QAV 522 Club

Cameron  00:00

Hi, welcome to QAV 522. You’re back in Sydney, TK. How was your Queensland golfing-horse trip?

Tony  00:18

Really good. Yeah, had a great holiday and catching up with the wonderful QAV members in Brisbane too. Lots of golf, although it was very, very muddy. So, yeah, lots of mud. Golf was good. Our friends sold their horse. I bought a couple — or, shares in a couple. So, yeah, all good.

Cameron  00:35

How’s the liver? Is it okay?

Tony  00:38

Resting. It got a good workout on the last night.

Cameron  00:44

And every other night, too.

Tony  00:46

True, that’s a good point. But yeah, we worked up to the last night, went out with a bang. And I had to drive six and a half hours from Coughs Harbour the next day.

Cameron  00:54

I don’t know how you do it at your age.

Tony  00:57

That was hard.

Cameron  00:58

You drink like a twenty year old.

Tony  01:00

Like a champion.

Cameron  01:06

I was talking with Tony and our friend Mark one night at a pub when they were here, and before we went to the pub, I think — in-between trips to the pub, maybe. And I was talking about how I gave up drinking when I was eighteen because I’d had a couple of scary incidents where I’d nearly died from drinking too much, and Tony said “nah, you’re just a quitter.”

Tony  01:33

That’s right, you gotta push through.

Cameron  01:35

Gotta push trough, yeah, you gotta push through. Thank god I didn’t know you when I was eighteen, I would not have survived twenty-one.

Tony  01:49

Yeah, well must be the Irish stock in me. I love a good pub. We had a good night that night. We had rounds of Negronis at the Story Bridge Hotel, it was lovely.

Cameron  01:58

I’ve got the same Irish blood in me, that’s why I needed to stop drinking when I was eighteen.

Tony  02:03

I thought you were Scottish. That’s even worse.

Cameron  02:05

I’m a Reilly man. They all come from Ireland, originally. My dad was Scottish, but, you know, we’re all Irish. Hey, we’re recording this seventh of June 2022. RBA are due to come out with a rate hike, everyone’s predicting today. The markets down, but the markets been down more often than not for the last month or two. I just wanted — before we get into all of that though, Tony — I had the thought in the last week when we were selling stuff and buying stuff that to me it just seemed like a game of musical chairs. The music stops playing on this one particular stock because it breaches something, just get off the chair. Get on one when the music’s playing on another one, just get on that chair. And then, you know, wait till the music stops playing on that one. You get off that chair, and then… it’s just, I just feel like it’s off the chair on the chair. No emotion, just getting off the chair.

Tony  02:55

Feels like that at the moment because the market’s so up and down. It’s just going sideways and then trending up and coming back. So, yeah, I’ve done more trading than I’ve done for a long time in the last few months, including today: I sold ASX. I got stopped out of ASX and bought Bendigo Bank which is on top of the buy list.

Cameron  03:15

I own ASX I think, I better go check that. Was it rule one?

Tony  03:18

Yeah, rule one.

Cameron  03:19

Oh, okay. I tell you what’s not going sideways, and that’s BNPL stocks today. We’re not supposed to talk about BNPL but…

Tony  03:30

That’s a record, it’s been five minutes into the podcast.

Cameron  03:35

Well, today’s a special occasion. Apple had their WWDC (Worldwide Developer Conference) today and announced that they’re launching Apple Pay Later built into every Apple device and automatically accessible at every store that accepts Apple Pay, which is pretty much every store. “Apple is launching a new feature for Apple Pay to let you pay for purchases in four instalments over time without interest called Apple Pay Later. It’s Apple’s take on a buy now pay later service built right into Apple Pay and coming with iOS 16,” and Zips share price, I noticed, is down another 10% today. It’s down, like, 95% from where it was a year ago.

Tony  04:21

And Block has been taken out of the ASX I think this week.

Tony  04:25

Maybe next week. So, probably a mercy killing for the Australian shareholders.

Cameron  04:25


Cameron  04:30

Yeah, Block are the guys that bought Afterpay, right?

Tony  04:34


Cameron  04:34

Took that out. I looked at the wax, you know, the old WAAAX stocks was Wisetech, Afterpay, Appen…

Tony  04:43


Cameron  04:43

Zero, and another “a”. Anyway, I looked at all of them today. Afterpay is obviously gone, but the rest of them are roughly down about 50% from where they were at the end of last year — or maybe twelve months ago. So, they’re roughly down 50%, all of those high fliers on average.

Tony  05:02

It’s been a tough ride.

Cameron  05:04

Yeah, it’s like, the cycle turns.

Tony  05:06

Well, yeah. And like, so, we’re complaining about musical chairs, but at least we’re intact and we’re still beating the index even though there’s a bit more work involved at the moment, and a bit more transaction friction than we’d like. But, hey, it could be worse, we could be in the high PE growth market and we’d be looking at wounds at the moment.

Cameron  05:28

Maybe. Or, maybe we would have bought in early enough that we would have done very well. But it’s that kind of, sort of, crazy up-crazy down roller coaster ride that we want to avoid, right?

Tony  05:40

Correct. Speaking of crazy, while we’re on the topic, what about Elon Musk over the weekend? “Anybody who doesn’t turn up to the office and work for forty hours a week is considered to have resigned.”

Cameron  05:52

Didn’t he say something like, “pick another place where you pretend to work?”

Tony  06:00

What was the other one? He’s predicting a worldwide recession? So, he’s gonna cut his staff by 10%.

Cameron  06:06

Right? Well, he could be right on that one. I don’t know what’s going on with his Twitter purchase at the moment. I think he reduced his price after he decided they were mostly bots.

Tony  06:16

Yeah. And he’s on the tweet today again about how Twitter’s full of bots.

Cameron  06:21

Driving the price down.

