QAV 518 Club

Cameron  00:07

Welcome back to QAV, TK. Episode 518, recorded 2:48pm, we started this on Tuesday the 10th of May 2022. Blood on the streets in the market today. Even Taylor’s texting me from LA going “what the hell’s going on? My portfolio is down by 4% today!” And I’m like, “yeah, it’s the interest rates and Ukraine.” He goes, “it’s got to be more. There’s got to be something going on, what’s happening? It’s crazy out there.” How do you feel TK yet? Are you panicking?

Tony  00:38

No. I feel better than the stock market is today, though. It’s business as usual, this happens, but it never ceases to amaze me, right? So, everyone’s known interest rates are going to rise, that there’s been a war in Ukraine for a while now, that China’s shutting down Shanghai to beat COVID. But, you know, it’s like someone rolled a pebble down a hill and by the time it gets to the bottom it’s a boulder and everyone’s panicking. And fear follows greed, right, so people are worried about the gains they’ve made and they’re trying to take it off the table and it just becomes a snowball. And that’s the market, that’s just human behaviour, but luckily, we have a system to deal with it.

Cameron  01:16

Not the good kind of Warren Buffett snowball. This is the bad kind of snowball. Yeah, but I was just saying to you off air, like, it makes me so happy to see QAV club members on our various forums over the last couple of weeks just go, “oh yeah, look at that. The markets going crazy. Watch your alerts, stay alert. Watch your alerts, but nobody panic. We have rules to follow. We just follow the rules.” Like, it’s great to see QAV club members saying that, not us saying that. People have gotten on board. Yeah, you just don’t panic, follow the rules. It’ll be choppy for a while, it’ll turn around. It’s just business as usual, as you say.

Tony  02:02

Or it won’t, and we’ll have cash to spend when it does turn around.

Cameron  02:05

Eventually it’ll turn around, right?

Tony  02:07

Yeah, exactly.

Cameron  02:08

It may not be soon, it maybe soon. We don’t have to worry about it because as you said last week the system will tell us what to do. It’ll tell us when to go to cash, it’ll tell us when to buy. Today it’s very hard to find anything to buy. All I could find was — I had to sell a few stocks — and all I could find to buy was QBE. Everything else was not just a Josephine, but a lot of them just get smacked around. Big drops.

Tony  02:34

And I’m not immune to it either. I’ve been selling shares; I sold out of BlueScope Steel last week, I sold out of Aurelia Metals, they both went below either rule one lines for me — or, I think rule one lines in both those cases. And then bought GRR and GMA. GRR has been smacked around, I’ve had to sell that today, and I bought QBE because it was the only large ADT stock on the buy list that wasn’t a Josephine. And I saw Rio today as well, I got rule one’d out of that. So, that’s just sitting in cash at the moment waiting for something else to buy. So, that’s just the way it works. That’s how the system handles this kind of environment.

Cameron  03:12

Volatility, yeah.

Tony  03:14

Happens to us all. I did want to talk about GRR, I made a mistake. It’s my bad, I think I made a mistake buying GRR, and it did go down almost as soon as I bought it. So, I was rule one’d out of it within twenty four hours, and looking back I sort of thought “what did I do wrong?” It might be worthwhile adding something to the Bible that if the underlying commodity, which in GRR’s case is iron ore, is a Josephine then don’t buy it. Because, I think that’s what’s happened with GRR. It had a terrific run. It’s been going up really well, and then of course, the day I bought it turned down. But, iron ore’s a Josephine so I should have picked up on that before I bought it.

Cameron  03:51

Ah, okay. Underlying commodity Josephine rule. Evolving the QAV, it is. “Mm, evolving the QAV, it is.” *With Yoda’s voice* We’ll talk more about commodities in a second, but I just wanted to point out somebody — or Taylor actually said to me this morning from LA, “what the hell is X64? All of a sudden I’ve got something called X64 in my portfolio, where did that come from?” And then I saw in our Slack channel, somebody mentioned that MML has changed its code to X64. Not sure if that’s because they’re one of the X Men now or if X64… Sounds like an Intel chip from back in the day or something?

Tony  04:33

I haven’t heard that one, so can’t provide any other information. Although I do know that MML was our worst performing stock for the week. It was down 11%.

Cameron  04:43

Because everyone’s going “what the hell is X64?”

Tony  04:45

Yeah, probably. Is that like the Commodore 64? It’s gone back to being a 64 computer? I dunno.

Cameron  04:51

Good old days. The Commodore. So, I think aluminium is a sell. I want to thank Duncan for pointing this out again on the Slack channel this morning. Aluminium has become a sell, I think, Tony?

Tony  05:01

Yeah, I had a look, I think it’s close. When I looked this morning, it wasn’t quite over. I better check it now again. I’m using Stock Doctor to check this. No, it’s definitely, it’s crossed today. It’s gone down even further. So, definitely right, it’s a sell.

