Transcript #527

QAV 527 Club

Cameron  00:07

Wel­come back to QAV, the COVID edi­tion. This is episode 527. For­tu­nate­ly, I’m the one with COVID and not you, TK. How are you TK?

Tony  00:21

Healthy. Yeah, I’m good. Alex has got COVID though, you’ve got COVID. We know plen­ty of peo­ple who’ve got it again, so it’s out and about. It’s back — if it ever went. But you’re okay, you’re not feel­ing too bad?

Cameron  00:33

Yeah, this is day five of symp­toms for us. I test­ed pos­i­tive three days ago, I think, and yeah, I’m a lit­tle bit nasal­ly but that’s about it. I’m pret­ty much over it. Real­ly only had one or one and a half days where I felt a lit­tle bit coldy. Had a cough, bad cough for a day, bit of a run­ny nose, but that’s it. Chris­sy’s has been fine for a cou­ple of days. Yeah, I think we’re in Utah still in and it’s the sixth worst state in the Unit­ed States for cas­es per capi­ta or some­thing at the moment, so not real­ly sur­pris­ing that we caught it. But there you go. Actu­al­ly, it was good to catch it in Salt Lake City because Chris­sy’s got fam­i­ly here and they were good enough to look after us and bring us food and then rat tests and stuff like that, so look­ing after us. It’s nice to get sick in a place where this fam­i­ly to look after you, I guess.

Tony  01:26

Yeah, right. Good.

Cameron  01:27

And you’re back from your lit­tle trip down to Wag­ga?

Tony  01:31

I could­n’t stand under­wa­ter world in Syd­ney any longer. It just rained all last week, and Jen­ny had board meet­ings for most of it, so she was just… well, I hard­ly ever saw her any­way. She was very busy from sunup ’till way into the evening. So, yeah, I just packed up and went down to Wag­ga where it was sun­ny. Rud­dy was back, he had a hol­i­day up in the North­ern Ter­ri­to­ry so caught up with him. We played golf and we drank whiskey, and we had a degus­ta­tion meal one night, which was love­ly. So, yeah, it’s been good. It was a good cir­cuit break­er.

Cameron  02:02

In Wag­ga?

Tony  02:03

Yeah, it was cold. Like, it was down to zero in the morn­ings down there, but beau­ti­ful sun­ny days about any­where between 14 and 17 degrees depend­ing on the day. So, it was nice. It was love­ly.

Cameron  02:15

Love­ly.

Tony  02:16

It’s a well-kept secret, Wag­ga. It’s actu­al­ly quite nice. The stan­dard of restau­rants and bars are great. It’s a love­ly lit­tle town.

Cameron  02:23

Yeah, that’s great. I’ll have to go down and vis­it Rud­dy down there some­time. I’ll tell you I guess in after­hours about all the crazy cool things that we’ve been doing before we go COVID, but the most amaz­ing thing for me about this trip I just realised a day ago is I’ve lost five or six kilos since I’ve been here.

Tony  02:40

Wow.

Cameron  02:40

Usu­al­ly, I come to the US and I put on ten kilos and then spend the next year try­ing to lose it. This time I’ve lost five or six kilos, pos­si­bly from the amount of hik­ing that we’ve done, but also, I think it’s because Chris­sy’s not cook­ing while I’m here. Because back home Chris­sy makes a big batch of food and then puts it in the mid­dle of the table and I have a plate, and then we get talk­ing and then I have absent mind­ed­ly have anoth­er plate, and then absent mind­ed­ly have anoth­er plate. Because she eats three serv­ings, because she can because she’s skin­ny as a twig, and I sit there and eat too much. But over here, we’re just not eat­ing much, or as much — I’m not any­way. So, that’s been good. I’ll have to come back here more often and lose more weight.

Tony  03:21

I’m guess­ing Chris­sy does­n’t have the same serv­ing size that you do either, giv­en she has three.

Cameron  03:25

No, she does. No, she has mas­sive serv­ing sizes. You know, my moth­er always says she’s so skin­ny, she should eat more. I say, “you should see how much she eats. She eats like a bloody army.” But, you know, has a fast metab­o­lism.

Tony  03:40

You need to get the gut bac­te­ria out of her and put it into you.

Cameron  03:44

Yes.

Tony  03:44

Isn’t that the lat­est health thing? The fae­cal trans­plant?

Cameron  03:49

Urgh Tony. Peo­ple are eat­ing while they’re lis­ten­ing to this, Tony.

Tony  03:55

Google it, peo­ple.

Cameron  03:56

Let’s get into invest­ing stuff.

Tony  03:59

Nah, let’s talk more about Utah and Salt Lake City.

Cameron  04:04

It’s not the most excit­ing sub­ject to talk about right now, I get it. I saw this recent quote from our old friend Richard Car­ri­er. Richard Car­ri­er is a philoso­pher and has a PhD in, I think ancient his­to­ry. He was in our film Mar­ket­ing the Mes­si­ah as the most hat­ed of the schol­ars that we had. He’s very unpop­u­lar with peo­ple in bib­li­cal schol­ar­ship because he calls bull­shit on a lot of stuff. But I like Richard a lot, he’s a fun dude. He wrote an arti­cle recent­ly about evo­lu­tion, and fun­ni­ly enough made me think of invest­ing. He was talk­ing about log­i­cal incon­sis­ten­cies that peo­ple have and strug­gle to under­stand when it comes to under­stand­ing com­plex top­ics like evo­lu­tion. Here’s the bit that I liked. He says, “I find that sci­en­tists — and even more so non-sci­en­tists — suck at all kinds of rea­son­ing, often because they sim­ply don’t know any­thing about pok­er or gam­bling in gen­er­al and thus don’t know how sto­chas­tic process­es actu­al­ly look when you observe them. For exam­ple, you would see punc­tu­at­ed equi­lib­ri­um in a pok­er play­er’s win­nings record as the kind of rare hands that give them huge pot leads that allow them to dom­i­nate a table hap­pen rarely but have the imme­di­ate result of gen­er­at­ing con­spic­u­ous wind­falls. They kill one table after dozens of com­par­a­tive­ly weak end­ings or loss­es.” And I was think­ing that sounds a lot like invest­ing, like, if I under­stand cor­rect­ly, you’re hang­ing in there for the big, over­sized wins and then you have a lot of aver­age sized wins, and a lot of loss­es, a lot of things that go back­wards. But, if I have under­stood your num­bers cor­rect­ly and what I’ve seen in the dum­my port­fo­lio over the last three years, the major­i­ty of the gains are made up with a small num­ber of real­ly big, out­sized wins.

