QAV #524 – Club Edition

Cameron 0:07
Welcome to QAV for the Phoenix edition, the hot edition. I’m in Phoenix, Arizona this week, Tony, and I swear that this place is built on the Hellmouth. It’s insane here. Absolutely crazy.

Tony 0:27
I don’t know what’s crazier, you being in Phoenix in summer or Phoenix itself? It’s a winter destination normally.

Cameron 0:33
Yes, it’s their summer holidays. Fox is here visiting — we’re here visiting Chrissy’s family, Fox’s got cousins around about his age here. He’s having a ball, having a whale of a time. Loving it. Doesn’t want to talk to me, doesn’t want to see me, just wants to play with his cousins all day, which suits me fine. So, that’s why we’re here. But man, is it hot? Like yeah, 42/43/45 every day, a low of 31/32 every day. But it’s pretty, really pretty. People are nice. It’s really pretty. We went paddleboarding. The in-laws took us paddleboarding down a white-water river kind of thing in the mountains at sunset the other night. There were wild horses coming out and drinking from the river as we’re paddleboarding down, the water was icy cold, cactuses, Saguaro cactuses. You know, it’s like being in a roadrunner-coyote cartoon. It’s really, really pretty, but it’s just insanely hot. And everyone I talked to, I’m like how do you live here? And they’re like, “yeah, it’s not too bad. You get used to it. It’s dry heat.” I go, “yeah, so is the top of an oven or a stove. Try putting your hand on it, see how you go.” Anyway, they all think I’m a stupid Aussie. They’re probably right. How’re you doing, TK?

Tony 1:53
Yeah, good. Doing well.

Cameron 1:56
How’s the portfolio?

Tony 1:57
Financially? Not so great, but still better than if I didn’t have a system, so, yeah. These times happen. It’s tough in the market at the moment. Yeah. Down millions. So, you’ve got to turn that off, I think. Read all the memes on Facebook like, you know, “from pressure comes diamonds,” and all this kind of self-help crap.

Cameron 2:20
Well, you know, what I’ve been telling myself and I’ve been telling people on our socials is I just keep reminding myself that what’s really going on out there is the market is preparing bargains for us. There’re great companies that have got a good track record, they’ve been around a long time, generate a lot of cash, good businesses, solid businesses, good management, that are available at a discount. We’re not buying them yet because we’re waiting for things to stabilise, but when things stabilise, we’re going to be snapping up bargains — great companies that we wouldn’t have been able to buy a year ago, they’ll be cheap, and we’ll ride them back up for the next year or two and that’s where we make our money, right? Isn’t that how it works?

Tony 3:02
Look at you, Padawan. You’ve learnt how the system works. That’s exactly how it works. And I think the bit you’ve missed out is the fact that we’re going to cash at the right time. So, even though it’s hurting to sell stocks that have been profitable and I’m being rule one’d every other day out of stocks and things like that, I’ve got a big pile of cash now which is just sitting there at the right time for when the market bottoms to get back in.

Cameron 3:26
Well, I tell you, talking about going to cash at the right time; I told you a few weeks ago, I had to cash out my personal portfolio. I’ve got my Super portfolio and my personal, but I had to cash out my personal portfolio to pay for this trip because we had used our trip money to invest for the last few years during COVID — our holiday money — and I got out of it. I cashed it out like a month ago. Really glad I did. I know we’re not supposed to time the market, and I didn’t, but accidentally got out probably at a good time.

Tony 3:58
Well, karma’s getting to you though, you’re living in Phoenix in 45 degrees.

Cameron 4:03
Yeah, that’s true. Anyway, so look, it’s rough out there but as you’ve been telling me for the last few years, this is just business as usual. Markets go up, markets go down. It’s like a roller coaster. We just stay on the ride, right?

Tony 4:16
Situation normal, yeah. And its what markets do. We’re always going to have periods of exuberance and periods of pessimism, we just have to switch that off; not let it affect us and just keep sticking to our knitting, doing what we do.

Cameron 4:32
According to Karen Maley in the Financial Review, this is the white-knuckle part of the cycle. There’s a good article I read today, she said, “highly regarded market strategist and economist David Rosenberg has come up with the most succinct explanation for the terror that’s now stalking markets. ‘We’ve had 8% inflation before,’ he tweeted a week ago. ‘Been a while, but we’ve had it. What we’ve never had before was the Fed hiking rates into an official bear market. Brand spanking new, more downside coming. Even though the US share market benchmark, the S&P 500, is already down more than 20% from its all-time high,’ Rosenberg warns the pain might not be over. Rosenberg pointed out that in the past fifty years a market decline of 20% has presaged a recession precisely 100% of the time.” So, this could go on for a while yet.

Tony 5:28
Yeah, I can’t predict it Cam. I could say it will go up and my gut feels is that it’s gonna go on for at least six months, but it could turn around today or tomorrow, too. Or, it could last years.

Cameron 5:38
Which is why we need to stay frosty.

Tony 5:40
Stay frosty. Yeah, exactly. I mean, I can make lots of commentary on the current situation. I agree with that commentator about the Fed raising interest rates when everything else is already going up. This is a supply side problem, inflationary problem. So, I don’t see how raising interest rates is going to affect that. It’s not going to unblock all the ships at sea who are lying with cargo off ports that can’t be unloaded, and it’s not going to help restaurants who can’t employ staff because no backpackers are in Australia, and all that kind of stuff. So, I don’t see how raising interest rates helps that. I guess, officially, what they’re trying to do is to get back to what they call the “neutral setting”. So, at the moment inflation’s up, asset prices, well, they have been up until recently in the stock market, and they’re still elevated compared to what they were a little while ago anyway. One of the things that I do pay attention to is what the PE of the market is, and I think both here and, in the States, we’re getting back to average. So, maybe we’re going to get to a neutral setting quicker than what the RBA thinks or the Fed in the US thinks. Unemployment is still very low. The RBA wants inflation to run at between 2 and 3%. It’s currently running in Australia at five, so it’s not going to need, I wouldn’t have thought, much of a tweak in interest rates to bring it back to 3% at least. And given the fact that it’s not really interest rates that are causing the inflation, its fuel prices because of the Ukrainian war, energy prices because of the transition to carbon neutral future, all those kinds of things are impacting it. It’s the supply chain blockages because of COVID, it’s the lack of immigration that’s just starting to come back now in Australia since COVID. None of those are really interest rate issues. So, I always look at the economy as having a stool with three legs, and we’ve kicked out petrol prices and we’ve kicked out the dollar — well, actually, the dollars okay at the moment, so I’ll take that back. We kicked our petrol prices and we’re now going to kick out interest rates. The stool is going to collapse. So, I think the RBA will aim for a soft landing but, you know, if interest rates do rise too high too quickly, that’s going to impact people’s wallets just like fuel prices are, like energy prices will, and that’s gonna hurt people so much they can’t spend in the economy. And that’s gonna be it for the economy and we will hit a recession. So, this is like, you know, the RBA is trying to bring a 747 in when cross-eyed` Karen Black’s at the wheels because Dean Martin’s had a heart attack and she’s trying to bring airport 75 and being talked at down through the tower, and Phil Low’s on the mic. It’s just like, it’s a really hard landing to engineer, so good luck to them. I don’t believe interest rates will solve this, but I’m not an economist.

Tony 6:18
What we need is Leslie Nielsen in the plane.

Tony 8:38
Yeah, what a time to give up glue sniffing.

Cameron 8:44
And don’t call him Shirley.

Tony 8:47
The other thing I’ve noticed just recently, too, out on my walks every day is that I am starting to see retail shop fronts up for lease again, empty retail shop fronts, and that’s always for me a precursor for a bad patch in the economy. I mean, you’ll know Silly Tart’s who closed in the last month or so.

Cameron 9:05
Oh, no!

Tony 9:06
Yeah, I know. Favourite little cafe and the scene for a couple of QAV dinners.

Cameron 9:11
You kept them in business all during COVID.

Tony 9:14
We did.

Cameron 9:15
That’s sad.

Tony 9:17
Lease came up, the owner of the building put the rent up, they just stayed afloat during COVID, and they were finding it hard to get staff. So, they were working seven days a week themselves and they just pulled the pin and they’ve left. I imagine there are other retail shop fronts in that kind of situation, because as I walk around, I’m seeing more and more empty spaces and spaces for lease, and that’s a bad indicator for the economy going forward.

Cameron 9:42
Nothing we can do about it, I guess.

Tony 9:44
That’s right. We can’t control it. We just manage our way through it. We make light of all this, but it’s going to hurt people, it’s not good. There will be people out there… I mean, Steven Main and Alan Koehler on their recent discussions were talking about trying to get a class act up against the RBA, because the governor has been saying since COVID that interest rates would rise until 2024. So, all the people who’ve taken a mortgage out in the last twelve months have a class action against him, because he’s now raising interest rates quickly.

