Transcript #517

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

190. 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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