Tony  06:07

Yeah.

Cameron  06:07

And then you man­age your loss­es as best as you can in between those big wins.

Tony  06:10

Absolute­ly right. And you don’t know when the big wins are going to come and it’s the same process that gen­er­ates a big win as com­pared to a loss or an aver­age win. So, yeah, no, that’s a real­ly good exam­ple. And, well, it’s a bit like what you know, your approach to gam­bling. You used to bet on my hors­es and then you had about half a dozen loss­es in a row and then you went, “oh, this crap,” and you fold­ed, and I think the next week some­thing got up at 15 to 1. That’s exact­ly it.

Cameron  06:42

That’s true.

Tony  06:43

It’s a good exam­ple. And I’ve often said that one of the rea­sons why I’ve con­tin­ued to be a horse bet­ter, a horse punter is because one thing informs the oth­er. You know, they both involve allo­cat­ing mon­ey, they both involve hav­ing a sys­tem, they both involve using the sys­tem unemo­tion­al­ly, all that kind of stuff. So yeah, they do inform each oth­er. I’m not a pok­er play­er, but it would be the same.

Cameron  07:04

That’s my prob­lem with the horse rac­ing, is you nev­er gave me a sys­tem.

Tony  07:09

Just back my hors­es.

Cameron  07:12

Tak­ing tips.

Tony  07:13

Exact­ly. No, good point.

Cameron  07:13

And also, I did­n’t under­stand what the hell I was doing either, it was all over my head. I did­n’t under­stand any of it.

Tony  07:23

That’s a real­ly good exam­ple. And the oth­er thing is, evo­lu­tion is alive in most peo­ple’s invest­ing lives in that one of the best exam­ples, I think it might have been by Richard Dawkins who’s writ­ten some fan­tas­tic books on evo­lu­tion­ary the­o­ry — I high­ly rec­om­mend them to peo­ple, start­ing with The Self­ish Gene, of course, the most famous one, but there’s plen­ty of oth­er ones. But he said, you know, if you want to under­stand evo­lu­tion think about this research exam­ple, which is a live research exam­ple: there’s a stream which has fish flow­ing along it, the researchers have been able to mark out a ten-metre gap on the stream and con­trol a lot of vari­ables. There’s one basic type of fish in the stream and there’s one bird that would fly and eat those fish when they spot­ted them in the stream. So, the researchers said, “okay, let’s stack the cards here one way or the oth­er.” So, they’ve actu­al­ly damned part of the stream, caught a lot of fish, put a red dot on the back of some, put a blue dot on the back of the oth­ers, released them back into the wild, and then dropped a whole heap of blue peb­bles onto the bot­tom of the stream in this ten-metre stretch. And after a week or so came back and said, “all the fish with red dots on their back have been eat­en by the birds, but the blue ones have sur­vived.” And that’s because the blue ones could­n’t be seen against the blue rocks on the bot­tom of the streams, and but the red ones could. So, they said great, and they went along, and they let the fish pop­u­la­tion mul­ti­ply again, and then they reversed it and they put red peb­bles on the streams and all the red fish sur­vived. And it was just a real­ly good exam­ple of how evo­lu­tion works. Peo­ple think, you know, because geo­log­i­cal time spans take hun­dreds of mil­lions of years for things to evolve that’s how it hap­pens. But it does­n’t, it can hap­pen in a week. And it’s a bit like that with our invest­ing. One cycle gets rid of all the growth investors who nev­er ever get val­ue invest­ing, who nev­er get a sys­tem, patients long-term, cap­i­tal appre­ci­a­tion, how com­pound­ing inter­est works, all those kinds of things, and they’re the red fish who’ve just been packed by the birds and they’re all gone leav­ing the blue fish. And that’s a sim­i­lar sort of sto­ry about evo­lu­tion and how it applies to invest­ing.

Cameron  09:28

But we need the red fish, right? Because they’re the ones that bring all the cash in and make bad deci­sions.

Tony  09:36

We don’t need them because we hard­ly ever trade with them, right? I don’t want to buy After­pay off some­one or Bit­coin off some­one, let them go off and do their own thing. But no, we don’t need them. Maybe they dis­tract the invest­ment bankers and keep them off our backs, I don’t know. Maybe that’s it. But yeah, my point is that we evolved, and the mar­ket evolves to leave peo­ple who, over the long-term, are com­fort­able with invest­ing.

Cameron  09:56

I see Dawkins is com­ing to Aus­tralia I think lat­er this year or next year, I got some alert to buy tick­ets. I’m went to buy tick­ets for when he’s in Bris­bane, and they were like $400 a tick­et.

Tony  10:09

Wow.

Cameron  10:10

I’m not going to pay $400 to see Dawkins, I can read his books. But yeah, I’m a big fan of Dick­ey Dawkins as my old mate Father Bob used to call him. “Oh, Dick­ey Dawkins.” All right, enough about evo­lu­tion. Inter­est rate rise update, Tony. RBA has been crank­ing it up.

Tony  10:30

Yeah, anoth­er 50 basis points. So, where are we at now, 1.35%? Which peo­ple should have in their spread­sheets for the IV 2 cal­cu­la­tions as the RBA cash rate, which we add 6% to. But that’s also meant the banks are putting their mort­gage rates up, and that’s anoth­er cell in our mas­ter spread­sheet where we test to see if the div­i­dend yield is above the stan­dard vari­able home rate, and they’ve been ris­ing quite fast.

Cameron  10:56

Now, just to test you on this I sug­gest­ed that I should just put the mort­gage rate up by 50 basis points as well, just to check that you were pay­ing atten­tion as I do from time to time. And you said, “no, that’s not how it works, idiot.”

Tony  11:11

I did­n’t say idiot.

Cameron  11:14

I read between the lines, it’s okay. And you said, “no, we actu­al­ly take the mort­gage rate from the banks.” Right?

Tony  11:24

Yeah, just a point on that. So, since we’ve been doing QAV I’ve been putting in the stan­dard vari­able rate. Now, most peo­ple will get a dis­count off that so their own rate will be less than that. Mine is, I get about a 1.3% dis­count I think, or so the bank tells me. You’re nev­er real­ly quite sure, because one per­son­’s rate’s always dif­fer­ent to anoth­er per­son­’s rate. That’s how they like it so you can’t com­pare and go back to them and try and do a deal. But you can plug your own inter­est rate if you have got a mort­gage and you’re using it to invest, you can plug your own inter­est rate in there. That’s what I’ve done for years, I’ve just tried to stan­dard­ise it since QAV start­ed for peo­ple who don’t have a mort­gage or who don’t use it to invest, and I’ve been putting the stan­dard vari­able rate in — which is around, sort of, 5% at the moment.

