. A couple of other points on this; the first one is that eventually the chart will roll forward. Like, it might take a few months, might take six months, might take twelve months, but the sell line will redraw itself and if you wait long enough, if the share price graph — like, sometimes happens with any stock really, like CIA, where it goes along seemingly flattish for a while and it takes a big steep increase towards the end of the second half of the graph — eventually, if you wait long enough the sell line will redraw itself to better reflect that recent upturn. So, there’s that point. Companies like CIA, of course, we use the commodities graphs. And I think, usually, they’ll tell us to sell the commodity before the share price does because oftentimes their graphs, the sell lines are higher. Not always, but it will help. And, if Reg is worried about a big drop, it’s possibly going to be triggered either by a commodity drop or bad news. So, that’s something else that you can use, like a red flag, to sell it. Or, if Reg wants to, you know, if it’s keeping you up at night, then go ahead and fudge. Go ahead and say that I’m not waiting for another year before the sell line redraws itself, I’m going to draw one over a shorter time period. I think that’s worthwhile considering as well. I don’t do it — I’ve probably done it a couple of times — I don’t do it consistently, but that’s a that’s a valid thing to do.

Cameron  1:01:55

Yeah, we saw that with a stock recently, like in the last week or so. And I can’t remember which one it was now, but one I had to sell because its previous L1 had dropped off the edge of the chart and its new L1 gave it a much steeper sell line. I hadn’t reset my sell alerts, I think, in the previous month or whatever and got caught out. Oh, that’s a reminder for people, by the way, as it is the first week of the month, reset your sell alerts. It’s on my to do list for this week for all of our stocks. But, what I always tell people, like, is look, I mean, you know, the chances that something’s going to fall from — a stock like CIA, from $7.30 to anywhere close to $1.22, that’s the complete bottom falling out of the business if it’s going to drop that far. It’s highly unlikely that anything’s ever going to, well, not anything, but okay, a BNPL stock, maybe, but the sort of stocks that we deal with like CIA’s case, that mine stuff and pull it out of the ground and sell it and have been doing that for a long time, the chances that its business is going to take that kind of a hit or its shares are going to take that kind of a hit is highly unlikely. In your experience, you know, they will drop and then turn back around, usually, right?

Tony  1:03:15

Yep. And, I mean, we saw a case of that kind of fall with TRS just recently, it was a bad news sell. So, you could have gotten out before the, well, at least some way down the fall. And I think from memory TRS is still above its sell line even though it’s fallen off a lot. So, yeah, so that’s an example. But that’s one stock that I can think of in the last three years where it’s occurred, and it’s because of bad news. So, we have a way of selling out based on that bad news as well. It’s one of our sell signals.

Cameron  1:03:46

There you go, Reg, hope that helps. Dave, last question. “Grange Resources, GRR, is skyrocketing. Its current price,” when Dave wrote this, whenever that was, “around about $1.36 dwarfs its 3PTL sell price of 23 cents.” There’s another one. “Looking at the five-year chart, the sell price is not going to change significantly anytime soon, so it would have to fall over 80% to trigger a sell. Using this as an example in such instances, is a fudge in order?” Well, this is another iron…

Tony  1:04:15

Same answer.

Cameron  1:04:16

Yeah, it’s an iron ore stock, Range, I think, right?

Tony  1:04:18

It is, yeah, iron ore pellets in Tasmania.

Cameron  1:04:20

I think I said to Dave, we sold Grange late last year when iron ore became a commodity sell.

Tony  1:04:28

Yeah, it’s a good, I mean, first of all the fact that Reg and Dave have had tremendous upsides, well done guys. That’s great, good problem to have. Secondly, Grange actually is going to redraw itself in four- or five-months’ time — or, the sell line will redraw sometime in the next five months — because the L1, which is June ’17, is nearly five years old. So, we’re in May ’22 now, so it’s going to redraw. And I think it still won’t be as high as the current share price, but it’ll look, I think from memory — I did some work this morning — it’ll be around 50 cents. Up from 23, but still well below $1.35. So, and it’ll probably sit there for a year or two, so if Dave is still worried about then he could fudge.

Cameron  1:05:08

Well, Grange Resources, yeah, I mean, would get pulled into an iron ore commodity sell, right? If there is one, and there will be one at some point. We would get out well before. And I suggested to Dave, and to anyone else who’s new and wants to know more about how that plays out, go back and listen to the last episode from last year, Episode 452, that I put out on the 29th of December. The “best of” episode. Because, I sort of told the FMG story from 2021, which was the same — I could’ve used GRR just as well. But the decisions that you made around when we should sell our iron stocks and how that played out, I sort of did a compilation of all of those bits from over the course of the year. So, if you’re interested in what that looks like, folks, check out episode 452 for, sort of, like, a capsule episode of one of those stories. I think I should do more of those. Like, whenever you want to take a week off, I should, like, pick a theme. *

Tony  1:06:14

See ya.

Cameron  1:06:18

I knew that was opening myself up for trouble, here.

Tony  1:06:23

Alex, when you’re typing out of this transcript, just put an asterisk beside that.

Cameron  1:06:29

Yeah, I know what your week holidays are like too. It’s like, “I’m going down to Cape Schanck for a couple of weeks.” Three months later, your still at Cape Schanck. “Ah, it’s nice down here. I’m not gonna go pack, I’m having a good time.” Yeah, so go back and listen to that. I think those thematic episodes, I can do those things more. Well, I could hire someone to do it, even better. It’s like a story and how it played out over the course of six or twelve months. I can’t think of anything off the top of my head, but I’m sure over time we will have more things like that emerge, like thematic things that we did over a long period of time that we can put into little capsule episodes.

Tony  1:07:08

I think the COVID cough would be a great one, a great candidate for that.

Cameron  1:07:11

Yeah, right? Just the selling and buying back in decisions.

Tony  1:07:16

Correct. And how we had no idea what was going to happen in the world and whether we were all going to survive or die or whatever, and how long it would take, and was this another GFC event, and all that kind of stuff. And yeah, the system worked it all out for us.

Cameron  1:15:42

Well, maybe I can keep that in mind when I’m in the US and looking for ways of putting out low effort episodes. Although those edit things aren’t low effort, hiring somebody to do it is low effort. Well, that’s the questions for this week.

Cameron  1:16:19

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