Cameron  05:16

So, that impacts, I think, South 32, S32 if you own that. What did we decide with CAA? Did we decide CAA is, sort of, not really an aluminium stock?

Tony  05:32

It’s not, but I mean our thesis was that, just like the banks doing better when interest rates are rising, CAA should do better with aluminium is rising and do worse when it falls. So, we should sell it I think.

Cameron  05:44

But wasn’t it this thing about them selling, like, third party products?

Tony  05:50

No, they sell their own products. They’re a manufacturer. What we found out was that they’re a buyer of aluminium and then seller of aluminium products after they put aluminium though their manufacturing processes. But definitely the share price’s track the aluminium rise and I expect it, therefore, will track the aluminium fall. So, I’ll be selling CAA.

Cameron  06:10

And then, Rio also has some aluminium exposure, but I’m not sure how much of their revenues it is. Do you know?

Tony  06:18

It’s mainly iron ore.

Cameron  06:19

Okay, what are we going to do with iron ore this time, Tony? We had to fudge it late last year. What do you think of iron ore at the moment? Are we fudging it again?

Tony  06:28

It’s getting close, isn’t it? I don’t have a definitive answer. I had the same thought this morning, so you’re gonna have to leave that one with me.

Cameron  06:35

Because it, you know, for those people who are new, even though the actual sell line for iron ore is quite low, if we look at a five-year monthly chart, it went up very quickly from, sort of, May 2020 through to June ’21. And then as it came down, Tony decided we were going to fudge the sell line on that because it had risen so much; like, from 80 bucks through to 230 bucks over a period of about a year. And then it dropped down to 85 bucks, then it went back up to 156. Now it’s down to about 127. So, it’s been very volatile itself, iron ore.

Tony  07:15

So, my thesis on the iron ore graph last time was that the cycle for iron ore was quite sharp, and I was using a two or three-year graph to fudge it. So, I’ll have to take that one offline and have a look at a graph. It’s not a five-year graph, maybe two or three-year graph and check out whether it’s a sell or not.

Cameron  07:33

Okay. In the last week, obviously the RBA lifted interest rates. You sent us a new master sheet with the new rate, and you’ve made it easier to edit.

Tony  07:46

Yeah, so it’s just now an input cell which changes all the formulas in that column. And the rate was sitting at 0.05% for a long time, and now it’s up to 0.035%. Yeah, not much really. That’s what I mean, like, everyone’s known interest rates are rising, they go up by not even 1%, they got by a portion of 1%, and the market just runs around with their hair on fire. Pretty crazy. Look, I know why. Because, it’s more to do with the US, and people are saying “how does the Fed get inflation under control?” Because if you’re lifting right interest rates when inflation is rising, that can be a recipe for a recession. And that’s what people are starting to fear in the US now. Again, it’s prediction and who knows what will happen?

Cameron  08:33

So, I was thinking over the weekend, it just seems like over the last couple of years we had all of these economists saying “it’s a brand-new world,” “interest rates won’t have to go up again,” “low interest rates are going to be with us forever,” “we’re going to MMT our way through things,” and “it’s okay. We don’t have to worry about inflation out of MMT.” Did I dream all that or did that happen?

Tony  08:58

Not at all. You didn’t dream all that. And I think what we’ll start to see now is that some economists will come out and say, “well, MMT only works in a low interest rate environment. But if you have inflation, it doesn’t work.” And of course, printing money has to be inflationary at some stage. So, yeah.

Cameron  09:13

But I thought they’d figured out the loophole.

Tony  09:15

No, we’ve been saying for years it’s fairy dust. That’s the loophole. It’s magic dust at the RBA.

Cameron  09:24

Magic Dust. Let me ask you a question. I bought a share yesterday, OEL. I’ve had to sell it today already, but the buy price was 2 cents. I’m thinking, what’s the rule one price on a share you buy for 2 cents?

Tony  09:40

90% of 2 cents. So, 0.18.

Cameron  09:43

So, you actually just track it down to decimal places?

Tony  09:48

Yes, Stock Doctor will give you the price in three decimal places, so you can see it.

Cameron  09:53

So, the share price drops by 0.02 of a cent.

Tony  09:57

Yeah. Which is probably going to be one transaction right?

Cameron  09:59

It was, today it dropped down to like, 1.135 or something — 0.0135.

Tony  10:05

That’s a big drop.

Cameron  10:06

I know right? But, it’s like fractions of a cent. I was thinking yesterday, should I even buy this like, at 2 cents? But, could have gone up to 5 cents. You don’t know, right?

Tony  10:16

Exactly. There could be some big leverage there. I don’t know this company very well. I mean, some investors have said over the years you shouldn’t buy things when they’re down at that low, when they’re down in the penny sort — it’s called Penny Dreadful end of the market. At the penny stock end of the market. And the reason that they say that, and there is some theory behind it, is because chances are this company has had to issue so many shares to keep afloat that they keep adding a decimal point in front of the share price. That’s going to be a problem one day when they physically can’t issue any more shares and add another decimal point. But I tend to ignore that. If it’s a good company, it’s a good company regardless of what the share price is and I would buy if it had the ADT, which this one probably doesn’t, but anyway.