Cameron  12:08

5.14 I think we have in the sheet.

Tony  12:11

There you go, 514. Okay.

Cameron  12:12

So, if peo­ple are using Tony sheets, make sure you get the lat­est ver­sion from the club mem­ber resources page, and if you’re using Andrew Flit­mans’ sheet, the AF mod­el, make sure you plug in your own num­bers into the vari­ables tab on that. Andrew did pro­vide instructions/reminded us how to do that in the Face­book group and add on Slack, cov­er­ing all of his bases. So, thank you, AF, for that. Here’s an inter­est­ing stat I found from Charles Schwab this week: “since 1974, the S&P 500 has risen on aver­age of more than 8% one month after a mar­ket cor­rec­tion bot­tom and more than 24% one year lat­er.” I thought that spoke well to what you’ve always told me that when the mar­ket turns around it often turns around quick­ly, and if you’re not there for that one month… Because I know a lot of peo­ple in times like this when the mar­kets been falling for the last four months, or what­ev­er it’s been, I think April is when it real­ly start­ed to turn down, you know, par­tic­u­lar­ly peo­ple that have start­ed their port­fo­lios in the last six months, and they see them­selves under­wa­ter, and they’re like, “ah, this sucks.” I’ve had a cou­ple of emails, not many, thank­ful­ly, but a cou­ple of emails from peo­ple say­ing, “I think I’m just going to bow out of the mar­ket and wait till it turns around again.” I’m always like, well, “that’s up to you, you can do that, but as a reminder, what Tony says,” and this backs it up, “when it turns around, if you’re not there, if you’re not pay­ing atten­tion…” And the prob­lem is you don’t know when it’s actu­al­ly turn­ing around because it goes up, then it goes back down and then it goes up, then it goes back down, it goes back — but when it goes up and then goes up and then goes up and then goes up, if you’re not there for that you miss out on that 8%. And if it goes up 8% one month after a cor­rec­tion bot­tom, and more than 24% over the whole year, that’s a third of the year’s growth you get in that one month. That first month con­tains a third of the year’s growth.

Tony  14:17

Well, to just unpick that a bit and be a bit fair­er, I typ­i­cal­ly miss the 8% because we’re wait­ing for the upturn to be estab­lished. So, we need to see some firm­ness in the mar­ket. But I get the oth­er 20% or 16% or what­ev­er it is, plus it keeps going usu­al­ly. So yeah, no one can pick the bot­tom — and we only gen­er­al­ly see that kind of J curve upturn that gets estab­lished, and things start to break above their Josephines or break above their three-point sell lines and we can buy them again — we need that kind of first 8% to con­firm the tides turned and then we get the rest. So, I’m not sure from that quote whether it’s 8% then 25, or whether the 8s includ­ed in the 25, but gen­er­al­ly you’re get­ting a big return after that mar­ket turns any­way.

Cameron  15:01

But you know, we’re always try­ing to be ful­ly invest­ed as much as the sys­tem will allow us to be, wait­ing for it to tell us when to get back in when it’s estab­lished, right? So, we might miss some of that, you’re right.

Tony  15:13

And don’t for­get, that’s the mar­ket aver­age, right? We’re gonna get above aver­age return. So, you know, com­ing out of the GFC I was get­ting 50% in 2009, not 25%.

Cameron  15:22

Right. Yeah, good point. Last note I’ve got here is I saw in the Finan­cial Review this morn­ing, Char­lie Munger, as if I need to say which Char­lie I’m talk­ing about, “the” Char­lie has invest­ed in his Aus­tralian soul­mate — or Berk­shire Hath­away’s Aus­tralian soul­mate. Did you see the sto­ry?

Tony  15:42

I haven’t read the Fin Review yet. No, some­one’s zoom­ing with me at 8:30 in the morn­ing.

Cameron  15:50

Well, this was pub­lished at 5am, Tony, so you had hours in which you could have read it. There’s a com­pa­ny called Stone­house Cor­po­ra­tion run by Amer­i­can-turned-Aus­tralian Charles Jen­nings, who was suc­cess­ful­ly emu­lat­ing the Berk­shire play­book to acquire and man­age busi­ness­es for the long term. And Char­lie goes on to say, “ ‘I got inter­est­ed in one Aus­tralian because I think he’s very much like the kind of peo­ple that are in Berk­shire. Berk­shire and Jen­nings are quite sim­i­lar. He’s picky and man­ages things well,’ ” and a bunch of this sort of remind­ed me of us and of you. “ ‘He has a mind­set very much like ours: busi­ness fun­da­men­tal­ism and relent­less ratio­nal­i­ty and doing busi­ness in a very high grade way. If you’re relent­less­ly ratio­nal, you don’t make a lot of mis­takes oth­er peo­ple may. It sounds so obvi­ous; you think every­body’s will­ing to stay ratio­nal, but of course they aren’t. The world’s full of Mad Men.’ Mr Munger, 98, is the vice chair­man of Berk­shire and the close busi­ness part­ner of the world’s most famous investor…” blahd, blahdy, blah. So, yeah, this guy owns three busi­ness­es, I think, let’s see… Gold­ners Horse Trans­port.

Tony  17:09

Oh no, I pay bills to them every month, Gold­ners.

Cameron  17:12

There you go. You should have just bought them like this guy did, Tony.

Tony  17:15

Right.

Cameron  17:16

“He found­ed his invest­ment hold­ing com­pa­ny in 2012. Gold­ners Horse Trans­port, portable cool­ing man­u­fac­tur­er and dis­trib­u­tor EvaKool, and Pres­tige Plants, a sup­pli­er of high-qual­i­ty plants in Aus­tralia. Before being acquired by Stone­house, the three sub­sidiaries were typ­i­cal­ly fam­i­ly-owned busi­ness­es con­tend­ing with busi­ness suc­ces­sion and own­er­ship exits. Mr Munger said the audit­ed accounts of Stone­house­’s busi­ness­es were ‘ridicu­lous­ly good.’ He owns ‘rad­i­cal­ly dif­fer­ent busi­ness­es, which is a Berk­shire type thing,’ Mr Munger said. ‘He’s just got three big busi­ness­es in twelve years. Berk­shires top forty deals in its whole his­to­ry amount for most of our achieve­ment. Life is a game where you work very hard and deal only occa­sion­al­ly.’ ” Sounds like the pok­er anal­o­gy again, going back to Richard Car­ri­er’s quote. “ ‘He treats the busi­ness­es with a pret­ty extreme decen­tral­i­sa­tion, which is very much like Berk­shire,’ Mr Munger said, ‘it’s very hard to acquire unre­lat­ed com­pa­nies, earn a high­er return on cap­i­tal and pay mar­ket prices for them. Most peo­ple who try to do that fail. And the only rea­son that Berk­shire and Stone­house suc­ceed is that we don’t do it very often and we’re pret­ty care­ful.’ ” So, Jen­nings says, “hav­ing Char­lie become involved in our busi­ness has been sur­re­al. I’ve admired him my whole life, and he’s now become a busi­ness part­ner.” So, I thought there’s a buck­et list goal for you, Tony, is we have to get Char­lie to invest in QAV.