Cameron 10:14
Yeah. Well, I was going to ask you, when do we put heads on spikes for all the people that said that MMT wasn’t going to lead to inflation?

Tony 10:24
Yeah, that’s right. That’s the other risk. There was a really interesting article in the Fin yesterday from the guy from, I think it’s Extant Capital, does a lot of data science work, and he’s pointing out that his people expect the Reserve Bank to have negative equity at the end of this financial year when they produce their balance sheet. And by that he means if it was a business, it would not be able to continue to trade as a going concern. So, it’s like getting a qualified audit. And that’s because interest rates are now rising and they have all these bonds they bought sitting on their balance sheet, and the bonds are going down in value as the yields rise. And so, the RBA if it was a company would have to raise more capital, and that’s going to be the issue going forward. You can’t print money in a rising interest rate environment, or you can’t do it as easy as you could do it in a lowering interest rate environment where you just stuff another bond on the balance sheet and wait for it to mature. It’s harder to do when you have to pay out higher and higher yields and the value of your balance sheet goes down further and further. So, MMT I think is going to one less lever the government can pull. I can’t see a government, if we do go into recession, that’s going to be really hard to do a cash splash like they did during COVID — the RBA can’t really assist with that. But, on the other side of the coin, the RBA, according to this article in the Fin yesterday, is expected to pay out $8 billion as a dividend to the government this year because of the fact that they have made money in a falling interest rate environment, and they’re flush with cash and they’re getting good income. So, that’s going to the government this year, but it won’t go next year, because if they’ve got negative equity, they can’t afford to pay a dividend next year. So, that kind of income is going to be hard to patch up. If we go into recession and the government needs to support the economy, and it’s not getting the same kind of dividends from the RBA, it’s going to have to make it up through increased taxes in some way. Or go even more seriously into debt which will hurt us as well, because our credit rating will go down, so the government debt will cost more. So, it’s a tricky situation for the RBA and the government going forward, for sure.

Cameron 12:28
Well, looking at our portfolio, Tony, for the financial year, the QAV dummy portfolio is down 4.25% as of the date of recording, which is the 21st, I think, over there, right?

Tony 12:44
21st in Australia, yeah.

Cameron 12:46
So, we’re underwater by 4.25%. Capital gain’s actually down 9.7% for the financial year but we’ve had some income, 5.46% per annum, these numbers are, so we’re down negative 4.25% per annum for the financial year. But again, I think over the… well, that’s compared to the ASX 200, which is down. I don’t have my glasses on, but it looks like 5.9%. So, we’re not down as much as them, but we’re almost neck and neck, there’s not a lot between it. But if I look at the long haul since inception…

Tony 13:25
While you do that, Cam, it’s a good point to make: the dummy portfolio’s down 4.5% even though the markets down, you know, 5-6%. So, it’s not like end of the world, this financial year. It would be highly unusual if we didn’t have years where we’re down 10% in the stock market, so this is just one of those years. I had the Navexa portfolio all time sitting at about $29,000. So, it’s still up, we’re still way up from when we started. I’ve got 16% as our run rate according to Navexa since we started, versus the All Ords of 5.58%.

Cameron 14:00
Well, if I take it from the second of September 2019, which is our inception date, it says we’re up 15.64% versus the ASX 200 up 3.71%. So, we’re doing four to five times better than the index over the period. So, yeah, they’re per annum numbers, too. So, versus the index, we’re doing fine over the long haul. And that’s what I keep reminding, particularly the new club members, people that have started with QAV in the last year: it’s been a rough year. Like, I feel for you, but as I said to somebody online today, as my father would have said, “it puts hairs on your chest.” Like, in some ways I think it’s a turbulent, scary period, but this is investing, right? See if you’ve got the cahonies to survive it.

Tony 14:57
And, I think it is the way you approach this. In my mind, okay, I’m upset we’ve lost money, but I know that’s the way this works.

Cameron 15:04
But are you really, though? Are you really upset? Not really, no

Tony 15:08
No, because there’s counters in a bank account somewhere, or a portfolio system somewhere. What I’m focused on is what can we do better next time, and so that’s what I’m focused on. And there’s been some really interesting posts in our Facebook group. Someone posted overnight that they are starting to look at buying some of the ETFs which are going up because they are focused on a recession, or focused on a downturn, so they’re negatively correlated to the stock market. So, I’m going to investigate that going forward. I remember a month or two ago, the Australian Foundation Investment Company — which is a Listed Investment Company, which is a sort of quasi-Index Fund with low fees — and Alex *hello :)*, my daughter, had shares in that, and it crossed into a sell situation, and I contacted her and said, “I think you should sell,” and she did. So, she’s ahead on that trade. But, you know, is that a sign that we can look forward to in the future that is the time to go to cash completely? I mean, there quire a lot of things that we can investigate so the next time this happens, and it’s going to happen in a couple of years again, we can perhaps even improve on how we do things.

Cameron 16:11
Yeah. That’s great that you’re thinking about how to improve the system even further, but I guess for new folks out there, people that have lost money — which a lot of people will have if they started in the last twelve months, their portfolio is probably down as the QAV portfolio is down a little bit — I just want to reassure them that, yeah, you’ll make it back up, stick to the system, be consistent…

Tony 16:37
Yeah.

Cameron 16:38
And, you know, I mean, without referring to your thirty year history, you know, I can say from firsthand experience now just in the last three years, there’s been times like the GFC — not the GFC, the COVID cough — where we’ve had to sell a tonne of stuff and we were down and things looked dire, and eventually the market picked back up again and we rode it all the way back up. And, you know, it’s come back down, but I’ve seen it happen at least one, I’m not sure if that was a cycle, really, but it was an event anyway that I’ve ridden through, and so this time I’m like, “Meh, yeah, you know, it goes down goes back up.” It’s like a roller coaster, right?

Tony 17:23
Correct. And the markets not gonna close, and the economy is not going to shut, so the share market might drop a lot further from where it is, it might go up tomorrow, we just don’t know. The important thing is to have a framework. To those people who are new to QAV, I do sympathise with them, because as we’ve spoken about, I’m down millions as well. So, I do sympathise and empathise with them, but I’m, I’m gonna just pose a couple of basic questions about share investing: is the time to sell at the bottom, or is the time to sell at the top — or just after the top? It’s obviously, you want to sell on the top. We choose to sell just after the top on the way down, go to cash and buy back in as close to the bottom as we can. So, if you’re new to it and you’ve lost money, hang in there, this system will put you back on a path to long term wealth creation. And you’ll look back on this and say it was a stumble of a start, but, you know, we survived and we got through and it’s working really well.

Unknown Speaker 18:17
*”Fire and Brimstone coming down from the skies, rivers and seas boiling.” “Forty Years of earthquakes, volcanoes.” “The dead rising from the great human sacrifice, dogs and cats living together, mass hysteria.” “Enough! I get the point.”*

.

Tony 18:32
“Dogs and cats,” that’s my favourite line.

Cameron 18:35
The clip I was looking for, which I don’t have apparently is: “you know, boys, someday this war is gonna end.” That’s what I just keep thinking, someday this is going to end. We don’t know when, could be six months from now, it could be next week. We don’t know, but we know it will end. It will turn around, and we need to be vigilant, we need to be invested. We need to be ready to, you know, fill the coffers when it turns, because when it turns it’ll go back up and we know from history, that’s where the money is made, right?

Tony 19:12
Yeah. And to set the scene, this might not happen for another twelve or eighteen months as well. So, we may well be trading in and out, sitting on cash for a long period of time going forward, too, because my prediction was wrong. It doesn’t seem like the Ukrainian war will be short, it will be long — well, it’s already been long.

Cameron 19:29
If the Americans have anything to do with it, it’ll be going for twenty years. $70 billion I think they’ve approved now in funding for Ukraine. I understand the mindset that says we want the Ukrainians to win, we want to support the Ukrainians, but what it means alternatively is it’s going to draw this thing out for a long, long, long time.

Tony 19:55
Yeah, so the oil market might stay high for a long time which is going to impact on people’s pockets as they fill their cars up, as they pay their gas bills. So, the economy may not right itself for a while. If we do tip into a recession, that’s not going to be an easy thing to fix. That’s going to take a couple of quarters, probably, to get us out of that, and all kinds of issues that will be raised by governments to fix that which could involve more taxes, or it could involve cutting to welfare, or all kinds of things. So, it may not be easy. On the other side, it could be all over tomorrow. Who knows?