Tony  06:23

Yeah, probably. But, I mean, some people think he’s brilliant. If you’re partnering in a venture with him though, I’d prefer to partner with someone who’s a bit more level headed. There’s a price to pay if you’re partnering with a genius, I think.

Cameron  06:36

As you well know. You’ve partnered with me many times over the years. Well, I guess we won’t be buying an island, then. I see this island for sale, Tony. Keswick Island’s lots for sale. I thought we could just set up QAV Island, we’ll all go and live there and only value investors are allowed on our island. It’s a bit like Atlas Shrugged, Ayn Rand’s book.

Tony  07:04

Yeah. Right. Where is Carl Galt?

Cameron  07:06

Yeah… Carl? Carl Galt?

Tony  07:11

No, Carl Galt wasn’t it?

Cameron  07:13

Something, something Galt. Andrew Galt? Don’t know. Something Galt. John Galt!

Tony  07:18

John Galt.

Cameron  07:19

John Galt. What do you think? Are you interested in buying an island?

Tony  07:24

Not really. I lived in Mackay for a year, and there will no islands near Mackay. Its gotta be a long way out because the barrier reef was like 100ks off Mackay by the time it gets that far south, so I’m assuming the islands part of the reef. So, it’s a long trip.

Cameron  07:44

That’s alright, we’re gonna live there. We’re just gonna…

Tony  07:46

How do we get supplies in? I looked at the article…

Cameron  07:49

Oh, supplies.

Tony  07:49

There’s no jetty, the airports only available to the Chinese who own it. How do you get in? How do you get your building material in to build your house?

Cameron  07:59

These are, you know, other people problems, Tony.

Tony  08:02

Jump off and dingy and wade in with a roof beam on your head, is that how you do it? No wonder the lands so cheap.

Cameron  08:11

Yeah. Oh well, there you go. So much for that idea.

Tony  08:16

No, it’s a good idea. I just can probably find somewhere better.

Cameron  08:20

Oh, okay. Well, we’re still gonna buy an island, just not that island.

Tony  08:23

Yeah. But it’s got to have a golf course — golf course and a pub.

Cameron  08:26

Okay. I read this good article in the Fin yesterday, I think. Cliff Asness, who is a hedge fund manager, AQR Capital Management, there was this great quote and he said that at some point in 1999 the market was booming because of the dotcom Boom. His portfolio wasn’t doing as well and he was unhappy, and his wife said to him, “I thought you make your money because people make mistakes.” The article says this comment was somewhat of an epiphany for Asness. The inefficiencies and irrationalities of markets he relied on for his strategies to work existed precisely because they were emotionally excruciating. And he says, his wife was effectively saying, “so you want people to make mistakes. You just don’t want them to continue to make them after AQR puts the position on.” He says he tells himself the story during the toughest days in the market to calm his nerves. Some days it works better from others. It made me think two things; one was we’re the same, right? We want people to make mistakes. The market only works by us disagreeing with the market. So, by our definition they’re making mistakes. By their definition, we’re making mistakes. So, in periods of great exuberance like we saw when we started the show a couple of years ago, dot coms booming, all that kind of stuff. Or at the moment when everything’s doom and gloom and the markets going down and dropping a lot more than it normally would. We need these things to happen. These are these are not things that we should as problems or things that make our lives difficult. We need this sort of stuff. And you know, I went through the other day — I’m doing this compilation episode, something you suggested to me a while ago from the COVID crash — of going back to starting at like January/February 2020 and just seeing it play out and what you said and how you were thinking and how you were feeling. And one of the things I got out of that relistening to it is you said, “I kind of get,” something like this, I’m paraphrasing, but “I kind of get excited when the market goes into a crash.” I mean, not — you don’t like seeing the effects on people’s livelihoods and people who don’t have QAV’s investments go in the toilet and lose their life savings and all this kind of stuff. That’s not good. But from an investor’s perspective it’s a good thing, because you can buy really good companies really cheaply when they go down. So, we need these things to happen and we shouldn’t look at look at them as trials and tribulations of being an investor, this is what creates the opportunity. Yeah, we want people to make mistakes, because that’s what makes us successful. But the second part of this was, he says he finds his work “emotionally excruciating”.

Tony  11:08

He’s not playing enough golf.

Cameron  11:10

I’ve done this show with you for three years. I’ve never seen you break a sweat let alone “mostly excruciating.” Like, what?

Tony  11:23

Only when I sign the checks.

Cameron  11:27

Yeah, okay.

Tony  11:30

No, that’s right. If it’s emotionally excruciating, go off and do something else. We do this to live, we don’t live to do it. But, he raised a good point. I mean, Buffett always said the best time to invest is when there’s blood in the streets. And that’s exactly right. And we do rely on mispricing of assets. So, go back and listen to the interviews that we had with a lot of people who were, you know, riding the growth story. And they were saying “oh, you just don’t get it” and “value investing is dead”, and “you’re performing poorly. Look at the US market, it’s up 25% this year,” blah, blah, blah. And it just reminded me exactly of the late 1990s when people like Warren Buffett were saying, “yeah, well, I can’t find anything to buy, but I’m not worried. I’m not gonna try and understand dotcom stocks, I’m not going to buy dotcom stocks, I’ll wait until they’re properly valued.” And it happened again, it’s happened again in the last, sort of, six months. Same things happened with what we want to happen and has happened. Look at when we were buying oil stocks, when we first started buying oil stocks, you know, we bought Santos at the bottom of the COVID crash. All the commentary was “oh, the oil markets about is gonna break, it’s gonna break down. No one’s buying oil, why do you want to buy oil for?” It’s exactly the time to buy an asset, right? It’s when no one else wants it, it’s when it’s so cheap everyone’s got their hands in their pockets, and that’s when we buy it. So, it’s the same in every cycle. *”It is different, every time. It’s always different, Tony. It’s never the same.” (Alann Kohler clip played)* *”Don’t hit me with them negative waves so early in the morning. Think the bridge will be there and it will be there. It’s a mother, beautiful bridge, and it’s gonna be there.” (Kelly’s Heroes clip played)

Cameron  13:13

Playing all the greatest hits now.