Cameron  10:59

Not for you, but it was big enough for my portfolio. All right, what else have you got on your news items of the week, TK?

Tony  11:06

Yeah, I just wanted to let people know, I know some people out there buy listed investment companies — including Alex who’s typing up this transcript, she owns Australian Foundation Investment. That also became a sell according to the three point trendline today. So, if any listener is out there listening to this, they should check their LICs as well as their stocks because the market is turning down. I wanted to just relay… had a conversation with a friend of mine, I won’t to tell the audience who. Long term friend, he became a QAV subscriber and didn’t tell me, but he did out himself when we were talking recently. I’m just going to relay what he said to me: he said had a superannuation portfolio for a long time, worked big corporate, rolled it over, and was paying $4 or $5,000 a year to their financial advisory firm and in return they were giving him three or four changes to the portfolio per year. So, he thought that was a bit wrong.

Cameron  12:05

Good work if you can get it.

Tony  12:06

Well yeah, if you’re a financial advisor charging four grand and making three stock tips a year. He said he took 10% and put it into QAV and is loving it, really happy with the results, really happy with the process. And just feeling comfortable that he can manage things for himself, whether it’s QAV, or a blend of QAV or whatever he does in the future. I don’t think his financial advisor is going to get four or five grand a year going forward out of him. I’m still just floored that people who are highly intelligent, have had professional careers are still enthralled to the financial management industry; the high fees, do nothing planning network which is out there. It just makes me even more motivated to get the QAV message out to as many people as possible.

Cameron  12:49

Yeah, but it’s like servicing your own car. Like, for people who haven’t been investors their entire lives, I mean, I think for a lot of us you look at it and it’s just like “Christ, like, where do I even start?” It just seems too overwhelming to get your head around. I did love, I saw this thing, in an article a guy wrote said he took his twelve-year-old son along to the Berkshire Hathaway shareholders meeting this week and they had a long drive to get there; was like a ten-hour drive to get there. He was like, “yeah, I figured, you know, this is the last chance my son will ever get probably to see Warren and Charlie on stage together.” It’s like going to see the Rolling Stones before Keith dies or something like that. And he was sort of listing what — the author was listing — what he thought the most important lessons were that he wanted his son to learn from Warren and Charlie. And one of the ones, I think it was the first one, was a quote from Buffett which is, “the best investment you’ll ever make is in yourself.” That’s how I think of QAV, right? This is an investment in yourself, because you’re learning how to do this thing that you’ll be able to do for the rest of your life. Teach your kids how to do it, teach your grandkids how to do it, it really is an investment in yourself. I think that should be the new motto on our website, this Buffett quote: “the best investment you’ll ever make.” Because that’s really what this is, right? It takes some time and effort and investment to learn how to do this stuff. I always tell people when they’re brand new and they email me, I say it’s like learning a language, right. It’s gonna take a year, couple of years of hard work to become fluent in QAV, but once you know how to speak QAV, man the party’s you will get invited to. People will be like, “are you the value investor?”

Tony  14:38

We need a secret handshake, a secret signal. What’s the one the kids put on their photos, the okay symbol backwards or something?

Cameron  14:44

No, that’s white supremacy. You don’t want to be doing that.

Tony  14:49

Devil’s horns then.

Cameron  14:52

I don’t think redheads are allowed to do white supremacy. You must have your own red supremacy, even secreter handshake. Okay. People do it because they don’t know what else to do, I think. It’s, you know, it’s like you go to a financial advisor like you go to a heart surgeon, a heart specialist. You don’t know what’s going on.

Tony  15:08

Yeah, no, exactly. But, I think people are largely being fleeced by these people. Largely. There’re some good ones out there. But anyway, all right, well, what else have I got. QAV portfolio was down for the week. I’m not surprised there. Down 2.68% for the last seven days, but the markets down 4.4%. And that was, I guess, not including today, 10th of May. So, it was up to the 9th of May. Biggest movement up was NHC, Newhope Coal, was up 12%, and MML, which is now X64 apparently, is down 11%. So, a few ups and downs there.

Cameron  15:41

We’ll have to sell MML maybe. Maybe, we’ll see. I’m not sure what the rule one is on that. Didn’t come up in my alerts today, though, so it’s probably all right. And you’re going to do a pulled pork for us today, TK?