Cameron 20:30
But we got to keep a long-term view and just ride it out.

Tony 20:34
Yeah.

Cameron 20:35
Let’s talk about the charts, Tony. Iron ore chart. Iron ore’s come back a lot from its high, and I remember last year you fudge a sell line for it. What are your thoughts on the iron ore chart at the moment? I think it’s down about 125 I think it’s trading at the moment, down from about 217/220 at its top. So, it’s almost come down 50%.

Tony 21:04
Yeah, I had a look at it yesterday and it was still fine, even on the fudge basis, but I’ll call it up and have a look.

Cameron 21:08
If you were gonna fudge it, like, how would you draw the line at this point?

Tony 21:12
Yeah, so when I fudged it last time I went back two years, which seemed to be the cycle for iron ore. So, I went back to April 2020 as L1, and then I used the COVID cough — well, actually it was after the COVID cough, November 2021 as L2, and I get a sell price at $99.

Cameron 21:32
We’re gonna hang in for that?

Tony 21:34
Yeah.

Cameron 21:34
Right.

Tony 21:35
By the way, iron ore looks like a Josephine at the moment, too, because it’s second buy is just below its buy price at the moment.

Cameron 21:41
Yeah, the reason I ask, though, is we own some iron ore stocks still in the dummy portfolio. I’m wondering when we’re going to dump them based on the iron ore commodity chart. Like, we’ve got GRR, we’ve got FMG, we’ve got FEX, and they’re not doing well. But we’re still up 54% on GRR this financial year. We’re up 54% on KOV this financial year, up 20% almost for KSC, up 70% for IGl. Some of our shares are still okay. Done really well out of them this year despite them coming back a lot.

Tony 22:17
Yeah. And that’s how it works, as well. It’s been my experience that we never go completely to cash, I never go completely to cash. So, there’ll always be something in the portfolio, but there’ll be a lot of stuff which we’ll rule 1 out of.

Cameron 22:27
So, you’re not prepared to give up on iron ore stocks just yet?

Tony 22:31
No, well, using the same logic as last year, the fudge is going to be sub $100. So, $99, I think, is the fudge sell, and the five-year sell’s even lower, it’s going to be around, sort of, sub $80. About 79 bucks.

Cameron 22:44
And then the gold chart, if you can have a quick look at that for me, too. I mean, gold is looking okay, but I think it’s still… it’s not a Josephine, but it hasn’t breached the second buy line for gold. So, I’m holding off on gold stocks.

Tony 23:00
Yeah, you’re right, actually. Yeah, it’s still below its second buy line. I bought a gold stock last week, I didn’t even check that — I should have, it went down. That was West African Resources. So, I’ve got — this is the gold futures current in Stock Doctor, GC#. I’ve got a sell price of around $16.65, so say $16.70, and the price today is $18.53.

Cameron 23:27
Well, I’m looking at the AUD chart because the stock Doctor ones USD, isn’t it?

Tony 23:31
It is. So, on a US dollar basis, the gold price is well above its sell, and on an AUD basis it’s getting back close to its sell, actually.

Cameron 23:41
Really? How are you drawing the line here?

Tony 23:43
So, I just need to go back, make sure I’ve gone back five years. Because you’re right, I’m getting a ten-year graph for the monthly. I’m going to use L1 as November 2018, and then that makes L2 April 19. And if I just do a ruler on that… no, she’s well above the sell line with those. Yeah, no, it’s fine. Has been going sideways for a while though.

Cameron 23:43
Yeah, but it’s a Joseph, right?

Tony 23:51
Yes, it’s a Josephine too.

Cameron 23:56
Because it hasn’t breached the line. Yeah. So, we’re not buying stuff there. Okay.

Tony 24:15
I wish I’d seen that last week. Thanks for pointing it out.

Cameron 24:18
I think I did point it out to you last week too, but you obviously forgot. All right. The other thing, I talked to you a bit about this off air, I’ve just noticed, particularly since I’ve been here… my process when I’m here in the US is when I wake up in the morning, I check my emails — because you know, nine o’clock in the morning is like middle of the night in Australia — and I check my Stock Doctor alerts for sells and then I throw them into a spreadsheet so I can double check my rule 1s and my dividends and my calcs, and that kind of stuff. And I’ve got sort of a tracking sheet. It uses stock history in Excel to give me the current price, then tells… because, sometimes the alert will go off in the middle of the day in Australia, but by the time I check it the price has gone back above the rule 1 line. But what I’ve noticed is that the current price according to stock history in Excel is different sometimes to the current price according to Stock Doctor, and Stock Doctor will still have it as a sell, but stock history will have it as being okay — or, sometimes just barely above the rule 1 price. So far, I’ve been using stock history’s price and not Stock Doctor’s because we’re using stock history now for the automatic Josephine calculator in the scorecard that Gary and Dave put together for us over the last few weeks. And if I throw out stock history as being unreliable, all that goes out the window as well. So, I’ve been sticking with it, but in some cases, and the one that’s most prominent for me at the moment is BPT. Stock history’s current price is like $1.71, which is okay in terms of our rule 1. Stock Doctor’s current price is $1.55, which is well below our rule 1. We need to make a captain’s call here on do we go with the stock history price, or the Stock Doctor price. So, I’m selling when I need to sell rather than holding on when I shouldn’t be holding on. Thoughts? And stock history is backed by Refinitiv, which we should be reliable. I haven’t reached out to Refinitiv yet, or Microsoft, about why there’s a big difference. What’s your gut feeling on this? If Stock Doctor says it’s below the rule 1, should I just sell it and ignore stock history?

Cameron 24:32
Well, I’m not an expert on stock history. I understand Stock Doctor’s on a twenty-minute delay. I think their data provider is Reuters, and I think Refinitiv’s data provider might be Reuters as well. I think stock history has a twenty-minute delay as well. So, I think they both should be the same. Was this a problem before you went to the States, or is it just happening now in the States?

Tony 26:31
I didn’t notice it before I came here, but I wasn’t doing twenty rule 1s a day either back then, so I don’t know.

Tony 27:00
I wonder if when you look at Stock Doctors, it’s the closing… well, hey both should be the closing price because you’re doing it overnight Australia time.

Cameron 27:13
No, I’m looking at the current price. Not the closing price, the current price.

Tony 27:17
Yeah, but if you’re doing it at, like, midnight in Australia, the current price would be the closing price.

Cameron 27:21
Yeah, that’s right.

Tony 27:21
So, the only thing I can think of is I wonder if there’s some trades going through somehow overnight that’s changing stock history, but stock doctors using a closing product? I don’t know. I’m not an expert, sorry. I haven’t seen that problem before, and I don’t use stock history that much. But look, I’m hoping, well, there should be some listeners out there who do use stock history and can give us their take on whether it’s reliable or not.

Cameron 27:45
Yeah, alright, anyone’s got any thoughts on that, please let me know. Alright, what have you got in your list of notes to talk about today, TK?

Tony 27:53
Yeah, I’ve got a few things, actually. Talking about how to improve things in the future, I mean, hats off to one of the listeners who asked the question about whether we should be buying GMA, the Genworth mortgage business, when the interest rates are going up. Because of course that price has crashed, and I was rule 1d out of that fairly early on after the RBA raised interest rates. So, it was pretty sound advice, but I just followed the system there. But again, thinking about things that we can improve on going forward, maybe that’s one of them; that we pay more attention to, or I pay more attention to how economic fundamentals are going to affect companies,

Cameron 28:31
is that effectively the same as looking at the commodity price for an iron ore stock? Looking at the interest rates for a mortgage business?

Tony 28:37
Could be, absolutely. So, I need to look at that a bit further. But yeah, hats off to the listener who raised that, and hopefully they sold out before the share price went down. Have we spoken about VGI and how it was merged and now is RPL? So, VGI was on the buy list.

Cameron 28:54
We mentioned it briefly at some point, or I did., because I spent half an hour trying to work it out one day because we owned VGI, and I was trying to work out what was going on with it. And then, yeah, I think you and I worked out that it had changed its name the day before or something. Yeah.

Tony 29:11
Yeah, if people haven’t worked it out, they probably have by now because it was a week ago.

Cameron 29:15
We ended up having to sell it, too, because after that merger and name change it crashed.

Tony 29:21
Good merger. At least the investment bankers got their money for the merger.

Cameron 29:24
Yeah, as long as they’re okay, that’s all that matters.