Tony  18:50

Yeah, right. At least get him on the show. This guy, Jen­nings, I haven’t heard of him. So, Stone­house, that’s an unlist­ed com­pa­ny I’m guess­ing, is it?

Cameron  18:58

I did­n’t look into it that much, but I’m assum­ing so, yeah.

Tony  19:01

Well, it’s well done. Well, it’s inter­est­ing that Char­lie would invest in that com­pa­ny. I can’t imag­ine it’s very big if it owns a flower busi­ness and a horse float busi­ness. I don’t know, worth look­ing into.

Cameron  19:14

Yeah. So, what have you going to talk about today, TK?

Tony  19:18

Well, you’re talk­ing about evo­lu­tion­ary algo­rithms, and I just want­ed to talk a lit­tle bit about the Cop­pock indi­ca­tor for peo­ple who haven’t heard about it. For a cou­ple of rea­sons, you know, we’re get­ting com­ments and ques­tions around, are we at the bot­tom yet? How long is it going to take? Are we buy­ing again yet? All those kinds of things, which are quite nat­ur­al. I did want to point out that this fel­la, Cop­pock, back in the 60s did some invest­ment — E.S.C Cop­pock — back in ’62, pub­lished a tech­ni­cal analy­sis indi­ca­tor called the “Cop­pock curve” or the “Cop­pock indi­ca­tor”. He did it because he was hired by one of the church­es in the States, the Epis­co­palian Church, I think, who had mon­ey to invest — sur­prise, sur­prise — and they asked him to have a look at it for him, but he was just equal­ly as curi­ous about them and human nature. And, you know, he was smart enough to realise the best time to invest in the mar­ket is when it’s turn­ing up. So, he was ask­ing them about-he was try­ing to align mar­ket behav­iour, which is a con­glom­er­a­tion of human behav­iour, indi­vid­ual human behav­iour, and he asked the priests how long do peo­ple grieve for? And they said any­where between eleven and four­teen months would be our expe­ri­ence. So, he start­ed play­ing around with indi­ca­tors which looked at eleventh month peri­ods in the stock mar­ket ver­sus four­teen-month peri­ods in the stock mar­ket, and through some oth­er witch­craft in there which smoothed it out over a long peri­od of time, and came up with the Cop­pock indi­ca­tor, which gen­er­al­ly shows the mar­ket turns about between eleven and four­teen months after a big down­turn — that the mar­ket goes through a griev­ing peri­od as well. And the rea­son for talk­ing about this is not because the Cop­pock indi­ca­tor is a great way to invest. It’s pret­ty reli­able; if you use the Cop­pock indi­ca­tor you will get bet­ter the mar­ket returns, but what I found from exam­in­ing it was that you come in late on the up swings. It’s again one of these mov­ing aver­age lines where the short term goes over the long term and all that kind of stuff, and so you gen­er­al­ly come in lat­er into the upswing than you would if you’re using our three-point trend­lines. It’s still some­thing peo­ple might want to have a look at, and the oth­er rea­son for rais­ing it now is that you can actu­al­ly graph it in Stock Doc­tor as one of their stud­ies if you’re using the advanced graph­ing in Stock Doc­tor. If you call up the ASX index, I think it’s called XAO in Stock Doc­tor, and then use a study using the Cop­pock indi­ca­tor it gives you the curve on the bot­tom of the graph. And the rea­son for talk­ing about it now is that that curve is nowhere near turn­ing up. So, if Cop­pock is right this time then the down­turn is near­ly begin­ning, and again he may or may not be right. I came across Cop­pock very ear­ly on in my invest­ing expe­ri­ence, and it was used by a guy called Col­in Nichol­son in the Build­ing Wealth Through Shares web­site and ser­vice, which I used to sub­scribe to. He was a big adher­ent to it, and back in the days before we had great graph­ing, he used to put out a spread­sheet where he man­u­al­ly cal­cu­lat­ed the Cop­pock indi­ca­tor and then graphed it in Excel. So, been around for a long time, does have some valid­i­ty to it. Not some­thing I use, but I raise it because it isn’t show­ing that we’re get­ting any­where near the bot­tom of the griev­ing peri­od for the lat­est stock mar­ket down down­turn. So, we don’t want to be a gen­er­al who fights the last war. And by that, I mean, when we had COVID in March 2020, the down­turn was abrupt, and the upturn was very weak. So, I’m not sort of, jump­ing the gun here to get back into the mar­ket, I want to see some trends estab­lished. But yeah, have a look at the Cop­pock indi­ca­tor every­one and do a bit of read­ing on it, it’s very inter­est­ing. That’s Coppock’s. The next thing I want to talk about was, just speak­ing of the Berk­shire Hath­away gang, Buf­fett has invest­ed heav­i­ly in a Chi­nese Elec­tric Vehi­cle Com­pa­ny called BYD. And I noticed they’ve opened up a show­room down the road from us on the way into the city in Syd­ney. But they’ve just become the biggest elec­tric car man­u­fac­tur­er in the world, and I thought, I had a lit­tle bit of a laugh at that because Tes­la was over­tak­en by BYD, so it’s anoth­er exam­ple of growth beat­ing-or sor­ry, val­ue beat­ing growth. I just raised that for a bit of a laugh. That’s it for me. I’m going to do a pulled pork now, have we got time?

Cameron  23:34

Yeah.