Tony  13:14

Yeah, it is. Yeah. All right. Well, I’ve gone on enough about being a contrarian. The point I took out of that article, which was in the AFR… So, this guy, Cliff Asness, he does a lot of statistical analysis on the share market. And he, one of the questions he was asked is “what happens when interest rates start to rise” And this guy has made a career out of statistically analysing the share market, and he said that as a value investor rising interest rates only affect his performance by about 30%. The other 70% of his performance is unaffected by interest rates. And that’s been my experience. I’m not gonna put a number on it, but I’ve always been able to make money if interest rates are going up or down or sideways. It hasn’t really affected my investing style at all.

Cameron  14:01

I had the feeling we talked about him before and we did, back in June 2020. Episode 328, the one we had Tobias Carlisle on. You mentioned Cliff and AQR, there was some article, or one of us mentioned anyway, something about “is value dead?” There was an article that he must have been mentioned in back then.

Tony  14:24

That was what, a year ago?

Cameron  14:26

Two years ago.

Tony  14:27

Two years ago, value was dead.

Cameron  14:29


Tony  14:30

Good time to be a value investor when values dead. That’s contrarian.

Cameron  14:34

Well, it’s dead every five years, isn’t it? That’s been my take on it.

Tony  14:39


Cameron  14:39

Halfway through the cycle it’s always declared to be dead.

Tony  14:42


Cameron  14:43

And then it’s back. You want to talk about the 0.35 change on the TK master checklist?

Tony  14:51

Yeah, so thanks to Sim — I hope I’m pronouncing the name right. So, I changed the master checklists to have a cell so we could enter in the RBA cash rate and then have it flow through the rest of the spreadsheet to calculate what our risk premium is, which is 6% plus the RBA cash rate, but I should have put in a percentage sign. So, I put the number in, 0.35, which was treating it as a higher number than it should have. It should be 0.0035 or 0.35 with a percent sign after it. So, apologies for that. It’s been corrected now, and if people want to update their spreadsheets they can, or they can download a new one from the website.

Tony  15:02

And so, that affects our IV 2 calculation. So, they would have all been out for the last couple of weeks if you’re using the that sheet. Do you think that will have changed scores dramatically?

Tony  15:44

Not dramatically, it will have changed scores, but not dramatically, no.

Cameron  15:48

Okay, yeah, go on sim. Thanks for picking that up.

Tony  15:51

And just on that, too, sorry, we’re recording this while we’re waiting for the RBA to come out with its news on interest rates. If we get that before we stop recording we’ll announce it. But certainly, I’m expecting interest rates to rise and we’ll need to go in and change our spreadsheets again because of that.

Cameron  16:06

Yeah, right. Portfolio updates, Tony. Oh, well. I’m looking at the Navexa portfolio.

Tony  16:14

Yeah, I’ve got it open.

Cameron  16:16

How’s it going today?

Tony  16:18

Today? Well, so the last time I looked, this is the financial year to date, the QAV portfolio is up 5.71% and the ASX is up 3.72%. So, we’re clicking along basically sideways, but still beating the ASX.

Cameron  16:37

Yeah, quite nicely. I mean, that’s what, 60%, something like that, over and above the index, which is pretty good for the financial year. And, I think since inception when I last looked, which was late last week I guess, we were still doing about three times the ASX 200 over the three years since inception, two and a half/three years. So, it’s on track.

Tony  17:05

And then the best performers for the week: Beach Petroleum was up 10.98%, this is as of yesterday, and Grange Resources is back up. It’s up 9% for the week. But the worst performing stock was Suncorp, which was down 9.54% for the week. And I think you sold it from the portfolio in the last few days?

Cameron  17:24

I did, yeah. It breached both actually, it breached a rule one and a three point, I think, but I think the three-point kicked in first.

Tony  17:35

Yeah. Suncorp is a bank but it’s also an insurance company, and I know there was a lot of analysis last week to say that the Queensland floods are gonna cost insurers a heck of a lot of money and that’s one of the reasons why it’s down. And I think one of the big brokers factored that calculation into their forecasts and lowered their forecasts for Suncorp as well.

Cameron  17:55

Well, sorry Suncorp. We barely knew you, too. It was only in there for a while. You want to talk about YAL? I don’t know if you’ve seen this today, but some news came out about YAL and the takeover today.

Tony  18:09

No, I haven’t seen it. What did they say?

Cameron  18:11

A few people posted it on our social channels. There was an independent review board, I think, that did an analysis of the Yankaung Energy takeover. The independent board have decided that it cannot support or recommended the potential transaction in its current form.

Tony  18:34

So, I’m guessing that’s the, I think, there was a couple of independent directors… I think there was a three-person independent director committee of the Yancoal board, is the independent review board you’re referring to there. It’s a no brainer. I mean, the Chinese parent was putting in a lowball bid. There were some rumours that Glencore wanted to get out, and so, really, the bid was directed at them. But, I think Glencore have also come out and called the bid too low. So, it could just be a bit of negotiations at the moment, but we’ll see. Yeah, I just wanted to say I was buying Yancoal when the trading halt happened and the takeover was offered, so I’ve stopped buying it because I don’t like buying into a situation when there’s so much uncertainty. It’s not, kind of, business as usual. But, if we get some clarity one way or the other then I’ll keep buying into it. I do own Yancoal, it’s only about a half a position for me. I think, you know, there’s so many issues with this takeover apart from the fact that there’s a large shareholder making a lowball bid. That large shareholder also will have to get through the Foreign Investment Review Board before it can creep up the register at Yancoal because they already own 60 odd percent. They made a, last time they got that high, they made an undertaking with the FIRB that they wouldn’t go above 70 or 72%, something like that. So, if they’re going to buy Glencore out then they’re probably going to have to go back to the FIRB and negotiate to do that. So, there’s lots of moving parts in this one. So that’s a risk. It’s just like any other takeover process, they’ll probably come back with a higher offer and we’ll see what happens. Coming in so low probably means they’re not going to overpay for the asset. So, I don’t think we’re going to see a huge premium paid for Yancoal, but who knows, could be. I don’t think we’ll get another bidder coming up out of the wings on this one either, because Yancoal owns so much, but again, who knows? The thing that is also of concern, but not yet, is if a large secondary shareholder like Glencore do take up the offer. When it’s attractive enough to them and if Yancoal gets FIRB approval, I don’t want to be caught as a retail shareholder if the Chinese company that is the major shareholder can get up around 90%. Because, once they reach 90% then they can compulsorily acquire the rest of the shares at the last bid and that can take a long time. So, I’d rather be out of the company before that happens.