Tony 29:26
I did want to make a comment on the banks. Again, it’s in line with the comment about GMA. So, I guess the rule in the past has been as interest rates rise, banks do well because their margin improves. So, they tend to pay more for their borrowings but pass all of that on to their deposit account, so they get the use of the deposit accounts for their mortgages, and they get a higher margin than what they get when interest rates are coming down. I think that still holds long-term, but the banks have all been sold off as soon as the RBA raised interest rates more than what was expected. It seems like it’s because of analysts expecting to have a rise in bad debts, so as interest rates rise, you’d expect some people who are borrowing on the margin, who are borrowing without any sort of ability to pay, and higher interest rates will start to go bad. I’m not sure that’s the case, but certainly, what’s called the provision for bad and doubtful debts has been a big driver of bank share prices going in the last sort of five to ten years, and the writebacks of those… so during COVID, the banks added a lot of provisioning for bad and doubtful debts to their balance sheets, and that saw the share prices tank. And then after COVID, they rode it back because the world didn’t end and people didn’t have to sell the houses, or they actually had a holiday on repayments, too, if they wanted it. So, the provisions were written back, and the banks took off again, and now they’re down again because people fear that they’re going to have to rise those provisions. And they might. So, that’s, I think, a short-term thing for the banks, and I think longer term in a rising interest rate environment they will do well. So, my gut says that the banks may be the first things we start to buy back into when things turn around. But anyway, that’s a prediction, we’ll see. About six to twelve months ago we were asked the question about whether we should focus on the small end of the market, and whether that outperformed the market in general. I went back and had a look at the Small Ords index over time versus the large-cap stocks over time, and they seem to go in cycles but neither outperformed over a long period of time. I know this just recently — this is last week when I saw this, so it’s probably even worse than these numbers — but I noticed that for a rolling twelve-month period, the small Ords is down 12.8% versus All Ords, down 1.64%. So, you know, this is the time probably when the cycles changing out of Small Ords doing well, small companies, small caps doing well compared to large ones. That’s just by the by, I guess it was reinforcing the answer to the question that was raised last year about whether we should be in small-caps or not. I’m agnostic to it, and if we were in small caps, we’d be doing a lot worse than what we are now. I’ve posted on Facebook, so a lot of listeners have already seen this, that we are doing a lot of selling at the moment and it does happen to be June, which is the traditional period for capital gains tax selling. And so, two points here: the first one is that the selling is being depressed by people who are taking advantage of losses, and they’re crystallising them. I think we may see that reverse coming out of June. So, towards the end of June and going into July the fact that people aren’t tax selling anymore may actually have a positive impact on the market. So, we’ll watch out for that. But I also just want to raise with people that the tax office will look for people who are selling out a share at a loss to claim a capital gains tax loss to put against the capital gains tax that they may have to pay, and if they buy the share back in a short period of time, the ATO will take a dim view to that.

Cameron 33:00
Can’t we just say to the ATO, “hey, we were just following the system?”

Tony 33:04
I think people will have to get their own advice on that, get their own tax advice, and I would think that if you are following the system and can point out, “this is how I trade normally,” you probably would be on reasonable grounds to argue the case with the ATO. But who wants to argue with the ATO, right? Because, they have the bigger card they can play which is, “I’m going to now do a complete audit on you going back over five years, produce your records,” and that’s just gonna tie you up in red tape for a long time, even if you are squeaky clean. So, I’m just raising it as an issue.

Cameron 33:34
So, what’s the window in which you shouldn’t buy back something?

Tony 33:39
As I understand it, there’s no period that the ATO has specified. I was once told by my tax advisor the window was six months that they would feel comfortable if I bought something back that I’d sold in June towards the end of the year, that you could say that’s enough distance, but there is no rule on what the window is.

Cameron 33:58
Is he out on probation yet?

Tony 34:02
Yeah, I’ve been sponsoring his kids for the last three years.

Cameron 34:07
Taking them a cooked meal, home cooked meal, to the shelter once a week.

Tony 34:12
Taking them to school every day. Anyway, look, I’m not a tax advisor, but just be aware of it, and if people can talk to their own tax accountants about it. But it’s an issue. What else has been happening? I’ve noticed that there’s been another yield curve inversion in the US, which is, again, a traditional forecaster of recessions. So, I guess if it happens often enough, we’ll get a recession. So, it’s quite possible that this case will prove to be true. But again, who knows? Something more germane to our podcast is, it’s around this sort of time in the market that people start to raise questions about three-point trendline sells. And if anyone wants to see the benefit to that, go and have a look in the master checklist on the top scores page. So, you know, our buy list page with all the other stocks that have been downloaded as well and scroll down looking at the QAV column. So, the stocks that are on our buy list have a three-point trend line sentiment check, which is “yes” in that column. So, yes, they’re above their sell lines and their buy lines. If you scroll down far enough, you’ll see companies which have a high QAV score but they’re sentiment is below the sell line. So, they’re stocks that we wouldn’t buy, but they have been on the buy list, a lot of them have been on the buy list before. Stocks like South 32, which was a big money spinner for me last year, my best performing stock and I sold out, is now down a lot. It was a real eye opener for me and reinforcing the benefits of the three-point trendline sells to go and have a look at that list and look at all the companies that are there. Just go back into the Brettelator with some of those and look at how much they have dropped when they crossed their sell lines. It’s quite a lot. It’s quite substantial.

Cameron 35:55
There’s actually a question that I’ve got later on from Kurt about that process. He posted on Facebook today and shout out to Andrew McClellan who weighed in with his experience, which I thought was fantastic. Andrew said, you know, talking about the selling etcetera, etcetera, because, you know, sometimes they go down, sometimes they go back up and all that kind of stuff. Andrew says, “I thought the same earlier on and then I went and looked at all the stocks I’d sold against better advice to see where they’d be if I hadn’t rule 1d them. Overwhelmingly worse off was the answer. I think if your QAV timeframe had started a year or two years earlier, then you’d be in a different position, also. After the first year my accountant did ask why I’d sold all my losers and lost money, and I explained to him that I was keeping the winners running.” And then he said, “another thing that took a little longer to get used to was not looking as much as I was. Always logging in and checking, comparing etc., was very distracting. Mine was a cold turkey scenario. Had some holidays coming up, I was so busy at work leading up to it then too distracted while on holidays to check.” So, two points there I think are worth repeating. Number one is that yeah, long-term, the reason we rule 1 things or 3PTL things is whilst some of them will turn around and go back up, we believe based on your experience that more often than not, six out of ten times they won’t go back up, and so we win on averages there. And the second point is, when you sell something don’t check it. You told me that one point and yeah, that’s been my rule. You’re dead to me. If I sell you, you’re dead to me until you turn up on the top of the buy list again. I don’t want to know about it. I’m like “la-la-la-la-la”.

Tony 37:47
Yeah, exactly right, and it was just by coincidence I went down the buy list to that bottom section, and just saw all these stocks that I had either own in the past or had been on the buy list. I went, “holy shit”, they had all cratered by a large, a large amount. It was quite eye opening.

Cameron 38:05
And I know it’s tough for people when you’re new, when you’re selling stuff and then you check and it goes back up, and you’re like, “ah, I should have held on to it,” etc, etc. But the point is that we’re putting into place stop losses, because, well, in most cases, not in the current market, but most cases, we can take that money and put it somewhere else that we’re a little bit more confident about. And your experience over thirty years is that more often than not, calling the stop loss is the right decision to make. It’ll go against you sometimes, but it’ll go in your favour more often than not over a long period of time.

Tony 38:46
Yeah, and the COVID cough is a great example of that as was the GFC, which I didn’t have the 3PTL lines for. And so, like, when the market went down 15% or so at the start of the GFC, or at the start of the COVID cough, we’re all going “rats”, you know, “we’ve been doing so well lately and we’re giving it all back,” but we’d get out and then…

Cameron 39:04
You rode it all the way down.

Tony 39:06
In the GFC I rode it all the way down, and suddenly 15% looked great, wish I had of sold out at 15% — which we did during the COVID cough. And so, when the market was down 35% or whatever it was in March 2020, I felt a lot better about the fact that I was down 15% at the start, and I had cash to invest back in. So, yeah, we’re flogging a dead horse here, or we’re repeating ourselves, but it is the system, and it is sometimes hard to implement, but it is worthwhile.

Cameron 39:36
Look, I know for people that have been listening for a long time it’s flogging a dead horse, but for all the new people this is their first correction, and it’s terrifying. I get it. You’ve invested money using a system, now the shares are gone, and you have to sell them. A lot of people have probably, you know, I’ve seen on Facebook, they had twenty stocks in their portfolio, and they’ve had sell three quarters of them in the last few weeks. And that’s like “holy hell”. But you’ve just got to chill, it’ll be okay.