Tony  15:52

Yeah, I’m going to do a little bit of a strange one. This was a request from a couple of weeks ago, from one of our listeners. They wanted me to have a look at Pendal, PDL, which I’ll do. It’s not on the buy list. I think it has been in the past, but it’s not there at the moment. But I’ll do it anyway just to illustrate that the process works for companies which aren’t on the buy list and we can work out, I guess, why they’re not. Pendal, it’s been around for a while. It was known as BT Investment and people may have heard of them. It was started back in 1969 as a joint venture between Bankers Trust in the US and Ord Minnette, a stockbroker in Australia, back when the fund management industry was fairly nascent in Australia. Eventually it was bought out by Westpac and they made it part of their wealth management offering, and it was then floated and separated from Westpac and Westpac have been selling down their stake in Pendal ever since. It is a large fund manager. It manages funds both locally and internationally, and all sorts of funds; income funds, growth funds, local, overseas, etc., etc. Interestingly, the name Pendal comes from the inversion of the first bit of business they ever had, which was the Dalgety pension funds. So, the “Pen” comes from the Pension Fund, and the Dal comes from Dalgety. So, it’s Pen-Dal, Dalgety Pension backwards. I’m gonna go through the numbers now. It’s a large ADT stock, so there’s 8.7 million available each day, which is, on average, which is good. I’m going to use a share price of 4.97, which was the share price on the weekend. That was less than it’s consensus target and it’s a recent consensus target update, so it gets a point for that. This is a high yielding stock, it’s yielding 8.25% which is really good, so it gets a point for that. Stock Doctor rates it strong and steady from a financial health perspective, so a couple of points there. But it does, at this stage anyway, lose out on its propcaf, which is currently 7.7 times, and a PE of 9.8. So, one of the companies where the cash flow is flowing through to the bottom line, which is good, but it’s above our threshold at the moment. Not a whole heap above it, so it may well come back onto the buy list during this recent downturn fairly soon. But at the share price its at, it is above IV1 and IV2 and IV2 isn’t a big difference to IV1, which made me dive a little bit further, and it does, this company does have a negative EPS growth forecast. So, something to watch out for there. And that means the growth divided by PE, which is one of our measures, is negative and so it’s scored a -1 for that. Directors only hold 3%, which is not bad but doesn’t meet our thresholds. So, no score there. Book plus 30% just scrapes in, book plus 30% or net equity per share plus 30% comes in at $5.02, and the share price was $4.97 when I did this analysis, so it’s borderline but it comes in. The PE currently is the lowest for the last three years, so it gets a score of two there. But the equity did have a down six months over the last three years, so it’s not increasing overall even though for the other five halves it was. Eventually that will roll off and we will probably see that score there, but not yet. All in all, quality scores only 33% for this company, so 5 out of 15, and the QAV score is 0.04. So, not one to buy now but if the price drops further, it’ll probably come back onto our screens.

Cameron  19:15

So just to be clear, this is PDL not PTL.

Tony  19:20

It is PDL, Pendal Group.

Cameron  19:25

Pendal not Pental.

Tony  19:28

Yes.

Cameron  19:29

In your notes you sent me, you said you’re doing the pulled pork on PTL.

Tony  19:33

Oh sorry. No, it’s PDL.

Cameron  19:35

PDL. Alright. Sure you did the right one?

Tony  19:39

I did. I’m looking at it on Stock Doctor now. I did,

Cameron  19:42

You sure that’s the one that somebody asked for?

Tony  19:44

Yep. I hope so.

Cameron  19:48

I’m just searching through my notes to see if anyone has asked for PDL, I don’t have anyone asking for PDL, so I’ll trust you.

Tony  19:56

Well, if it’s Pental I can do it next week. That’s PTL

Cameron  19:59

PDL, Pendal. Alright, shall we move on to Q&A, TK?

Tony  20:04

Yes, yes, please.

Cameron  20:06

Alright, thanks. This first one’s from Jeff. He was asking a question from the financial review, I think this would have been last week. “What does this mean? ‘Cash settled total return swap.'” He saw this in a story about Mike Cannon-Brookes, my old friend, tried to acquire AGL so he can shut it down. It’s like Rupert Murdoch buying dotcom startups in the year 2000 in order to shut them down. “Cash settled total return swap.” Does that mean anything to you, Tony?

Tony  20:42

Yeah, I’ve heard it before. Mike Cannon-Brookes isn’t trying to buy AGL to shut it down, he’s trying to stop a demerger from going ahead which would separate the retail part of the business from the coal fired power plant part of the business. He wants to keep them together.

Cameron  20:55

So he can shut down the coal part of the business, though, right?

Tony  20:58

Yeah, shut down the coal plants earlier. But essentially, this swap is leverage. So, it’s a bit like when you’re shorting a company and you can go to institution and rent the shares, and then sell them and hand them back once they drop. So, what Mike Cannon-Brookes has done is he’s teamed up with a banker to find and Insto who will rent him, I think it’s about 10% of the shares. He’ll pay a fee, probably a very hefty fee for that, and there are some conditions on the swap. So, he’ll get the voting rights, he’ll get any dividends that are payable, but he has to pay a fee. And he has to, I think he has to guarantee the downside. So, if the shares drop he has to make good on the company that lent them to him. And he has to settle all that in cash, so he’s made an agreement to do that. So, I would think, even though it’s not obvious, I would think there’s a whole series of options going on so that he’s managing his downside risk. So, he’s probably put options into the market, again at a fairly hefty fee, so that if the share price drops he has the ability to sell the shares at a higher price. And he’s paying the rental for the swap. So, yeah, I mean, the bank would love this. They’re charging a huge fee for putting the deal together, and then charging fees on all the options to hold it together. Mike Cannon-Brookes is probably pretty happy, too, because he’ll get what he wants and he’s rich enough to be able to afford it. But, that’s what it is, it’s essentially a share rental deal to allow him to vote against the demerger at AGL.