Cameron  20:54

So, you’ve only got an Eric on Yancoal right now?

Tony  20:57

Correct, yep, half a bee. Which ipso-facto was better than not half a bee.

Cameron  21:04

Knew you’d get that.

Tony  21:09

Eric the half a bee.

Cameron  21:15

All right, well that’s Yancoal, what else you want to talk about? Iron ore.

Tony  21:19

Iron ore is no longer a Josephine. So, I mean, the reason for it is because the Chinese lockdowns because of COVID are starting to be, have started to be lifted in Shanghai in particular. And so, there is a bit more building activity going on again in China so the iron ore price is rising. But from our point of view, if you look at the iron ore chart there was a second buy line crossed with iron ore. So, it stopped going down and started going up again is the shorthand way of saying it. So, that brings a lot of shares back onto our buy list that we can buy again. Because iron ore’s been a Josephine we haven’t touched Fortescue and Rio for a while, but we can buy them again now.

Cameron  21:58

Actually, we did buy FMG a little while ago, then we sold it and then we bought it again. Well, I think that’s everything apart from, are you doing a pulled pork today?

Tony  22:09

I am, yeah, so I’m doing a pulled pork on Prosper Group, which is one I promised to do a couple of weeks ago, after I had to do two or three odd PTL/PDLs.

Cameron  22:19

The final P. The P trilogy.

Tony  22:23

This is PGL. That’s right, yeah, the third book in the series.

Cameron  22:28

Usually not the best, the third one. Should we just skip this one?

Tony  22:33

We had the second record syndrome with PTL.

Cameron  22:34


Tony  22:35

No, this is, well, this is an interesting one. The reason why I wanted to swing back and do it again is this is a growth stock, a fintech growth stock, which is has been on the buy list. It actually dropped off a little while ago. But it’s only, well when I did the analysis this morning, a cent and a half away from his buy line, so it could well cross soon. The stock price I’m using for this is 75.5 cents, by the way, and I think the sell price was 77 I think, or 78. So, it’s not too far off going above its sell price and it’s already above its buy price. But the reason why I wanted to go through it is because it’s an interesting one. So, we don’t often get growth stocks, you know, out and out growth stocks. This is a bombed out one. So, it listed, rose quite high, now it’s dropped dramatically, and now it’s on its way up again. And that often happens with these kinds of companies. So, they get to a stage where the market either turns or gets tired of the fact that they’re not making money and the share price drops dramatically. And then they go through a period where they can’t raise capital because they’re not making money, but they slowly inched their way back towards profitability. So, PGL, Prosper Group is in that sort of situation at the moment. It lost half a cent per share on the profit line in its most recent results, which are going back to December, but the forecast is the next set of results which will be out in three weeks — June, well, they won’t be out, but the June books will be rolled off at the end of June — the forecast is for a 4.4 cents per share profit. So, it’s becoming profitable, and the reason for that is because its operating cash flow is so good. The sales are still growing, which is always the thesis with a stock like this, that it would eventually become profitable. So, we’re actually at a turning point in the life of this company, and if we think back to people like Matt Joss that we had on the show early on, he always thought these growth stocks will go through a number of checkpoints, one of which was when they first became profitable. So, Prosper Group is approaching that. For people who don’t know the company, it’s a fintech start-up. It only operates online, and it offers loans to small businesses. According to the website, you can borrow up to 300,000 and you can receive the funding quickly in twenty-four hours. So, it offers small business loans and also it offers line of credit facilities as well as b2b payments platform. So, it’s trying to disintermediate the banks. And as an aside, my last trip to Wagga, Ruddy and I were talking about Charity Exchange, our raffle business to raise money for charity, and he was saying that the Commonwealth Bank was offering him loans for small businesses without having to have security on a house. So, that was a first. Something I hadn’t heard of for a while. But obviously they’re being spurred on to do that because companies like prosper group are out there offering these kinds of business loans. So, they’re having an effect and they’re being taken notice of by the big banks. This one is only a small company, market cap of 124 million and ADT of only 14,000, so it’s only going to suit small investors. If this plays out the way I think it might, then that might only be short lived. But, with a company like this there’s some negatives and positives. So, if I go through the numbers and focus on the positives first, the reason why it was on our buy list is it had a low price to operating cash flow which was around 2.5x. It has high ownership by directors, sitting at about 28%, and it’s trading at less than price to book; an equity per share for this company is 81 cents. The forecast earnings per share growth is 998%, so very high EPS forecast growth. But, it’s not making a profit, so no PE at the moment. So, growth over PE doesn’t score yet, but I expect it will next half when the results come out. Stock Doctor isn’t giving it a good financial health score but it is giving it a financial health score which they call “recovering”, which is a trend score for them. Which means we score it two points because it’s often the case that even though the current health is early warning, if Stock Doctor scores it as a recovering financial health trend the financial health is improving, which is also a good sign for an investment. So, they’re all the good things on the scorecard. The negative side of things, of course, is there’s no profit and there’s high debt to equity. It has taken on lots of debt and higher than what I would normally find investable, however, with the cash that’s coming in, it won’t take them long to pay that debt down if they so choose to. They’re not paying a dividend, of course, so they won’t be devoting profits to that, but I wouldn’t mind betting that they devote it to paying down some debt so it gets back to comfortable levels, but we’ll see. Doesn’t have a record low PE, can’t score that because it doesn’t have a PE, so it’s zero. Doesn’t have consistently increasing equity, equity’s been up and down as you’d expect because they’ve been borrowing money. So, it gets a zero there and there’s no yield. So, all in all on balance, the QAV score for this one is sitting at 0.21. When it crosses its sell line again which it may do, it’s only a couple of cents away from that, may do soon, then the QAV score will rise a point or two. And a quality score for this one is 53%, which is down because of that debt. But that may improve, again, when the results come out in the next round of reporting. So, just wanted to highlight this one, it’s a kind of in a unique position in the business cycle. If the results come out and they’re good we may well see that it comes back onto the buy list and does strongly.

