Transcript #518

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

The QAV Pod­cast is a pro­duc­tion of Space­craft Pub­lish­ing Pro­pri­ety Lim­it­ed, autho­rised rep­re­sen­ta­tive of AFSL 520442, AFS rep­re­sen­ta­tive num­ber 001292718. Please don’t make any invest­ment deci­sions based sole­ly on lis­ten­ing to this pod­cast. This is pre­sent­ed as gen­er­al advice only, not per­son­al finan­cial advice. We don’t know your per­son­al finan­cial cir­cum­stances. Please see a finan­cial plan­ner before mak­ing any invest­ing deci­sions.