Tony  23:35

One of our lis­ten­ers asked me to do a pulled pork on White­haven coal, WHC, which isn’t on the Bible. It’s I think it has been over the last twelve months or so, but it’s sit­ting just below the buy list. Has a QAV score of 0.09, and I did this analy­sis last Fri­day at a price of $4.71. I noticed that over the week­end the price closed on Fri­day high­er than that, I’m a lit­tle bit out of date here, but just bear with me. White­haven Coal, peo­ple will prob­a­bly know is that it’s one of the biggest sole expo­sures to coal in Aus­tralia; there’s New Hope and there’s White­haven. It’s based in New South Wales in the Hunter Val­ley around Gunnedah, and it’s also expand­ing out into the Bowen Basin in Queens­land. Obvi­ous­ly, it’s been rid­ing the Chi­na boom sto­ry, and since the Russ­ian inva­sion of Ukraine, etc., ener­gy prices have been going gang­busters and coal is still going strong, but it has­n’t always been upwards momen­tum though. Chi­na put a ban on Aus­tralian coal a year or two ago, so that’s effect­ed it, but in the last twelve months cer­tain­ly very, very strong, and the com­mod­i­ty graph for coal has been strong. They are start­ing to do a few things to alle­vi­ate the naysay­ers on coal, who for ESG rea­sons and obvi­ous­ly for glob­al warm­ing rea­sons don’t want to invest in coal. White­haven is focus­ing on qual­i­ty coal, so that’s the kind of coal that can be used in the low­er emis­sions pow­er sta­tions, espe­cial­ly in Japan and some parts of Asia where they have high qual­i­ty low emis­sions reac­tors there. They’re not, sort of, any­where near wind or solar, but they do emit less car­bon than the old-fash­ioned pow­er sta­tions. And they also are get­ting into cok­ing coal, so that’s the sort of coal which is used to make steel. Again, which is less focused on by the peo­ple who don’t like glob­al warm­ing. I’m going to stay neu­tral on that. My per­son­al opin­ion as peo­ple will know is I’m focused on the invest­ment qual­i­ty of the busi­ness, not nec­es­sar­i­ly what it does, and I also believe we’ll need coal while we tran­si­tion to oth­er forms of ener­gy. So, if you don’t like coal com­pa­nies, then by all means don’t invest in this, I’m gonna go through this from a QAV per­spec­tive. The inter­est­ing thing about White­haven Coal is it is again anoth­er sto­ry which talks about the fun­da­men­tal volatil­i­ty and extremes that can hap­pen in com­mod­i­ty mar­kets. So, this com­pa­ny start­ed in 1999, list­ed in 2007, so it’s only been list­ed for some fif­teen years. When it list­ed it raised $26 mil­lion fif­teen years ago, and it now has a mar­ket cap today of $5 bil­lion. So, peo­ple talk about, you know, growth stocks and “to the moon” and stuff, but there’s plen­ty of val­ue stocks out there which can also have these kinds of growth char­ac­ter­is­tics, but they just tend to be over­looked by the high-PE brigade. That’s a tes­ta­ment to how strong and volatile these cycles can be. The oth­er thing I want to talk about, just as an aside and for a bit of fun. You can’t real­ly talk about White­haven Coal with­out talk­ing about Nathan Tink. If you aren’t famil­iar with Nathan Tin­kler you can google his sto­ry quite eas­i­ly, but he was a young elec­tri­cian going back maybe fif­teen-twen­ty years ago, or maybe even less, who mort­gaged his house and took out some options on a coal mine in I think it was the Bowin Basin but might have been the Hunter, and then before the options expired man­aged to talk Japan­ese investors into stump­ing up anoth­er $20 mil­lion along with his house mort­gage to take over this coal mine, and then sold it two years lat­er for $530 mil­lion. So, in that time, obvi­ous­ly, coal went from being you know, very, very low and down­trod­den on its com­mod­i­ty cycle to being the start of the Chi­nese boom, the Chi­nese wave. And he did that a cou­ple of times; he bought assets off Rio Tin­to which were sell­ing very, very cheap­ly because Rio was just look­ing to get out for the cost of reme­di­a­tion. He bought them, and again, over the course of his hold­ings made orders of mag­ni­tudes out of that kind of invest­ment. He then became well known for being the biggest horse race own­er and breed­er in Aus­tralia, lived in New­cas­tle, bought the New­cas­tle Jets, the soc­cer team. I think he may have bought the New­cas­tle Knights, I’m not quite sure. And then spec­tac­u­lar­ly went bank­rupt, he was bank­rupt try­ing to take over White­haven Coal. He was try­ing to merge his assets with White­haven Coal, they defend­ed. I would­n’t be sur­prised if he still has a large hold­ing in White­haven Coal, and I know there was some legal action recent­ly where he was try­ing to recov­er mon­ey, he thinks they owe him. I don’t have a com­men­tary on that, very colour­ful char­ac­ter and tied up with the coal boom and tied up with White­haven Coal. Any­way, he’s not as big as he was, but White­haven Coal goes from strength to strength. In terms of the num­bers in QAV: like I said before, they have a score just sit­ting below our thresh­old as a buy, but that’s large­ly because their price to oper­at­ing cash flow sits at 7.4 times and our thresh­old is sev­en or less. So, that might come back into vogue again if the share price drops, or if in their lat­est results they improve their oper­at­ing cash flow, which is entire­ly pos­si­ble. Cou­ple of things about it: IV 2 is $20 in our cal­cu­la­tions, which is more than two times its price. So, that scores well. The pre­dict­ed earn­ings per share growth for this com­pa­ny is 325% for earn­ings per share, so when we take that growth and put it over their PE we’re get­ting 23.8 times, which is incred­i­bly high. So, it scores a 2 for growth. If peo­ple remem­ber, our thresh­old for scor­ing some­thing on growth over PE is 1.5 times, so it’s an order of mag­ni­tude above that. The yield is low, 1.7, so it does­n’t score for that — 1.7%. But that’s not unex­pect­ed, when you’re earn­ing lots of mon­ey, you’re bet­ter off rein­vest­ing in the com­pa­ny and pay­ing a div­i­dend. Sur­pris­ing­ly, to me any­way, direc­tors are only hold­ing 2% of this com­pa­ny, so it scores a zero for that. It’s not a star stock, which again was a bit sur­pris­ing, I thought, but it does have strong and recov­er­ing finan­cial health. So, that’s prob­a­bly the rea­son why it’s not a star stock. Over its recent years it was on sat­is­fac­to­ry or even ear­ly warn­ing, but now it’s back up to strong. We like that, recov­ery stocks often are growth stocks, so it’s get­ting two points for that and one point for strong finan­cial health. So, two points for recov­ery and one point for strong, so it’s get­ting three points based on the Stock Doc­tor finan­cial health. It does­n’t score in the man­u­al­ly entered data cat­e­go­ry, so it’s not its low as PE ratio, has­n’t had a recent upturn — the coal prices have been ris­ing for a while — but it does­n’t have con­sis­tent­ly increas­ing equi­ty over the last five years, either. So, it’s a recent sort of growth sto­ry. All up though, qual­i­ty of 67% not too bad, and QAV of 3.9. So, one to watch going for­ward.