Cameron  28:09

Thanks for that. PGL, interesting.

Tony  28:13

Hang on, I’m just gonna look up… we’ve got a new report on the interest rates.

Cameron  28:18

Oh, how much did they crank it up by?

Tony  28:21

0.5 percentage point increase.

Cameron  28:24


Tony  28:25

So, the cash rate is now 0.85%.

Cameron  28:29

That’s a pretty big jump, right?

Tony  28:30

It is, yeah, I think the market was expecting less than that. So, could be another choppy time in the market.

Cameron  28:36

Well, back to what I said early on: it’s all good for us, choppiness.

Tony  28:41

Yeah. So, interest rates in our spreadsheet should now be 0.85%.

Cameron  28:46

Take note, folks. If you need help in knowing where to put that… I’ll post something actually, I’ll do it today. You’ll see it, just check the social forums and the newsletters and whatever. Okay. Now what, Q&A?

Tony  29:00


Cameron  29:01

Q&A&V? Jeff… look, I know we’re not supposed to talk about fund managers on the show. Oh, we’re past the half an hour mark now, I think it was a free listener that was complaining, he won’t hear this. Jeff sent me this and asked TK to talk about it. Jeff says, “read this in the AFR while enjoying a frosty Melbourne morning. I’d be interested in TK’s take on this article.” Now, interestingly, it was an article entitled “No clear winners in value v. growth debate” was the title of the article that Jeff sent me. When I looked up the article, they’d changed the title of it in the Fin to “Two thirds of active funds are outperforming.” I was like oh, that’s interesting.

Tony  29:53

Good sub editing.

Cameron  29:54

Yeah, but why did the subby decide to change the title? I think they got some complaints, because it’s very critical of funds, this article, I think they got complaints and she or he had to change the thing.

Tony  30:09

Think from memory that two thirds of active fund managers are outperforming, I think, this year or this financial year maybe. But the longer period, there was like, it was reversed, wasn’t it? One third outperformed the index.

Cameron  30:20

Look, it’s been a while since I’ve read it, but I’ve just pulled it up now. Quoting somebody called Mr Steed, Jason Steed, JP Morgan equity strategist. He tracks the performance of the markets fifty largest active funds. He says, “relative to the benchmark, about a third of managers are outperforming the benchmark so far this calendar year. In the financial year to date that shifts to two thirds of funds outperforming the benchmark index,” they don’t actually say what the benchmark index is though.

Tony  30:54

Yeah, can be different for different funds for sure, but it’s generally the All Ordinaries.

Cameron  30:59

Right, okay. “Individual fund performance tells the story on a three-year basis. Net of fees T Rowe Price — which has a growth bias — is down 96 basis points, and over one year, it is down 501 basis points net of fees.” What does that mean, basis points? What’s 501 basis points gonna mean?

Tony  31:22

One basis point is 0.01%. And the financial services industry uses basis points, or bips as they call it, to just clarify that they’re talking about less than 1% when they mention numbers.

Cameron  31:34

Bips is billions of instructions per second.

Tony  31:36

Yeah, it is, but they also use that as a shorthand for basis points.

Cameron  31:40

Okay. “Value managers,” oh no, he goes “that compares with another growth fund Hyperion, which is up 290 basis points over three years, and down more than 20% over one year. Value managers show a different trend: over one year, Perpetual is up 102 basis points, and on a three-year basis is up 138 basis points net of fees. Over one-year Maple-Brown Abbott is up 10%, but over three years is up just 30 basis points.” So, they’re all over the place.

Tony  32:14

Bear in mind Navexa is telling us the All Ord accumulation index up 3.5% this financial year.

Cameron  32:19

So that’s what you gotta beat.

Tony  32:20

Which was almost twelve months, yeah. And these guys are using basis points to measure their results, they’re less than 1%.

Cameron  32:26

So, what are we up basis points? What’s 5.8?

Tony  32:32


Cameron  32:33

Basis points, that’s what it is?

Tony  32:34


Cameron  32:36

“Stock Spot’s Chris Bricky, who advocates investing via exchange traded funds or drastically reducing active manager fees,” we should get him on the show, “says his analysis shows that most funds underperformed over a five-year period regardless of style. The average of three hundred and eleven Australian large-cap active managers almost equal index ITF returns before fees, but fell short after fees, underperforming by 1.48% over five years. Some eighty large-cap managers outperformed the index ETF over five years, while two hundred and thirty-one funds underperformed.” So, just the old story: funds underperforming,

Tony  33:23

We can’t really add much to this story, can we? It goes all the way back to the 1930s. If anyone wants to read a good book, it’s called Where Are All the Customers’ Yachts by a guy called Fred Schwed, which Buffett always says is the first book anyone should read on investing.

Cameron  33:37


Tony  33:38

I mean, don’t read it, it’s pretty old. I have read it. It’s very old fashioned, but you can get the idea from the title, right?