Tony 40:07
I guess the last comment I’ll make about the market at the moment is, there’s two things which drives the market either up or down, and they’re both reflected in the PE ratio. So, at the moment we’re seeing what’s called PE compression, which is driving the market down. So, you know, most of the stocks on the stock market are profitable, just as profitable as they were, if not more so, six months ago. The markets trying to guess that they might be less profitable six months from here, and therefore the price they’re paying for the same earnings goes down. So, we’re seeing what’s called PE compression. So, we we’re above market average PE, we’re back to market average PE. I think the pendulum will keep swinging and we’ll go below market average PE. So, we’re seeing nothing different on the earnings front, at least the reported earnings front, but the people’s willingness to pay for earnings is dropping, and so we’re seeing what’s called PE compression. That’s always the first leg down of the stock market. The second leg down is when we see earnings reduce, and so we get the PE going down because the earnings are going down. Whether or not that happens is yet to play out, but we won’t know that until the reporting season — either this next one coming up in August, or perhaps later on. Probably August I would think we’ll start to see either the earnings be affected, or companies call out that their projections are going to be affected by it. So, that might be when we see another leg down in the share market. But there’s always two legs to this; PE ratio either goes down or goes up because people are either more pessimistic or more exuberant, and then we see what’s happening with earnings after that.

Tony 40:07
But you’re gonna take a long-term view. I don’t want to be sexist about it, but this separates the men from the boys, or the women from the girls, or whatever. Just the testicular fortitude to be an investor, a value investor, a professional investor.

Tony 42:01
Yeah.

Cameron 42:01
Right? This is where the rubber meets the road, you’ve got to be able to stomach your way through corrections and downturns because that’s just part of the part of the cycle.

Tony 42:14
Correct. We tune the market out. I have one last comment to make and that’s something I noticed about, again in the Fin Review, an article last week that the ALP since it’s been elected are considering throwing out the financial — I don’t know what the correct term is — but the rules governing financial advice in Australia and they’re going to change them. So, at the moment if you go to a financial advisor you have to pay for a full assessment to be done on your situation that generally costs sort of $3,000/$4,000/$5,000 depending on your situation, which is turning a lot of people away from financial advice and has also created a downturn in companies that provide financial advice. The rumblings in this article are that the ALP are going to introduce a new rule which says that you can provide some kind of basic financial advice for about $500, which has always been the Nirvana in in wealth management circles. So, I imagine it will be along the lines of our investing ladder. You know, if you’re the first rung on the ladder, you go in, they’ll ask you some basic questions: do you have a house? How much is it worth? What’s the mortgage? Do you have spare cash? What’s your Super like? Okay, pay down your debt or buy an ETF or something like that, and they’ll charge 500 bucks for that. If that nut’s cracked and the regulations changes, then I would expect companies like AMP to have a good run. So, AMPs, I think, below its sell line for us at the moment, but otherwise it will be on the buy list, so it’s one to watch going forward.

Cameron 43:43
I think we still have it. I better check the portfolio. Maybe we got rid of it, I can’t remember. Bloody ALP. Did you notice that this market downturn happened when the Labor government got elected, Tony? It’s all their fault.

Tony 43:55
It’s always the Labor government that cleans up, isn’t it? Kevin Rudd got in and then had the GFC happen, and now it’s Albanese’s turn.

Cameron 44:04
Yes. Is Dutton blaming Albo for the recession yet?

Tony 44:11
No, but he was blaming him for the problems in the energy market which I thought was a bit rich. He’s only been in for two weeks and already’s been blamed for the energy market, which has been stuffed up by Angus bloody Taylor for the last ten years.

Cameron 44:25
All right, you’re ready for some Q&A?.

Tony 44:27
No, I want to do a pulled pork.

Cameron 44:29
Oh, the pulled pork. What have you got in your oven today, Tony?

Tony 44:34
I’ll do a quick one. Woodside Energy Group. Was called Woodside Petroleum, now has merged with BHP — or the oil and gas assets from BHP — to create quite a big energy powerhouse in Australia. Certainly, ranks up there on the global stage now. Woodside Energy Group. The figures I’m going to use are the ones that are in our buy list and they’re still pre-merger because they haven’t released their results since they merged. But I guess I’ll make a global comment. It’s interesting, the fact that Woodside has come onto our buy list means it’s got a low price to operating cash flow, and I know it’s got a reasonable PE. Those things I would think will even improve more when new results come out, because there are more assets and more cash flow to add to that from the merger. So, again, I don’t want to forecast it, but it’s one worth looking at. It actually has been about the only thing I’ve thought of buying, well, I did by West African Resources when I shouldn’t have last week because gold was a Josephine, and I didn’t pick it up. But a couple of days I’ve come close to buying Woodside, but they’ve been having some down days as the oil price has move down a bit, so I’ve been hesitant to buy on a down day. But it is not a Josephine and it is above its buy price, and it’s probably one of the only things on our buy list which is. So, just quickly, I’m using a share price of $30.36 which was the price yesterday, 20th of June 2022. Price is just below consensus target, it’s a borderline star stock in stock doctor, so it gets a score of 0.05 for that. It’s got a high dividend yield of 5.86% which scores a point for us. Financial health is strong which is a score of one, and recovering, which we like to see as well, so it gets a score of two on that basis. Price to operating cash flow 5.7 times, and as I said, I would think there’d be more operating cash tipped into this company because of the BHP oil and gas assets being added. So, that might actually improve going forward, but we’ll see. Price is less than IV2 and less than two times IV2, so it’s scores for those. Growth over PE is quite high, it’s seven times, and if you recall the scorecards looking for a growth to PE of above 1.5. But I think in this case the growth is coming from the mergers. So, we’re still looking at a PE based on the current figures, but there’s a lot more earnings per share coming into the combined company which is, therefore, the forecast is saying earnings per share will rise if growth over PE looks good. It’s the lowest PE for three years. It doesn’t have consistent increasing equity, so it doesn’t score on that. All in all, it gets 103% for quality which is a really good score and the sign of a well-managed company, and a 0.18 for QAV, so we might look to Woodside on a good day fairly soon.

Cameron 47:29
Except I sold it today. I rule 1’d it out yesterday.

Tony 47:32
Oh really? Oh, okay.

Cameron 47:34
You said it’s not a Josephine but I think it is still below its second buy line.

Tony 47:39
Okay, I haven’t looked at that, sorry.

Cameron 47:42
I had a look at it this morning, because it popped up on my buy list and I was gonna buy it for my portfolio, my own portfolio. But yeah, I think it’s… it’s on its way up, but still a little bit below the second buy line.

Tony 47:55
Okay, thanks.

Cameron 47:56
No problems. Thank you for that.

Tony 47:58
Anyway, it’s one to watch.

Cameron 48:00
Yeah, one of the very few things that’s looking good at the moment. AVA is the other one that looks okay at the moment, but again, I don’t think it’s gone above its second buy line recovering from a Josephine. Not a lot of things out there right now. All right, Q&A. Here’s a question from Dave S: “hi Cam and Tony. This isn’t a question as such, but maybe an interesting topic for the next show. The saying ‘why bench Michael Jordan’ is often cited in relation to selling a stock whose price has risen dramatically. I think this confuses price with performance. A counter analogy is ‘Why sell Fernando Torres.'” And then for people like me who have no idea what he’s talking about, he helpfully provides the following explanation. “In 2011, Fernando Torres was one of the English Premier League’s best strikers having scored sixty-five goals in his four seasons for Liverpool. He was sold to Chelsea for the irresistible price of 50 million pounds. With the proceeds, Liverpool bought Luis Suarez for 20 million pounds who was even more prolific, scoring sixty-nine goals in his four seasons before being sold Barcelona for 65 million pounds. Torres, meanwhile, scored just twenty goals in his subsequent four seasons at Chelsea before eventually being released as a free agent. So, by selling their best player at his peak, Liverpool got two massive profits totalling 75 million pounds plus sixty-nine goals. Had they kept him, they would have received no profit and just twenty goals. So, why bench your best player, Michael Jordan? Well, he’s the best because he scores the most points, not because he demands the highest transfer fee. And you’re not benching him, you’re selling him for an astronomical fee. With that fee you might afford five Steph Curry’s, and just because he’s the best player doesn’t mean he isn’t also the most overhyped and overvalued player whose value could revert to mean any day. Thanks again for the show, hope this is a useful contribution. Dave S.” What’s your take on all of that, TK?