Cameron  22:24

Relatively cheaply control a large percentage of stock.

Tony  22:28

Yeah, I mean, I was listening to Stephen Mayne on the Money Cafe podcast even today when I was out walking, and he’s railing against this kind of thing going on, saying it doesn’t happen overseas. It’s been used before by people like Kerry Stokes to take over Boral, they’ll suddenly pop up with a large interest and you’re meant to declare that you’re a shareholder after 5%, but now Mike Cannon-Brookes has a 10% holding. And when the Boral takeover was going on, Stokes didn’t reveal his share interests through derivatives until he had a 10% stake. So, I understand the argument. It’s in favour of transparency in the market, you know who’s controlling what, but generally it only occurs in these kinds of situations when things are in play.

Cameron  23:11

That’s Stephen Mayne’s only complaint. I mean, does he have any other complaints around what MCB is trying to do?

Tony  23:18

No, he didn’t.

Cameron  23:19

Well, he’s certainly interesting to watch, MCB. He’s a man of big dreams and big visions and doesn’t mind taking a few risks.

Tony  23:28

Yeah, he’s kind of Elon Musk of Australia now, isn’t he?

Cameron  23:31

I wasn’t gonna make that analogy, but yeah, he certainly in that sense, he definitely is.

Tony  23:37

Have you watched that Netflix documentary “Return to Space” about Elon Musk and his spaceflights?

Tony  23:43

No.

Tony  23:44

I mean, I was watching it, and every time I see him I just think Bond villain. He’s kind of this nerdy guy in a black suit with a black tie, kind of awkward, a bit autistic, with grandiose plans, you know, to get off Earth and into Mars, and I’m just like Bond villain every time I see him.

Cameron  24:02

“Don’t Look Up”, remember the rich guy in Don’t Look Up?

Tony  24:06

Yeah, was that mask?

Cameron  24:09

No, I think it was based on a combination of Musk and Zuckerberg and maybe Gates. Yeah. Guy who’s extremely, sort of, introverted. Yeah, whatever. Asperger’s kind of rich dude. Alright, hope that helps, Jeff. Sue asks, “interest rates being topical and having never been an investor during a time of increasing interest rates, I was curious to check ASX performance last major run of interest rate hikes. Our last journey of interest rate rises was between 2002 and 2007 when the cash rate went from about $4.25 to $6.25. Pleasingly, the All Ords basically doubled during this period just before the global financial crisis. This gave me confidence of the uncertainty of interest rate rises on the ASX, but also got me curious about Tony’s experience during the 2002-2007 time, what he was doing, and if there was any QAV data or trends during this time? A focus on this period would be a really interesting upcoming episode, certainly would balm any anxiety around this sort of environment for those without skin in a rate rising market. I know the rules don’t change, but I’d be fascinated in Tony’s experience: highs, lows, warts and all during that time, and any lessons he learned that would help us over what may be an era of interest rate rises. Many thanks, Sue.”