Cameron  33:47

I just liked his name Fred Schwed. That’s good. Well, look, Jeff asked you to comment on it, Tony. You have to make Jeff happy here, what have you got to say?

Tony  33:58

I really can’t. I mean, we’ve been saying this for a long time, that most active fund managers don’t beat the index. And Buffett says that’s because they’re not disciplined enough. When things get tough they change style and they forget what they were meant to be doing. It’s because of their fees. It’s because of all sorts of reasons.

Cameron  34:15

Sorry, Jeff. That’s all we got to say. Yeah, we know.

Tony  34:20

We know. We sympathise with you, Jeff.

Cameron  34:22

I don’t think Jeff cares. Jeff’s rescue QAVing.

Tony  34:26

Yeah, good. It is amazing, though, Cam, that we can do it and beat the index. I’ve been doing it and beating the index for a long time, but the fund managers can’t. I still don’t understand that.

Cameron  34:37

I don’t understand it. I was gonna say, like, you said, “we can do it.” No, you can do it. But, you figured out how to do it and you’ve learned from others, and then you’ve taught all of us how to do it. And we can do it now that you’ve taught us, we can do it. Like, it’s not that hard.

Tony  34:55


Cameron  34:58

I don’t want to take anything away from what you put together, but once you’ve put it… the putting together of it was, you know, I still think you deserve a Nobel Prize for putting it together. But they’d say, you know, “here’s your prize of a million dollars, Tony,” and you’d go, “pfft, well, that’s lunch. Make it worth my while.”

Tony  35:21

It’s like winning the Hard Quiz mug, isn’t it? What are you going to do with your Nobel Prize? Stick it up your ass.

Cameron  35:33

It’s not very noble.

Tony  35:34

No, sorry.

Cameron  35:35

But, like, you figured out how to do it and you’ve taught us, and we can do it and it’s not that hard. I mean, there’s a learning curve for us to learn how to use the checklist and etcetera, etcetera. But once you learn how to do it, it’s not that hard. It doesn’t take a lot of effort. There’re no excruciating emotional roller coasters as Cliff Asness said, it’s not that hard. And you would think that people running these funds would have learned from people who came before them, who, you know, would have taught them the way that you’ve taught us how to do it. But that doesn’t seem to be the case. So, the question in my mind is always do they not know how to do it? Or, do they just not have to do it because it doesn’t matter?

Tony  36:19

I suspect it’s a number of things. I think first of all the approach that I take is, I’m just doing this to fund my lifestyle. It’s not my full-time job. Whereas, I think if I’m running a fund or you’re running a fund and it’s your full-time job, and you turn up to work for five minutes each day and then piss off and have bacon and eggs and read the paper and then go and play golf, it’s not going to go well with your investors. But actually, that’s…

Cameron  36:42

That’s when Elon Musk calls you and says go pretend that you work somewhere else.

Tony  36:45

Yeah, exactly. But that’s the best thing you can do. It’s why Buffett stayed in Omaha. You don’t want to be in the hurly burly of having your head spun by management or other analysts or other fund managers, ringing up and saying, “oh, you missed out on that one.” You know, you stay away, stand outside the game. I think that’s important. And I think these people who are full time employed think they have to be busy to earn their pay, and it’s the exact opposite; you shouldn’t be busy, you should just have a system and implement it and then go off and play golf.

Cameron  37:17

Well, that gets me back to something I said in the show last week. I decided that I don’t want to become the world’s greatest expert on economics, or investing even, and all this kind of stuff, I just want to be really good at QAV and that’s it. If I can apply the system effectively, I don’t want to have to think about investing any more than that. It’s just enough to get it done and no more. And I think you’re right, the more time you spend having to do this stuff, maybe it’s not good for you. You want to spend as little time as possible on it.

Tony  37:51

Can you imagine if I went to work and the boss kept saying, “where’s Kynaston? His office is empty again.” You’d make up things to do, and that’s part of the problem. You over complicate things. So, that’s one thing. The other thing is that Buffett’s always been saying that the efficient market theory is wrong, that you can beat the index with a system. And he wrote a great paper that people can look up called the “Super investors of Graham and Dodsville”, and that was in response to Eugene Fama who came out with the efficient market theory back in the 70s or 80s, whenever it was. And he said, “look, your thesis is that no one can beat the market,” which is kind of also the thesis behind the story we just read out, and the ETF providers, are people can’t beat the market. But he said, I’ve been doing it for, whatever, like thirty years at that stage, probably. And he said, “and here’s ten other people that I used to collaborate with, or have crossed paths with, who are also doing Benjamin Graham’s way of investing, and they’re all beating the market, too. So, I think your thesis is wrong.” So, that’s the second point. But there are so many people out there who are adopting so many different styles and flavours of the month that they’re overlooking the thing in front of their nose. And as Buffett said, “I’ve been teaching value investing for forty years, and people still haven’t caught on.” So, there’s that. And then, I think we spoke about the other thing, which I think is that there’s this tremendous pressure on people when they do go through, if you’re a fund manager, and they go through a period of underperformance. And it’s gonna happen to QAV listeners, we are not always going to outperform the market in every period. That’s just not possible. We will do it over time, but when we underperform there’s going to be pressure on people to say, “oh, that QAV. I can do it better.” Or, “I can jump on the other train that’s doing better, and I’m going to be a growth investor now,” and blah, blah, blah. But that’s the worst time to jump off, because regression to the mean means that a period of underperformance is followed by, not just a period of better performance, but a period of outperformance, and so you missed that great sling shot back and that’s what happens. The fund managers, they see all their funds being withdrawn and they’re under pressure to to change what they’re doing. The ones who have done it well are the ones who resist that pressure, and they say to themselves, “look, people come and go but I’m gonna stick to my knitting and in the long term, will come good,” and they do.