Tony 50:10
I think a couple of things. The why bench Michael Jordan-ism is a warren Buffett quote, and he talks about letting his best stocks run. I don’t know, this might be over labouring the analogy a little bit, because we do have our sell rules, so we will sell Michael Jordan at the right time, hopefully. And when regression to the mean happens. The question and the key is in Dave’s little summary there, he’s saying that in this case, Chelsea I think it was sold their player at their peak and then Liverpool sold to Chelsea and got a good price by selling their player at their peak. The question for Dave I’ve got is, if you have a better way of picking a stock when it’s at its peak then let us know, but I’ve always found it incredibly hard to know when a stock is at its peak. I know when they’re not at their peak, and it’s when we sell them, they’re on their way down. But, you know, I’ve tried over the years rebalancing portfolio trials, you know, selling from the bottom of the buy list and buying from the top and various rules around that, and it’s never performed as well as holding on to those good stocks even when they appear to be overpriced according to our checklist, until they turn, and we sell them for whatever reason. So, yeah, I understand what you’re saying, Dave, I just haven’t been able to crack when a stocks at its peak, and it’s the old saying that no one rings a bell when the markets at the top of the cycle or at the bottom of the cycle. Same goes for stocks. So, happy to accept your analogy, but I haven’t been able to put it in practice on any sort of improved basis than the rules we use currently.

Cameron 51:49
And the example that I always go back to is FMG a few years ago. When we bought it, people said we were buying it at the highest price it had ever been, we were crazy. Then it went up 100%, people said we should sell it, we’re crazy. Then we held on to it, then it went up like another 100% over the next year. And yeah, obviously it doesn’t always work out that way, but again, we think that more often than not good companies will continue to be good companies and they’ll continue to generate cash and be loved by the market until they’re not anymore.

Tony 52:28
Yeah. And that’s kind of the essence of our way of investing. As you say, they have to be a good company to be on our buy list. They score on the quality metrics, usually, and they have to be throwing off lots of cash. So, I guess our faith, or our investment thesis is that there’s a good management team behind this company and they’ll know what to do to deploy the cash, and they’ll multiply that cash in future years back into the company. So, it goes against our thesis to sell too early those good stocks.

Cameron 52:58
And I totally understand Dave’s point, and a lot of people have made this point, is they want to take profits off the table and redeploy it somewhere else. And if we could be sure that the stocks that we redeployed it into would perform really well then great, but we can’t be sure. I mean, QAV is a system of trying to identify the stocks that will outperform the rest of the market, but six out of ten times is what we’re looking for. So, we don’t know what we’re putting our money into when we sell one. When we’re on one that is performing really well, we’re reluctant to give it up. You can divorce your hot wife and marry a younger model and think that, you know, you’re gonna get a good ten years out of that one, but you don’t know what’s really going on until you’ve been married to her for a couple of years.

Tony 53:57
And then you have a kid when you’re our age running around.

Cameron 54:00
Don’t remind me, it’s why my hair is so grey. Yeah, you just, you don’t know what you’re getting yourself into. Even like, even with QAV, you still don’t know what you’re buying. I mean, you hope that we’ve done our research and odds are that it’s going to do well, but you don’t know.

Tony 54:20
That’s another good point, yeah. If we’re getting six out of ten right, then if we sell one of those six that’s gotta lower the odds and we reinvest it with a 60% accuracy. If you keep playing that game too much suddenly the odds, swap, and it’s a 40% success rate, which is going to kill us.

Cameron 54:35
But, you know, people should feel comfortable — do what feels right for you. You know, you don’t have to do it the way Tony does it. But we can’t be sure what the results will be. Go do it, and then as you always say, come back in five years and let us know how it went.

Tony 54:50
Yeah, and if someone can tell us when a stock is right for selling at the top of its market, great. Let us know.

Cameron 54:56
Who did we have on? Oh, was it Michael Goldberg? The interviewer hasn’t gone out yet, but we spoke to Michael Goldberg from Collin’s Street a week or two ago, and he was telling us a story about one stock that they bought and they made, sort of, 50% on it. And he thought that’s good, then they got out and it went up another, like, 100% in the next year, and he was kicking himself that he didn’t stick with it. I can’t remember which company it was. Alright, Kush has a question. “Hi Cam. I owned UPST, Upstart in the US, which is going through a difficult period. It would be great to have TK’s long term perspective on the AI/financial sector. Thanks, take care. Kush.” How familiar are you with the AI financial sector, TK?

Tony 55:44
I guess AI’s artificial intelligence. I’ve got no idea on the AI sector. I guess my comment about — if that’s what it is — my comment is, yeah, look, I’ve been through, this is now my second dotcom bubble that’s burst. And, you know, I’m not gonna say people can’t make money out of investing in hype stocks and stocks that may one day deliver future benefit to all of mankind. But twice I’ve seen it happen, and people tend to come out with their asses handed to them.

Cameron 56:15
Isn’t it going to be three times now? The dotcom crash, GFC, and now this one?

Tony 56:22
The GFC didn’t really have a dotcom component to it. Like, obviously, there were growth stocks in the GFC which came off, but the dotcom bubble in this one, there’s been a bit of a dotcom boom; Tesla, all the WAAX stocks and all that kind of stuff going on, and they’ve all come back quite strongly. So, again, it just says to me that unless you know what you’re doing, you’re probably gonna find that, or unless you’re trading, you may make some money on the way up, you lose it all on the way down. And my guess is, and this hasn’t played out yet, but probably only about two or three of the stocks that were hyped during the boom are going to go on to be good businesses, just like it happened last time round in the dotcom boom, you know, with Amazon and I’m struggling to think of any other ones — maybe Yahoo, maybe Microsoft.

Cameron 57:09
eBay.

Tony 57:10
eBay after the dotcom, boom. It’s going to be the same this time around as well. So, that’s my take on the AI market, be careful buying into stocks that don’t make any money and require you to keep tipping into capital raisings. It’s just that to me, it just always ends in tears. On the financial sector side of things, I’ve covered it earlier in the podcast that there’s worry now about the banks taking provisions for bad and doubtful debts. So, that will crimp their share prices in the short term. But I think in a rising interest rate market, assuming interest rates continue to rise — and that’s also not a given in the long-term sense — that the banks will do well, they’ll do better than what they have in a lower interest rate environment. So, that’s I guess my broad brush take on the financial sector.

Cameron 57:55
For those people wondering what upstart is, UPST. According to their website there like an automatic, like an online lender by the sounds of it. Founded by ex-Googlers, Upstart is a leading artificial intelligence lending platform designed to improve access to affordable credit while reducing the risk and costs of lending for our bank partners. By leveraging Upstarts AI platform, Upstart powered banks can offer higher approval rates and experience lower loss rates, while simultaneously delivering the exceptional digital-first lending experience their customers demand. $25.4 billion in lending, 74% of loans fully automated. So, yeah, it’s basically a tech company.

Tony 58:42
A Fintech. Yeah, so my take on the fintech sector is that, at least in Australia and I can’t really comment on America, but I suspect it’s the same, the banks are big lumbering beasts that get fat and lazy. They have competition amongst themselves, it’s been a long time since there’s been small, nimble, upstart players competing with them. My general experience in that kind of situation is that if a company does do well, like Upstart may be doing, a bank will buy them out and adopt their technology and put it on their own platform.

Cameron 59:11
And screw up that process, and all the founders will leave, and it’ll just become another boring bank service.

Tony 59:18
Yeah. But the banks, I mean, the banks acknowledge that they do need to improve their ability to service applications quicker. I mean, you know, go and try and apply for a housing loan. That can take couple of weeks. I called it cardigan country, like, I used to sit in one of the banks when I was consulting to one of them and watch their mortgage department. There’d be, like, guys in cubicles with paper higher than the cubicle walls, they were the mortgage applications on paper they were processing, and they’d walk one across to the next cubicle and add it to that pile. It would take a couple of weeks for the paper to get through the system. So, yeah, it’s ripe for disruption, but whether that will be profitable for a fintech, or whether the fintech will get bought. I guess if you’re a shareholder and the fintech gets bought out by a bank it probably will be profitable, but that’s probably how it’s gonna play out.

Cameron 1:00:03
Or the flip side is the fintech crashes and burns. I mean, another fintech, a clone of it gets bought out and does well. It’s part of that whole thing where you’re speculating about its future. You don’t really know, right? Its gambling.

Tony 1:00:16
I don’t have it up in front of me, what’s the share price been doing for Upstart and what’s its PE like? Can you see it?

Cameron 1:00:22
Over the last year, it’s gone from… October 2021, it was trading at about $390 USD a share, its currently trading at $35 USD a share. So, not a great time for investors in UPST in the last year. It’s only down whatever that is, like 90% in the course of a year. So, it’s PE…

Tony 1:00:54
I just called it up, currently 21 times. In the last period it’s been up as high as 35, but I imagine when it was at its peak, it was 100 or something like that.

Cameron 1:01:03
But its financials look good. Its revenue’s up 154% year on year, net incomes up 223% year on year, $32 million. Earnings per shares is about 34 cents, up 209%. Net profit margin’s up 30% year on year. So, on the basis of those financials it looks like it’s doing okay, but the shares have crashed. Maybe they’ve bottomed out and maybe they haven’t.