Tony  25:38

Yes, it was a really good period to invest, Sue, coming off the dotcom bubble burst in 2002. And also too, the Gulf War II happened around that time as well. So, I guess the first similarity between that time and now is oil, so oil went up during that period — at least for the startup. Last time, it was Iraq. This time, it’s Ukraine, that’s suffering. But it certainly has similarities. The other thing I guess that is worth understanding is that the rising interest rates can actually create a rising market as well paradoxically, and certainly there was a late stage bubble in the share market in, sort of, eighteen months leading up to the GFC. The market was definitely overvalued and we kind of all knew it, but the returns were fantastic. I mean, the last, I think 2007 was something like 30 or 40% return, it was quite good. So, that happens prior to a downturn. There was a housing bubble going on, there was lots of flipping in the market, particularly in the US but also here. And it was something called mortgage bonds which were introduced in the market, which did cause our housing and apartment market to inflate. So, the way that worked was that, again, you didn’t have to have a deposit to buy an apartment, you could take out a mortgage bond. And that meant that somebody else was guaranteeing that you would settle on the transaction, even though you didn’t have a deposit. And so, people were taking out mortgage bonds, buying an apartment off the plan and waiting for it to be built. By time it was built, it was worth a lot more and so they would just sell it day one and continue the progress. And of course, you know, when the market did turn down, when the GFC happened, all those mortgage bond holders were toast and they suddenly had negative equity when the buildings were completed. You know, that did have flow through effects into the market as well. And it was interesting watching the GFC unfold. I mean, no one saw it coming despite what The Big Short says, they saw it coming within months of it occurring, not long term saw it coming. It was interesting watching it unfold. And you slowly found out the reasons after the fact, you know, the ninja loans that they were offering in the US for no income, no job applicants, I think they were calling them jingle loans as well. So, if you didn’t like the mortgage you could just hand the keys back to the house and walk away, you were never kept on the hook for any negative equity in the house when it sold. CFD suddenly became something which everyone knew about which we didn’t know about before. I spoke before about the ratings companies and how they completely dropped the ball during this period. There were bank runs going on, you know, what was going to happen? Were the banks gonna go broke? There was Northern Rock, went broke in the UK and Lehman Brothers went broke in the States, and then government stepped in and tried to stop that but didn’t really know what was gonna happen. Governments in Australia came out and guaranteed your bank deposits, even though they charged the banks to do that, so it flew back into a lower return for deposits. But anyway, that was all going on. So, it was a really interesting time in the world. I don’t remember interest rates being that big a part of the whole deal, even though they were rising. That’s the other, sort of, context I’d put on today’s market is that for the majority of my investing career, and the majority of my life, interest rates have never been 0 or near 0 or even 3%. They’ve been probably averaging around 7 or 8% for a home loan. I’ve already said before too, that my first home loan was at 15.9%. So, everything still exists when interest rates are high, right? So, that’s why I think its kind of funny that the markets having tantrums now interest rates have gone up 0.25%. It’s a funny time. But no, we will all survive. Companies will adapt, people will adapt. Look, I’m not saying there won’t be issues. I mean, people have become over leveraged, perhaps, and if the property market does dry up and starts to come back and people have negative equity in their houses they won’t be able to draw down and take a holiday, they won’t be able to draw down and buy a car, and that will have flow through effects on the economy as well. So, there will be issues but you know, I’m pretty sure we’ll get through.

Cameron  29:40

And from a QAV perspective, guessing here, nothing changes?

Tony  29:46

No, not at all. No, I mean, I did some research recently on whether the VIX index should be used as some kind of a red flag before we buy, but… The VIX is the volatility index, so I think it’s on the Chicago Board of commodities. It’s basically a way of trying to use volatility in the market to rate whether people are in fear mode or greed mode. So, when the VIX index is up it means the markets volatile, there’s a lot of fear, and when it’s down it’s happy days and clear sailing. But, I haven’t been able to get a fine point on it enough to use it in our buys and sells, so I don’t think it will be.

Cameron  30:21

Alright, Sue. Well, I hope that helps. Basically, business as usual, as you correctly predicted, Sue, it’s just follow the rules. Ali says: “BSL, take today,” this is going back a few days. “I know there was a podcast discussion around its divestment to Woodside Petroleum, is there a factor here or anything to do with the buyback?”

Tony  30:46

I think Ali might have these two, BSL and BHP, confused.

Cameron  30:50

Think it was BHP?

Tony  30:51

Yeah, BHP have sold off their oil and gas interests to Woodside Petroleum, not BSL. BSL has tanked. I think that’s got to do more with China affecting the growth forecast for the rest of the world. So, BSL is BlueScope Steel, steel maker so they’re heavily aligned to the construction industry, both housing and commercial, and infrastructure. And if world growth comes off, which is now being predicted, then there’ll be less steel needed. And so, kind of part of all this fallout is steel prices are down and BlueScope Steel share price is down.

Cameron  31:24

Okay, hope that helps, Ali. Mark says, “Hi, Cam. As a holder of S32, I note that greater than a third of their revenue comes from alumina and aluminium. The aluminium price is trending down,” obviously this is a few days old as well, “I’d like to know TKs thoughts on the price of both products and how they’re used together to arrive at a sell decision. Is there a reliable alumina price chart that TK uses?” I don’t even know the difference between alumina and aluminium, Tony. I know a bauxite falls into it, but what’s alumina?

Tony  32:00

Yeah. So, bauxite would be the raw material, the ore. Alumina would be the processed ore, which would be the feedstock for someone like Capral who then turns it into aluminium and makes girders and car parts and sidings for houses out of it. We’ve been using the aluminium, not futures, but the physical, physical aluminium price in Stock Doctor to track our charts.

Cameron  32:23

And what about an alumina price?

Tony  32:26

Haven’t looked at it. Don’t know, sorry. I’d be surprised if it didn’t track the aluminium graph, though.

Cameron  32:31

Yeah, I’m having a look at it in Focus Economics. Alumina’s going up? Oh, that’s January 17. Okay, this chart… Trading economics. Let’s look at this. Alumina, AWC. Yeah, it’s plunging, plunging. I would say it is a three-point sell as well, just eyeballing it here. But in theory, if one of them was going down and the other wasn’t, what would we do?