Cameron  30:31

Oh, thank you for that. Hope Kane the jew­eller liked that; it was Kane the jew­eller’s request. Good old Kane Kelfkens, who came on the show at the begin­ning of COVID, I recall, and told us about how tough it was. I think his busi­ness is doing much bet­ter now. All right, time to get into Q&A, or should we talk about the port­fo­lio? You got any top or is it just too depress­ing to talk about the port­fo­lio that we don’t even both­er?

Tony  31:01

Oh, sor­ry, I haven’t prepped for that. I usu­al­ly get the email from Navexa today, and I haven’t got it yet. We’re doing this on a Mon­day which is unusu­al for us, so sor­ry.

Cameron  31:09

Bright and ear­ly on a Mon­day because I’m…

Tony  31:12

You’re trav­el­ling.

Cameron  31:13

Trav­el­ling and doing stuff. Let me just quick­ly bring up Navexa and see where we’re at with that. Well, we’re look­ing at the finan­cial year, because it’s the begin­ning of the finan­cial year, but if I look at since incep­tion — ter­ri­ble movie, but we can talk about that lat­er on, made no sense what­so­ev­er. We’re since incep­tion, which for new peo­ple is the 2nd of Sep­tem­ber 2019, QAV dum­my port­fo­lio is up 16% per annum CAGR, that is Com­pound Annu­al Growth Return, and the ASX 200 is up 3.84% over the same peri­od.

Tony  31:59

Can I just point out the Navexa actu­al­ly tracks us from 15th of April, when we first start­ed the show. So, this num­ber of 16.4% is actu­al­ly back to where we had cash for a long time.

Cameron  32:12

But I’m doing a cus­tom report.

Tony  32:15

Oh, sor­ry, I’m look­ing at all time, my mis­take.

Cameron  32:18

I’m doing a cus­tom report from that date. So, 16.03% it has ver­sus the SPDR 200, up 3.84%. So, we’re doing rough­ly five times as good as the 200, which is insane, real­ly. You know, for peo­ple that are rel­a­tive­ly new, and you’ve only been around, let’s say, six months or less, and it’s been a time when the mar­kets been in tur­moil. And it can be dis­con­cert­ing, I get that, but go and have a look at, you know, the all-time per­for­mance which is what we report on the web­site. This is where the rub­ber meets the road, I think, is the long-term per­for­mance.

Tony  32:57

And also too, I’ve just quick­ly looked at the last quar­ter in Navexa which is the big down­turn in the mar­ket, and we’re down for sure. The QAV dum­my port­fo­lio is down 9.8. The mar­ket is down 13.2%. So, I mean, that’s the oth­er thing for those peo­ple who, you know, begrudge the fact that QAV has pro­duced a neg­a­tive return, it’s still a bet­ter return than the mar­ket over the same time peri­od. So, they may have done worse if they had­n’t been using QAV but still invest­ing.

Cameron  33:23

Yeah. And if I do the last one year, the last twelve months, were down 6% ver­sus the SPDR down 5%. So, the last year, you know, it has­n’t been a great return for us com­par­a­tive­ly. But, you know, that’s just the way the cook­ie crum­bles.

Tony  33:40

Yeah. And I think also too, again, this is evo­lu­tion tak­ing care of things. If you can’t invest through a mar­ket down­turn, it’s prob­a­bly not for you. Go and put your mon­ey in a Super­fund.

Cameron  33:50

Yeah, I often think of say­ing that, but I nev­er do. But it’s a lit­tle bit harsh for you to say that in par­tic­u­lar. I’m the one who says harsh things, you’re the nice one. I feel for peo­ple that start­ed in the last year or the last six months, even though I know some of our mem­bers have had real­ly good returns in the last year. But, yes, as we talked about ear­ly on, this is just mar­ket cycles, right? This is nor­mal, you have good years and bad years. The sys­tem is designed to make sure that over the long term our returns are bet­ter than the mar­ket. Alright, let’s get into Q&A. First ques­tion is from Mark: “hi Cam, I trust the wild west of the US is going well for you and the crew.” Well, it was until I got COVID, Mark, but that was just a blip. Apart from that, hon­est to God we’ve had an amaz­ing time here. Too amaz­ing, hon­est­ly. I’ve come to the con­clu­sion that the opti­mal amount of time to go to the US or Europe is two weeks when you’re doing stuff like we’re doing, because after two weeks your brain just can’t han­dle any more. If it’s Europe, it’s mar­vel­lous art­works and church­es and cul­ture and his­to­ry. And here for us it’s nation­al parks after nation­al parks after nation­al parks after nation­al parks, and they’re all mind blow­ing­ly stun­ning. And after a cou­ple of weeks your brain just gives up and goes, “alright yeah, yeah, yeah more beau­ty. Yeah, yeah more vis­tas. Yeah, yeah, more amaz­ing stuff.” So, two weeks I think is the best amount of time to do this kind of a trip. We’re all kind of over it and exhaust­ed now. Any­way, Mark goes on to say, “thanks for the update on the sec­ond buy lines on this week show. I’ve got­ten a bit con­fused with sen­ti­ment, falling knife and sec­ond buy lines of late,” I’m sure you’re not alone there, Mark, “and won­dered if you could talk a bit more about the falling knife/dead cat bounce and per­haps go through a few exam­ples from the COVID cough of when stocks came out of the knife.” Com­ing out of the knife, we’ll have to use that. “Look­ing at the score­card this week, you have TRS as a buy but not MQG. When I look at their respec­tive graphs, I see both falling like a stone, but TRS has not crossed up above the sec­ond buy line where­as MQG has. Per­haps MQG had­n’t start­ed its run up when you assessed a sen­ti­ment on the week­end as explained by TK in say­ing it may take until the sec­ond week of the month to get the trend to form. MAM is also a buy on the score­card but not above its 2BL, BFG is on the buy list and has bro­ken above its 2BL like MQG. Thanks for clar­i­fy­ing. Cheers, Mark.” So, I point­ed out to Mark in my email reply, just a reminder, we don’t fil­ter the buy list each week for Josephine’s. We did at one point, but, a, it was way too much work to do the two hun­dred stocks on the buy list to look at their Josephine’s every week, and b, it changes so quick­ly in nor­mal times that I can report some­thing as being a Josephine at nine o’clock on Mon­day and by 10 o’clock on Mon­day when peo­ple look at it it’s not, and vice ver­sa. So, we end­ed up say­ing, look, just check that it’s not a Josephine before you buy some­thing, right? Do you do your own check, because it just moves too quick­ly. It’s very, very hard to keep up to date with it.