Cameron  40:08

It kind of reminds me of this new David Simons show, We Own this City, about policing in Baltimore. I’ve been listening to some interviews with him and George Pelecanos, the cocreator of the show, and talking about what’s wrong with policing, and they’re just banging on about the fact that policing in the United States measures the wrong things. Cops get incentivised and rewarded for the wrong behaviours. They get incentivised and rewarded for being able to put dope and guns on the table and for arrest numbers, but the respect they have in the community, the trust they have in the community, the hatred against them in the community, the ability to get informants to cooperate with them because they trust them doesn’t exist, because the behaviours they’re exhibiting don’t… David Simon says they haven’t been taught real policing, these guys, they’ve been taught this one style of policing which is, he believes, not effective because it’s short-termism. Because the mayor wants to get crime numbers down right now; the chief of police needs to get them right down because he’s up for re-election, or promotion and the mayor is up for re-election and promotion. So, it trickles all the way down. And I think it’s the same with fund managers, they’ve got quarterly targets, yearly targets that they have to hit so that their bosses and their bosses… and it’s how the share market rewards people based on bonuses and options, and all these kinds of stuff. Whereas, you and Buffett don’t have a short-termist view, right? You have a long-term view, so you just keep doing what works. You don’t have to worry about what looks good.

Tony  41:48

Yeah, short-termism. It’s not just in the fund management industry or the policing industry that’s the problem, it’s in the CEOs. It’s in the businesses that we’re investing in. So, that’s why I think one of the benefits of investing with a founder is that they’re taking the long-term view, they’re not being pushed around by analysts who you want better numbers this half. They’re just going, “well, I’m here for the long haul. All my money is tied up in this, I’ve been doing well over the last ten-twenty years. I’m gonna keep doing what I’m doing.” Whereas, if you’re a CEO and you’ve got a tenure of the average five years, you’ve got to hit some runs quickly.

Cameron  42:21

Yeah, it’s the short-termism, I think, that’s killing everything. Okay, John, “Cameron, how are you?” Good, thank you, John. “Question for Tony on downturns and preparing oneself for going through periods of losses. Looking at the dummy portfolio chart, we were about 40%. up in May/June time last year. Now we’re about 25% up, so a drop of about 15%. This probably reflects where we are at in most of our portfolios. This is fine and part of the process, as long as it does not continue for many years. So, wondering how long Tony has had a falling portfolio for in his investment history. Also, any tips on how to manage it from a psychological point of view?” Negronis is the answer to the second part of that question, I know.

Tony  43:05

And golf. It’s a good question. I think GFC was probably the worst performance in the portfolio, and it was pretty horrid because I didn’t have three-point trendlines to guide my selling process. People have asked me about the share market during the GFC, and I would say things like, “well, it’s not a loss until you sell.” So, I was a buy and hold investor, I was holding all the way through. But, eighteen months in and the portfolio was down more than half. It was getting tough. But no, I didn’t worry, I knew there was always going to be something better coming and I was always focused on the numbers. There were some opportunities still during that period, because most of the companies in Australia were raising capital at a deep discount, so I was able to take part in some of those which turned out really well. Commonwealth Bank comes to mind, Wesfarmers comes to mind. So, that was good. But yeah, it wasn’t an easy period. But you know, I focused on other things. I was raising my daughter, I was coaching her basketball team at school and there were lots of other good things going on in my life. So, it wasn’t just all doom and gloom. And that’s, that’s probably one thing to always be aware of, is that investing isn’t everything. I also didn’t so much rue the fact that I was losing money, I’ve rued the fact that I was losing a cycle. That’s probably the biggest thing, that I had planned out a doubling in every four or so years going forward, and this was one doubling I wasn’t going to get. And that has a big impact on your net wealth at the end of your life — it had an impact, obviously, along the way — but I always see things in terms of, you know, I’ve lost a doubling rather than I’ve lost money. So, that’s kind of, I guess, a way to abstract it, but that helps you to deal with the emotions as well. But I always remember the cartoon Jeff Wilson used to show, and it was a guy driving down the road and he sees out the window of his car a billboard saying “market crashed, one kilometre” and then down the road a bit further it says “market rally, five hundred metres.” So, bear in mind that it doesn’t matter how bad the share market gets, it’s always going to rally at some point after that. And, I clearly remember in March of 2009 when the results started to report, I just fell over myself, I was so happy every day. I couldn’t believe the prices that the companies were trading for when their results were this good, and I leveraged up and bought in and made all the money back — and, some — you know, within about six months.

Cameron  45:27

So, you didn’t lose a cycle?

Tony  45:29

I probably did, because that would have gone for a period of about three, three and a half years. So, I got back what I lost, and then a little bit more. So, I was a little bit better than square after three or four years after the GFC. So, yeah, I did lose a cycle. But that’s how it went, and that’s how it goes. But that period after the GFC was exceptional.

Cameron  45:50

Did that make up for the cycle that you missed out on?

Tony  45:53

Yeah, probably.

Cameron  45:54

 Because you’re 19.5% is over 25-30 years, so.

Tony  45:59

Yeah, takes those periods into account. And bear in mind, through that 19.5% takes into account that I didn’t have three-point trendlines during the GFC. I think if I had’ve sold out early into the GFC and gone to cash and then bought back when things turned up, I think I’d have a better performance record than that.

Cameron  46:15

We talked about this a while ago, your performance since you introduced the three-point trendlines post GFC is more like 28% I think, on average, right?

Tony  46:25

I’m not sure, sorry. I’d have to look it up.

Cameron  46:27

Let’s just go with that, lets just pretend its right. It was a lot better than the 19… no, I remember it, maybe it was 24% or something like that.

Tony  46:37

I think it was 23-24%, yeah.

Cameron  46:41

Which is exceptional. So, yeah, the three-point trendline. So, that gets back to John’s inference, like, the way the QAV works now is we don’t just sit and hold when the markets crashing or in a correction, we have our stop losses in place and we get out.

Tony  46:59

Yeah, and the benefit of that is if you’re someone like me who’s not putting any more cash in usually, into my portfolio, that gives me cash for when the good times roll again. Just like COVID, I’ll sell out 60% of the portfolio on the way down, and then reinvest it on the way back up.