Tony  33:02

I don’t know. So, aluminium I think has a direct bearing on companies like Capral. Maybe alumina is more important to South 32, but I would think that both graphs would probably go in lockstep.

Cameron  33:15

Okay, but you don’t use one usually, which is Mark’s question.

Tony  33:20

Yeah, I use aluminium, physical XAL_, and it’s now a sell so I’ll be selling South 32 and Capral in the next 24 hours.

Cameron  33:28

Alison asks a question about rule one alerts: “when Tony’s bought a particular stock in a few different tranches, does he set an alert for each different price he bought a parcel at or does he adjust the one alert so it’s at the average cost of the whole holding?” I think it’s the latter. isn’t it?

Tony  33:48

Yeah, I just have one alert. I want to keep it simple because I have a number of different structures; super funds, family trusts, individual holdings, etc. So, I can buy something in three or four different parcels, and within those buys then Alex Hay at Baillieu’s — or, now Ord Minnette — will, you know, have a whole raft of trades going on to fulfil that purchase. So, that could be half a dozen trades. It’d be too complex to set a rule one for all those, so I just sum them all up and use one.

Cameron  34:15

There you go, Allison. Dan asks, “interesting article from an analyst covering GMA. Doesn’t sound too pretty. I know a lot of the QAV members will hold this company, would love to know Tony’s thoughts. Interesting from GMA, impact of rising interest rates and active risks. Investors should be mindful,” I guess this is coming from GMA’s report. “Investors should be mindful of the active risks posed by higher interest rates on GMA. As of December 21, around 58% of GMAs bond portfolio is allocated to fixed rate instruments versus floating rate, hence any lift in interest rates may not fully translate to higher investment income in the near term. Additionally, the bond portfolio is susceptible to devaluation; i.e. bond value decreases as yields move higher and collectively weigh on the group’s first quarter ’22 insurance profit of $49.2 million. Additionally, rising rates may weigh on Australia’s property market and see softer GWP growth for GMA in the near term. Rising rates could also induce mortgage stress, leading to higher claims environment for GMAs LMI insurance products.” What do you think of all of that, Tony?

Tony  35:30

I wish Dan had asked me the question today, because I bought GMA on Friday — sorry, had asked the question last week because I bought GMA on Friday. I did see this piece of analysis, it looks like the one that Stock Doctor put out last week. And look, I still decided to buy GMA. It wasn’t a Josephine at the time when I bought it. I did understand the risks, because it is leveraged to the housing market and interest rates are rising. But also, I mean, this is a bit like when we were buying Fortescue Metal and people were making counter arguments about the iron ore price and China was trying to sell its own mine in Africa, and Vale, the South American Iron Ore company was going to come back on track, etc., etc. You can go down the rabbit hole on this kind of stuff and it becomes prediction because there are counterpoints, right? I went and had a look at GMA’s announcements, and they’re still calling out quite a large increase in profit for this next year. Even if it does come off a little bit, it’s still going to be a big increase. And they were also saying things like unemployment is at record lows, and that’s good for people buying houses. So yeah, there’s counterbalancing risks here. And you know, the other point to make is that, yes, there will certainly be a bump in house prices. I think there’ll be a leg down when interest rates first start to rise. But like I said, my first mortgage was at 15.9%. Houses were doubling at that stage and that’s why people were taking out mortgages at 15%, because they wanted to get into the market and get a part of it. So, don’t think that housing prices will necessarily always go down when interest rates go up. They’re not in an inverse contrarian relationship like that, they can still rise. So, I appreciate the analysis. I think there are risks with the stock and I couldn’t be rule one selling it fairly soon, but that’s probably going to be based on the general market moves not these kinds of risks. And I’m prepared to take these risks, as we’ve said before, its risks like this in a stock that allows us to buy them at a cheaper price. There is always going to be some kind of contrarian argument at play when we’re buying a stock if we’re a value investor. So, that’s why we have a system and we try and ignore that and focus on the metrics that we focus on.

Cameron  37:33

And would it be fair to say, too, that one of the big differences between QAV is a methodology and what Buffett or Munger might do is, we tend not to go down into the weeds. Basically, looking at stuff like this and trying to work out if this is going to be a good thing or a bad thing is prediction, as you said, and “when you predict, you make a dic out of you and me.” So, we just tend to avoid anything that involves prediction.

Tony  38:06

Yeah, look, I’m not gonna say the prediction won’t come true and I might have to rule one sell this. Or, maybe in six months when the results come out the analysis was sound and they’re worse than we thought. But like I said, those risks enable us to buy a good company with a cheap price.