Tony 1:01:30
Might be one of those stocks that does survive, and it comes onto our buy list at a cheap price. But it’s in the US, so I don’t know.

Cameron 1:01:36
It’s not going to come into our list here, no. I hope that helps Kush, I suspect not, but there you go. Dave asks, “hi Cam and TK. I wanted to share my current performance, and dare I, question rule 1.” You dare, obviously Dave.

Tony 1:01:53
Join the line, Dave.

Cameron 1:01:54
“80 to 90% of my sales have been rule 1. In eight months since inception, the portfolio has turned over not once but twice because of rule 1s alone. Average holding time for rule 1 stocks has been about eleven weeks and as short as one week. Portfolio is down 50% versus market 10% total return. The rule 1 sells amount to a 25% realised loss on the portfolio. Performance of GRR has single-handedly dragged it back up to negative 15%. To test rule 1, I went back and simulated the portfolio ignoring rule 1 and relying on the other sell rules only thanks to the Brettelator, a great tool. I found I would have got a return of negative 3% versus market negative 10%, an 18% improvement and with far fewer sells. My suspicion is that rule 1 may be useful in a rising market but difficult to combat in a sideways or falling market where 10% fluctuations are more frequent. The 10% loss is locked in at the first available opportunity time and time again. This makes it very hard to establish a new portfolio. More philosophically, rule 1 seems at odds with the QAV philosophy; the quality, value or price sentiment of a stock is unrelated to the price at which one individual has bought it for. So, I’d like to ask if such a high proportion of rule 1 sells is common, and secondly, will it be possible to do a similar retrospective simulation on the QAV dummy portfolio, i.e., ignoring rule 1 sells? I’d offer, but I have three kids under four. Sorry for the lengthy question and thank you for the show. Dave.” While you answer this I’m going to go fill my glass with water because I’m getting parched, because I’ve still got the aircon on, and it’s hot. So, you talk.

Tony 1:03:45
What time is it over there, by the way?

Cameron 1:03:47
5:35 in the afternoon.

Tony 1:03:50
That should be cool. Should’ve cooled down by now.

Cameron 1:03:52
Yeah, it’s only probably 40 degrees outside.

Tony 1:03:56
All right, I’ll answer the question. Thanks, Dave. So, a couple of comments I would make. The first one is you’re talking about that rule 1 may be useful in a rising market but difficult to combat in a sideways or falling market where 10% fluctuations are more frequent. Well, you’re possibly right and it has been a very unusual market in the last, say, six months where the market was going sideways and we were turning over the portfolio a lot more frequently than we normally did. So, yes, it’s possible that the rule 1s will be negatively impacting our portfolio compared to just having 3PTLS as our sell policy during that time. But, if I look at the longer term, that’s one six month period in the last twenty plus years that I can think of where we’ve had that kind of turmoil. It was certainly one of the most turbulent periods, if not the most turbulent period, I can think of. Where the rule 1 does come into its own is not necessarily in a rising market, I think it comes into its own in a falling market which is what’s happening now. And we’re stopping out when we lose 10% and probably putting it into cash to be ready to reinvest it at some stage in the future when things are cheaper. So, I’m glad I’ve been stopped out of all the stocks, and certainly that’s been a blessing. Yes, my portfolio is down, it’s still not down as bad as the market just like our dummy portfolio, so I think it’s worthwhile doing. Look, I think there’s always going to be periods where any of these rules will look like they underperform, but over the long term they outperform. So, rather than trying to cherry pick when I apply the rules, I’m just going to apply them and not have to think about whether it’s a choppy market or an up market or a down market. Because, oftentimes those things don’t reveal themselves to you anyway until you’re well into them, and then its too late to change the rules based on your perception of how the markets going. So, appreciate what you’re saying, Dave, and how it’s worked in particular for your situation. But, you haven’t convinced me to change what we do.

Cameron 1:05:58
Yeah, and I’m sorry to hear that your portfolio is down 15%, Dave, that’s gotta be discouraging. But yeah, it’s unfortunately just this last year when you started has been the worst possible time, probably, in some ways. Apart from the educational aspect of it, you know, you’re getting education by fire — trial by fire. I mean, I don’t know if, well, yeah, you did do the analysis on would it have been better off if you hadn’t sold? But yeah, that’s, uh, as Tony said, it’s just seems like it’s a not a big enough data set over a longer period of time to determine whether or not it works. We probably could do that with the dummy portfolio, but I don’t really have the time or the inclination, but maybe we can get our intern to do it.

Tony 1:06:43
Our intern’s interning somewhere else at the moment, so no, we can’t do that.

Cameron 1:06:47
Well, we need a new intern.

Tony 1:06:49
Yeah.

Cameron 1:06:49
By the way, best thing about being in the US is Clamato juice. Love Clamato juice. Still annoyed that I can’t get it in Australia.

Tony 1:07:00
Put some vodka in it.

Cameron 1:07:02
Thank you. Thank you.

Tony 1:07:03
Bloody Mary.

Cameron 1:07:04
The official alcoholic of the show, put vodka into everything.

Tony 1:07:09
I’m not the alcoholic. Who was the one who posted on Facebook you were doing the download with a bottle of scotch beside you?

Cameron 1:07:20
You’re a bad influence on me.

Tony 1:07:22
I was talking with Alex because she was meant to be, like, she had a week off because of her exams and stuff. And she goes, “Cam did the download with a bottle of scotch. Is it okay? I didn’t see the results.”

Cameron 1:07:33
No, it was probably terrible. Well, you know, it was a big one.

Tony 1:07:40
One last word about rule 1s. I always view rule 1s and stop losses as an insurance policy. Sometimes you claim on it, and sometimes you don’t. But, I like the fact that there’s an insurance policy in place.

Cameron 1:07:52
Yeah, like it gets back to that thing with the three-point trendline whatever. It’s not going to work in your favour every time, but long term we believe it will.

Tony 1:08:01
Well, we know it will.

Cameron 1:08:03
Petra asks, “when the market drops like it has, is TK tempted to buy a wonderful company at a fair price and ignore sentiment? Are there some companies he would own if on sale regardless of sentiment? MQG springs to mind,” Macquarie Group.

Tony 1:08:19
Yeah, again, this is another version of the last question. It’s, are we value investors, or are we value and momentum investors? I’ve found over time that the benefits of adding the sentiment checking and rule 1s to our portfolio has improve my returns. But yeah, a traditional value investor would be rubbing their hands now and probably dollar-cost averaging into stocks like Macquarie groups. So, good company, share price is down, will always be around, will always do good going forward and eventually it will turn up. So, I get that, that’s just not how I invest because Macquarie Group could go a lot cheaper, and I’ve invested capital which I could have been either putting in cash or something else while waiting for Macquarie group to establish an uptrend. So, to me that’s just, sort of, basic logic, and I think it’s an improvement on value investing and it’s proven to be for me. So, no, I won’t buy Macquarie Group at the moment, it’s still a falling knife. But when I see sentiment return, and assuming that Macquarie Group’s still on the buy list, which it probably will be because it’s a good company, then I’ll buy it at the right time.

Cameron 1:09:22
Yeah, so it’s currently trading at $162. It was as high as about $207, and we did buy it.

Tony 1:09:30
I bought it.

Cameron 1:09:30
Yeah, I bought it and bought it for QAV, too, I think around about $200 — $198, something like that, I recall, then had to rule 1 it. But let’s say it went from $208/$209 at its peak only back in April, and let’s say you bought it at $190, it had dropped 10% and you thought “ooh, you beauty, I’ll get in there.” Now it’s $160and it could drop further, so you don’t really know, right? How long it’s going to drop for, when it’s going to turn around, et cetera, et cetera.

Tony 1:10:04
Correct. So, I just prefer to step aside when the drop happens and then re-enter when it’s a good time to re-enter.

Cameron 1:10:11
TK, I’ve got three late questions that came in today that don’t require any prep. Are you willing to just, you know, handle them extemporaneously?

Tony 1:10:23
Yeah, sure. I mean, we’ve been going for, what, an hour and three quarters, so…

Cameron 1:10:27
We probably won’t do one next week, because I think I’m going to be hiking in a canyon somewhere, so I think I’ll put out an interview, I’ll put out Michael Goldberg’s interview next week. Just think of this as two weeks of shows crammed into one.