Tony  37:14

No, look, I agree. Do your own research on that. So, he quick­ly had looked at a cou­ple of stocks from the COVID cough, that was the first part of the ques­tion. And if Mark wants to have a look, a cou­ple of exam­ples would be Fortes­cue Met­als Group and Myer, they’re the two that I had to look at. In the Bret­te­la­tor of course, you can plug a date in. So, we usu­al­ly use the Bret­te­la­tor and leave the date cell blank, and that gives us the graph up to the cur­rent date, but you can go in there and put the date in. So, if he puts March 2019 in for FMG and April 2019 in for Myer, you’ll see some real­ly clas­sic exam­ples of how things went into an upturn quick­ly and steeply after the COVID cough. And that was because of the gov­ern­men­t’s sub­si­dies.

Cameron  37:55

That would be 2020, not 2019, though, Tony.

Tony  37:58

The COVID cough? 2020 was it, sor­ry?

Cameron  38:01

Yeah.

Tony  38:02

Oh, 2020, it was.

Cameron  38:03

I know it’s been a long time, but yeah, 2020. It seems like it was three years, but it’s only two.

Tony  38:09

Okay, sor­ry, plu­g­in a date after the COVID bot­tom and have a look. And it was pret­ty clear after the COVID cough that things were turn­ing around quick­ly, and you can see this sort of clas­sic J curve up turn. And also, too, for the graphs of the stocks pri­or to the cough, you can see they’re gen­er­al­ly on their way down. So, the con­trast when they turn, it’s clear­ly breach­ing a falling knife line. So, they’re all pret­ty easy. As Mark’s already point­ed out, we’re not get­ting, sort of, easy sig­nals in the cur­rent mar­ket. Some things have been down hard and they’re just start­ing to turn up like Mac­quar­ie or TRS, and some things, you know, start to do that and then turn down again. So, I don’t get the feel­ing that we’re like we were back at the end of the COVID cough. That might come but I’m not see­ing it yet. Yeah, the sec­ond point I was gonna make is that this time I don’t think it’ll be like the COVID mar­ket with gov­ern­ment sub­si­dies; they were fight­ing a pan­dem­ic, it was an exis­ten­tial threat, they threw mon­ey at it, inter­est rates were low, and they could afford to do it, and busi­ness­es rebound­ed quick­ly. That that might come. There was cer­tain­ly a fea­ture in lat­er stages of the GFC, for exam­ple, but the GFC went through an eigh­teen-month peri­od of declines before it real­ly bot­tomed out. Com­pa­nies were rais­ing lots of mon­ey and then the gov­ern­ment sup­port was kick­ing in to help the pop­u­la­tion get back on its feet. I get the feel­ing that might be what hap­pens this time, although I can’t pre­dict and who knows, but what we’re gen­er­al­ly look­ing for, Mark, is some sol­id trends turn­ing up. So, I’m not inclined to buy Mac­quar­ie group just yet just pick­ing on one par­tic­u­lar stock, and even TRS, because I’m not see­ing clear up sig­nals. And like I said last week, you know, how do I see a clear sig­nal? I’m still try­ing to get the code right. For me, if we do the buy line fol­lows the sell line which the Bret­te­la­tor does, it will say that these things are a buy from months ago, but they’re in a down­turn so they’re a Josephine. When are they in an upturn? Well, I go back to the old-lets look at the high­est H1 and H2 and call that the sec­ond buy line, and when they start to breach those. And if you look at Mac­quar­ie Group, you can draw a line from its high point almost straight down, but there’s no sec­ond, there’s no H2 yet for Mac­quar­ie Group. So, that’s one thing that is a bit wor­ry­ing. I’m not say­ing Mac­quar­ie Group won’t go on from here, but often­times when things start to go up, they do have at least one month where they retreat before recon­sol­i­dat­ing because almost noth­ing goes up in a straight line. So, I’d just be a lit­tle bit care­ful on this mar­ket at the moment. I’ve been work­ing with Brett around try­ing to code all this into the Bret­te­la­tor, so hope­ful­ly we’ll get some­thing out soon on that one which will make it eas­i­er for peo­ple to read. I’m just a lit­tle bit cau­tious of putting it out yet until I’ve test­ed it. There was some­thing in my email box this morn­ing about it, so I’ll work on it this week. It’s not that clear cut. As you said, Cameron, it moves around a lot. If you did a sim­ple test of if its cur­rent share price is above last months close ear­ly in the month, that can be a Josephine now and in an hour’s time it’s not, so things can move around a lot. I still get the feel­ing we’re not going to get a clear sig­nal just yet that the mar­ket is turn­ing.

Cameron  41:14

Yeah, as you said, after the COVID cough — which for new lis­ten­ers is a name that one of our lis­ten­ers came up with after COVID, it was a cough, it was just a blip, I guess. It dropped and then it rebound­ed quick­ly, and obvi­ous­ly there’s many dif­fer­ences between that and this, all of the MMT, etc., we don’t have this time around, the gov­ern­men­t’s not print­ing mon­ey and hand­ing it out. But the oth­er big dif­fer­ence is inter­est rates are going up and they weren’t then, so there’s a lot of things that are dif­fer­ent this time, and as you say it could be quite a while before the mar­ket sta­bilis­es. Just for peo­ple who are con­fused about the sec­ond buy line, I might just go over that again, and a Josephine, etc., etc. So, par­tic­u­lar­ly for new peo­ple or peo­ple that are con­fused like Mark, a Josephine is just an indi­ca­tor that we have that says that today’s price is less than the price that it closed at last cal­en­dar month.

Tony  42:10

Cor­rect. So, it’s in a one-month decline, which is not the strength we’re look­ing for to say the stock price is turn­ing around.