Cameron  38:20

And for average punters, average investors like me and I think most of our listeners, we don’t have the wherewithal, the skills and experience to be able to look at stuff like this and decide if this is a good thing or a bad thing. So, like, I know Buffett just bought a company I read, can’t remember which one — Allegany Insurance maybe — that he said he’s read their annual report every year for sixty years waiting for a chance to buy them. And finally, they came to him and said, “we’re ready.” He’s been studying their financials for sixty years just in case one day he gets to buy it. Most of us aren’t going to do that, and with QAV we don’t need to know the ins and outs of the business or the sector. We just, I mean, there’s a certain amount of prediction built into QAV, though, really. I mean, the reason we’re looking at their performance history and those sorts of things is, there’s sort of a loose prediction built in there that if they’ve been performing well and growing their equity and those sorts of things, that they will continue to do well. Or, if they’ve done badly for a long period of time and now they seem to be turning around, we’re predicting that we think they will regress to the mean because that’s what tends to happen over time, stocks regress to the mean. So, there’s a certain amount of prediction built into QAV in a sense.

Tony  39:49

Yeah, it’s a different type of prediction, it’s statistical in nature. We expect things to regress to the mean, which is different to saying I have a view on what the housing market will do, and how it will therefore affect this company. Yeah. And look, we all own houses…

Cameron  40:03

Not all of us, Tony.

Tony  40:05

Sorry, a lot of us own houses, most of us own houses, and if we’re honest we’re not that great at predicting the housing market. I bought houses when I needed them, rather than necessarily saying that the housing market’s a great place to invest it at the time.

Cameron  40:18

And look, even Buffett and Munger say they can’t predict what’s going to happen in the future. So, I just… you’re just opening yourself up to a world of hurt. People who get paid to predict what’s going to happen obviously don’t do a very good job. Look at the fund manager performance we talked about last week. No one, I’m convinced that no one really can predict what’s going to happen. So, it’s a mug’s game.

Tony  40:44

That’s a really good point and I didn’t address it when I was talking about that article last week. But, like, if you’re a big fund manager and the employ a roomful of spreadsheet jockeys to do a deep dive on GMA and what’s gonna happen to their bond portfolio, none of them are going to say “I don’t know,” they’re going to come up with an answer because they’re paid to come up with an answer. Whether it’s right or wrong, no one will ever acknowledge it, because it’ll be on to the next analysis and the herd travels on. But yeah, it’s like Buffett’s also said the one of the most important things about being an investor is learning how to say no. You don’t have to have an opinion on the bond portfolio of GMA to make this decision about buying or not buying GMA.

Cameron  41:21

Okay, hope that makes sense, Dan. Last questions from Ali again: “is ANZ a sell or does the dividend bring the sale price down by 72 cents, or am I not getting it?” I had a look at this, and I think when I looked at it on Friday the dividend was going ex on Monday. So, there was a bit of a discussion on our Slack channel, I think, about “well, according to what you’ve told us before we factored the dividend back into the price when it’s between it going ex and when we get the money.” If it doesn’t go ex for a day, or two days, or a week, do you figure “well, I’m gonna be holding it then. I’m gonna get that so I might as well just hold and do it”. Or do you go…

Tony  42:09

No.

Cameron  42:09

No? even if it’s the next day?

Tony  42:11

Well, this is a good example. So, if ANZ was a sell last week and it goes ex-dividend today, it’s gonna go down further today, right? So, if it was a sell last week I would have sold and I wouldn’t have added the dividend back in. If it’s ex-dividend today I’d add it back in, but just looking at the ANZ price this morning when I had a look at this question it’s still a sell even when you add the dividend back in, right, because it’s been going down in the last twenty-four hours. So yeah, I wouldn’t fudge that one myself.

Cameron  42:39

So, it is what it is. You don’t hold it even if it’s a day away, because as you say you expect if there’s a 72 cent dividend the price is going to drop by roughly 72 cents anyway after ex date.

Tony  42:52

72 cents. Yeah, correct.

Cameron  42:53

Yeah, right. Okay.

Tony  42:54

All things being equal. We found recently that they dropped by more than 72 cents. I think what’s happening is people, especially with the banks, because annual results are coming out now for three of the major banks plus Macquarie and therefore their dividends are off cycle with the rest of the market, people rotate out of, you know, high paying dividend blue chip companies in the December/June results and they go into the banks and now they’ll be selling out of the bank as soon as they get their dividend. So, I think, you know, I’ve found in the last little while that the banks tend to go down more than the dividend before they go back up again.

Cameron  43:28

Good question, Ali. And a good explanation, Tony, thanks. I’ll have to put that in the Bible somewhere because I’m sure we’ll get that one again.

Tony  43:36

Okay.

Cameron  43:37

Well, that’s the questions for this week.

Tony  43:40

One more thing sorry, I just noticed in my notes: I had, according to Stock Doctor, gold as a sell. That’s in US dollars though. I went and had a look at another graph outside of Stock Doctor which is the gold price in Australian dollars, and gold is still okay. So, I’m gonna not call gold a sell at this stage, but it’s certainly one to watch along with all the other commodities at the moment.

Cameron  44:02

Good stuff. Do you want to get into after hours…

Cameron  56:07

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