Cameron  47:15

Yeah John, well, yes, it goes up, it goes down, but we just have faith in our Lord and Saviour Tony Kynaston we’ll go up over the long-term.

Tony  47:24

Well, I have faith in the fact that I’ve seen it all before and markets go up, markets go down, and it’s just part of the process, right? But the thing is, like, bear in mind, I’m making light of it but there is a psychology in all this and it will be tested. The market will always probe human psychology. So, if you’re feeling bad when the markets going choppy like this, then you’re gonna have to get a bit more experienced because it’s gonna go bad at some stage — whether it’s now or the next cycle — and it’s gonna test you, and you’ve just got to have the experience to say, “I follow the system. Okay, I’ve got cash, and the cash is ready to go when the market turns again — which might be next week, next month or next year. Who knows?”

Cameron  48:02

Yeah, and look, a lot of people listening to this have a lot more money than I have invested, but I think it’s all relative. To me it just seems pretty simple: if the markets correcting, you just follow the rules. If you have to sit on the sidelines and wait a little bit, you sit on the sidelines and wait. Yeah, we will know that, unless it’s the end of the End of Times as we know it, the market will come back at some point. We’re just waiting for it to come back, for our signals to tell us when it’s going to come back and then we buy back in. Like, yesterday, when we did the buy list, I haven’t been able to buy much for the last month or six weeks. I think there was like five or six stocks I could buy yesterday that I didn’t already own. And so, there’s a lot of stuff that was available and we jumped back in, we had some cash sitting there in some of our portfolios we threw back in. We may have to sell them and wait again in different periods, but I don’t know, it’s just one of the things I love about the system is it just removes any thinking or emotion, really, for me from trading.

Tony  49:05

Yeah, I agree. I mean, investing, financial markets, they’ll always prey on the sort of wiring in the brain which hasn’t evolved to do this stuff. And so, to have a system to rely on so you don’t have to experience those emotions — or if you experience them, ignore them — and trust in the system is really the key to this whole process.

Cameron  49:25

And there’s something I was talking about, the mistakes article. I think I wrote this in one of the newsletters I sent out yesterday, our job is to, we want to profit from other people’s mistakes whilst making as few of our own mistakes as possible. We will make mistakes, me more than most, but the great thing about the system is it’s there to stop us from making mistakes. We don’t get caught up in the exuberance during the bull markets, like a lot of people do. And then we don’t get caught up in the doom and gloom when the market cycle turns, it just keeps us nice and in a very narrow laneway.

Tony  50:04

Yeah, well, it’s set up to avoid mistakes, that’s exactly right. There’s stop losses in there that tells us when to sell, it tells us to only buy quality companies at great prices so you don’t go into the froth and bubble of the market. So, yes, that’s how it’s evolved to be defensive — and last, and last the long term. It’s evolved to keep us alive, basically, and don’t get blown up. That’s the secret in the market. Like, there’s all sorts of studies which say, you know, if you missed the twenty best days in the stock market, you’d miss out on all the performance. You know, the market basically averages for the other thousands of days, it just breaks even, basically. So, we want to be in the market as much as possible, and we want to be comfortable in the market for as long as possible. And, we want to last in the market for as long as possible.

Cameron  50:50

I like that, it is, it’s about surviving, being in it. Because, that seems to be the trick; just to be in it and surviving, and making just a few less mistakes than the rest of the market makes.

Tony  51:02

Yeah, unfortunately, like, a lot of people withdrew money from their Super in COVID and put it into Bitcoin or Afterpay, or whatever, and they’re probably not going to be in the market going forward. So, that’s, you know, that’s unfortunate that we’ve wiped out a generation, but that’s, you know, we’re trying to avoid that for ourselves.

Cameron  51:17

All right, hope that helps, John. Misa says “re: BYE qualified audit,” Byron Energy qualified audit, “which is in the last full year report, but not mentioned in the half year report.” She said, “my understanding is that half year,” he/she, I’m not exactly sure of the gender, sorry, Misa, “my understanding is that half yearly reports are not audited. Deloitte states this in the Byron half yearly report. So, not sure if that means that there’s a qualified audit that it stands until the next full year results.” Is this true? They don’t have to tell you in the half year report if there’s a qualified audit?

Tony  51:54

So, I’ve always assumed they did. I’ve had a quick look at Byron Energy this morning, the qualified audit was the one which says that there’s a material uncertainty about it’s going concern, and that was in the financial notes. That was because they were highlighting the fact that they normally have to raise debt or equity to continue going because they’re an energy exploration company, and that it was a risk twelve months ago when the annual report came out because of COVID — and other things, I guess. It’s not mentioned in the half yearly report. I did quickly have a look, I couldn’t see that Byron had raised debt or capital, so I’m not sure if their positions any better during this half. But, they should have still had that note in their financials, I would have thought, if they had a… because the accounting rule is that you prepare the accounts on a going concern basis. And then, you’re supposed to put the asterisks on that and say, “well, we’ve done that, however, we’re not sure we are going to be able to continue as a going concern if we can’t get funding,” for example, in this case. So, even though there hasn’t been an audit, I would have thought the auditors should still say if there hasn’t been a problem. If there’s still a concern, they should raise it, I think, or highlight the fact that the directors have raised it. Look, it’s a good question. I think we should probably get in touch with Jamie, our auditing friend, and ask for a better commentary on the situation than what I can provide.

Cameron  53:13

James, if you’re listening to this… I think we’ve got some other auditors too, that are club members now. So, any of our auditors that are club members, please let us know the status of a qualified audit in the half year report. That would be good to know.

Tony  53:29


Cameron  53:30

And thank you to Misa for pointing that out. Well, that’s all of the questions, Tony. After hours.

Tony  53:35

After hours…

Cameron  1:10:02

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.