Tony 1:10:40
That’s why I thought we did the Michael Goldberg interview. Oh, and by the way, before you put that interview out, I will foreshadow a little bit. We asked him for his best idea which he said was Link Market Services which was under a takeover offer, I think from a Canadian pension fund or something similar. It looks like they’re gonna walk away and the share price has dropped a lot. So, I’ll just, I like Michael, and I just wanted to put that out there that when people listen to that best idea, then do your own research.

Cameron 1:11:07
Yeah. Well, all right. This one comes from Sue: “Hi, Cam. Was wondering what TC recommends when you get jumped on rule 1? An example is…”

Cameron 1:11:17
TK.

Cameron 1:11:17
What’d I say? Oh no, she wrote TC. Who is TC? It’s you and me, Tony Cam. Yeah, we’re, it’s like JLo, no not JLo, like one of the celebrity couples. That’s our celebrity couple name, is TC, Tonycam. “An example is, I got NHC and on Friday I was sitting at a negative 9% return. Today it plunged to negative 12%, so I’m sitting at negative 21% without blinking today. Would Tony still sell this on rule 1, or is there a scenario where it’s gone down so much where he thinks it’s too late to sell? I feel like I remember an episode in early pandemic times where the dummy portfolio missed a rule 1 window, may have been HAW, and it was better to hold than sell. I couldn’t be dreaming this.” I think it was you and AMI. Was it your own portfolio? You missed AMI?

Tony 1:12:09
Yeah, it does ring a bell.

Cameron 1:12:09
I think you said you missed the rule 1 and then you thought “screw it, I’ll just hold on to it.”

Tony 1:12:19
Yeah, well, I think I raised it on the show because it was the wrong thing to do, so…

Cameron 1:12:25
It kept going down, or it stayed down for a long time.

Tony 1:12:28
Yeah, so I got stopped out of NHC yesterday myself and it was down more than 10% when I sold it, so I think you should still sell.

Cameron 1:12:37
So, you would still sell? Yeah, okay. You still want to stop your loss, cut your losses and get out.

Cameron 1:12:42
Correct.

Cameron 1:12:43
There you go, Sue. Philip asks, “for stocks that have had big gains and now have a large difference between their current share price and the 3PTL sell price, what is the view on fudging the 3PTL sell price? Eg. champion iron ore, CIA and Grange resources, GRR, are two examples. Both are down negative 10% today, and if we wait until they hit the 3PTL sell price as determined by the Brettelator, they’ll have lost more of their value before selling. Should we fudge and still take a profit?” The answer is obviously, no.

Tony 1:13:14
Correct, yeah. So, like, I mean, first of all, 10%. Big deal. They’re up a lot. I’m familiar with CIA more than GRR because I own it, and if you look at the graph it does have an almost like a factory roof to it where it goes up and down by big swings. So, I’m not worried about that. We spoke about the iron ore graph, it’s quite possible that the fudge sell for iron ore will happen before these stocks reach their 3PTsLs, so I’d be watching that. But yeah, fudge away people. If it makes you feel unsettled, then go ahead and sell it.

Cameron 1:13:46
Pack that fudge like you’re Tom Cruise, but we will hold on.

Tony 1:13:50
Yeah, so I own CIA.

Cameron 1:13:52
But if you’re going to fudge anything, it’s going to be the iron ore sell price, not the stock sell price.

Tony 1:13:58
Correct.

Cameron 1:13:58
And the last one is from Kurt. Again, “in these times of steep declines.” Sounds like a Paul Simon song. “In these times of steep decline.” I should start singing these questions if it goes down any further. Speaking of singing, we went to see Ben Folds last night with Chrissy’s sister and brother-in-law. It was great. About ten or fifteen minutes into the show, he pointed out that the piano was broken. He would hit a note and it would sustain, he’d hit it and walk away from the piano, the note would just keep sustaining. So, he, with very good humour, I was really impressed, he was like, “I think we need to take an intermission and have someone come and look at this piano.” So, we just took a break for fifteen minutes and these technicians came down and messed with the piano and then he came back, and the piano still wasn’t working properly, so he would constantly play stuff and he’d have to reach in — it was a grand piano — he’d have to reach in and manually knock the bumpers down when they were being stuck up. In full credit to Ben Folds, I don’t know if you’re a Ben Folds fan, but I have been, you know, for twenty years. No?

Tony 1:15:05
Oh, so-so.

Cameron 1:15:05
I’ve seen him live a bunch of times. He’s a very funny guy, like, he’s great with the audience, he’s very entertaining as a performer, and he handled it with aplomb. I had to give him credit. Like, a lot of performers, you know, they turn up, they expect to have good pianos. I don’t know if it’s the venue or the promoter, or whoever organises the piano, but he could’ve thrown a tantrum and, you know, set the thing on fire — somebody in the audience did suggest he should set it on fire. This being in America, pull out an AR15 and shoot it up, maybe. But, he handled it very well.

Tony 1:15:38
I went to a WHO concert once when Pete Townsend didn’t like the sound coming out of the app, so he put his guitar through it.

Cameron 1:15:44
Doesn’t he just do that for shits and giggles?

Tony 1:15:48
Probably. I didn’t know you were a Ben Folds fan; I didn’t think you were.

Cameron 1:15:51
Love Ben Folds. Yeah, just, I really dig Ben Folds. His songs are, sort of, bittersweet with some humour, and yeah, he’s great live. Gets the audience involved singing three-piece harmonies. I remember seeing him, you know where you had your 50th? I think it was that pub or somewhere near that. Saw him do a little venue. He lived in Adelaide for a long time. Saw him play at this is little venue there once, and he’d spend, like, ten or fifteen minutes just doing music theory tests with the audience. Like, he’d just play really obscure chords and see if the audience could work out what the chord was. And he had, obviously, a bunch of music nerds there and they were competing to see who could call out the chord name first. He’s very popular with music nerds, which I’m not, but Chrissy is.

Tony 1:16:44
He didn’t have the Shat with him, did he?

Cameron 1:16:45
No, but you know that track with the Shat?

Tony 1:16:48
Oh yeah.

Cameron 1:16:49
Well, he kind of, he reinvigorated the Shat’s musical career with that song — which is a great track if people haven’t heard it. Dark, dark, really dark. Hey, did you listen to that interview with the Shat that I told you about last time?

Tony 1:17:05
No.

Cameron 1:17:06
The Bill Maher interview, you gotta check it out, man. It’s gold.

Tony 1:17:10
I will, okay, thanks.

Cameron 1:17:11
Another good Bill Maher one I listened to on the way here — I know it’s not after hours yet — while it’s top of mind was with Sammy Hagar, which was really interesting. And you would have liked it, I think, because they talked at length about the Beatles documentary. So, what Sammy was saying was how disappointed he was when he watched the documentary with John Lennon’s attitude. And he said, “I’ve been a huge Lennon fan all my life, love Lennon.” And he said, “I thought at this stage of the Beatles career, he was just heroined out of his brain, but he didn’t seem to be heroined out. He just was being disruptive, and every time Paul would have an idea, John would just take the piss out of the idea, disrupt proceedings,” and Bill Maher was like, “I didn’t get that at all. I thought he was having a good time.” And Sammy was saying, “listen, I’ve been in bands my whole life. Bad dynamics I know really well.” Obviously, having played with Eddie and broken up with Eddie and all that kind of stuff. I get it. He said, “man, I could read the room there, and Paul was just pissed. John was just causing problems.” And he said, “it broke my heart to see John just being a dick,” you know, in the whole thing. So anyway, interesting. Anyway, last question, Kurt. “In these times of steep declines, like many of you, I’m just currently witnessing a lot of my shares which have proudly been in the green over the last nine months quickly disappear. Like in the past month, 30%-11%. I appreciate that still above the ASX, but what’s concerning me is that I’ve never sold a share since I started in September last year for any profit. They all go back to zero or negative 10%. Does this sound wrong?” Does this sound wrong? Was that wrong? It’s a George Costanza line. “Was that wrong?” When he had sex with the cleaner under the desk. He’s like, he gets caught and he says “was that wrong. Because if anybody had told me that we shouldn’t do that, I wouldn’t have.” “I always record the three-point sell line from the Brettelator, but it rarely seems to rise acutely enough for the downturn to recover any profits. Hopefully that makes some sense. Thanks in advance.”

Tony 1:19:17
Well, same answer as before, isn’t it? It’s unusual times. So, yeah, the fact that you — I think you said he was getting out and breaking even’s actually good in this kind of market. So, look, it’s gonna always be the case. You can look back and say, you know, this stock was worth 30% more, I wish I’d sold it. But, unless you knew that in advance, it’s useless doing that.

Cameron 1:19:37
But well, that’s the questions for today, TK after hours, what have you got for me and after hours…

Cameron 1:32:52
The QAV Podcast is a production of Spacecraft Publishing Proprietary 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.

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