Cameron  42:16

And the rea­son it’s called a Josephine is because I’m a Napoleon nerd, and there’s a famous say­ing from Napoleon that’s anec­do­tal, prob­a­bly nev­er hap­pened, but “not tonight, Josephine.” And these are stocks that are tech­ni­cal­ly a buy, they’re above their buy line and above their sell line, but we’re hold­ing off. We used to call it a “hold”, we’re “hold­ing” off, because they’re not show­ing the strength that we need, as Tony said. But hold is bor­ing, and I like to laugh at myself, so I called it a Josephine. I like to amuse myself, that’s gen­er­al­ly how I sur­vive in life, is make myself laugh. Dri­ves my wife crazy. She’s like, “why are you laugh­ing?” I’m like, I’m just telling myself a joke in my head. I don’t care if no one else finds it fun­ny, I find it fun­ny. And the sec­ond buy line is this thing Tony’s been toy­ing with of late which is to answer the ques­tion, when does a stock cease to be a Josephine? Ini­tial­ly, it was just when it turned up or went above its clos­ing price at the end of last month, but now we’re look­ing for a new buy line. So, even if it’s already crossed its legit­i­mate buy line if you look at the Bret­te­la­tor, it crossed it but then it’s fall­en down — still above the buy line but it’s been a Josephine — we cre­ate a new buy line. We cre­ate a new H1, the high peak on the chart, and then we’re look­ing for a sec­ond high peak to the right, H2, and it needs to cross over that line before it is no longer con­sid­ered a Josephine. So, the prob­lem we have with a lot of stocks on the buy list today, even though they’re buys, they’re above their buy and their sell line, they haven’t crossed that 2BL yet. So, we’re hold­ing off because, you know, they could drop back down, and we just want to make sure that there is enough sup­port behind them before we jump in.

Tony  44:14

Is it worth­while going through a cou­ple of these exam­ples for Mark?

Cameron  44:18

Sure, if you want to walk us through it.

Tony  44:21

Yeah, so I’ve just called up TRS, The Reject Shop, in Stock Doc­tor rather than the Bret­te­la­tor because I want to draw my own lines to try and get this explained. So, in the Bret­te­la­tor, TRS is a buy. So, using the buy line fol­lows the sell line, the his­to­ry of the graph has gone through buys and sells and it’s a buy. How­ev­er, since July 2021 it’s been in a down­turn. And peo­ple famil­iar with this stock will know that the MD resigned unex­pect­ed­ly and that was one of the things that sent it into its lat­est spi­ral down, as well as, obvi­ous­ly, the inter­est rates ris­ing and oth­er reces­sion­ary fears etc. But if I look at this one, how do I draw my sec­ond buy line? Well, cur­rent­ly, what I would do is look for the high point, which to me is 29th of March 2018, which has a clos­ing price of $7.34. I think this is an exam­ple of a stock which has, which we need to put the 8% rule in — the flat top rule — because it’s its high point is March 2018. It’s H2, its sec­ond high­est point is Novem­ber 2021, which is $7.25. They’re fair­ly sim­i­lar, and if I take 8% off the $7.34 and look for a peak after H2, I think I’m gonna use Feb­ru­ary 2022 as my H1 in this case. So, there’s a peak there. And then draw a line down. H2 in this case won’t be a peak, it’ll be a point, March 2022. And it actu­al­ly has breached above that, so I think Mark’s prob­a­bly right. I think TRS is quite pos­si­bly, I think it is a buy at the moment. That’s not to say it won’t drop again, because it could be a dead cat bounce. But using the cur­rent cod­ing, I guess, TRS is clear­ly above its last month close, so it’s turn­ing up, and it’s crossed the trend­line using the H1H2 method to draw.

Cameron  46:17

Good, well, that’s excit­ing, we might be able to buy some­thing for a change.

Tony  46:23

Yeah. Hope­ful­ly, that gives Mark some infor­ma­tion on how to draw one him­self until we get the Bret­te­la­tor code to do it.

Cameron  46:29

Can we have a look at NCK, the one I asked you about the oth­er day?

Tony  46:33

Oh, yeah. Sure.

Cameron  46:34

Some­body men­tioned on the Face­book group. So, NCK I get a new H1 of 31st to Decem­ber 2021, but like TRS I don’t real­ly have a sec­ond peak. I’ve got some points I could use, like March 2022. Won­der­ing what you think about this one?

Tony  46:58

I would do that. So, I think it’s the same as TRS, I would use those two you’ve nom­i­nat­ed H1 and H2, it’s a point. H2’s is a point, sor­ry. And that would be an upturn and a buy at the moment.

Cameron  47:10

Hey, look at that. Hap­py days.

Tony  47:14

The only ques­tion on NCK I’ve got, and again, this is some­thing I need to talk to Brett about fur­ther. If I look at a stock like NCK and draw its sell line, the ques­tion in my mind is am I gonna use L2 — so, L1’s pret­ty obvi­ous, L1 start­ed the sell line at the last point in the graph, March 20. L2 is Sep­tem­ber 2021, or it could be the cur­rent month of June 2022. So, I think it’s going to work. Whichev­er way you use it, if you do go back and say, well, I had a sell line, we would have sold it back up in Jan­u­ary 2022. We now have a new buy line as we’ve just talked about draw­ing it using Decem­ber 21 and March 22. Yeah, so it’s fine. The new sell line has an L2 of June 2022. So, no, that’s fine. I think it’s a buy.

Cameron  48:11

Wow. Alright, so I can add those to the port­fo­lio. Sweet. Alright, I’ll post these charts to Face­book and in the newslet­ter, if I remem­ber. So, yeah, but I’ll post them up to Face­book and slack so peo­ple can have a look at those if you want more clar­i­ty. All right, mov­ing on. Dun­can linked to an arti­cle, says “saw this and won­dered if TK might com­ment on Mr. John­son’s insights.” It was a video on the ABC, “Jef­frey’s lead bank­ing ana­lyst Bri­an John­son explains which banks he thinks are well fortressed against the com­ing reces­sion and eco­nom­ic down­turn.” Do you have any thoughts on bank fortress­ing, Tony?

Tony  49:00

Well, it was a good a good inter­view. So, if peo­ple want to watch it, it’s on the abc.net.au news pro­gram­me’s the-busi­ness. And they should be able to google it and find it there, but we have a link.

Cameron  49:14

Yeah. And I’ll post it as well.

Tony  49:16

Okay. Thanks. Yeah. So, good analy­sis, and I think banks have been dif­fi­cult for me recent­ly. I think a ris­ing inter­est rate does tend to, well, does help banks because their mar­gin expands. But as this ana­lyst points out, not dur­ing a reces­sion. So, that’s prob­a­bly why the banks are off our buy list at the moment. To just talk about some of his com­ments. He’s say­ing that he was­n’t buy­ing banks, except for Mac­quar­ie which was rel­e­vant to the last dis­cus­sion. And a dif­fer­ence, of course, with Mac­quar­ie is it’s not just a retail bank. In fact, it’s most­ly not. It’s a big infra­struc­ture own­er, and infra­struc­ture tends to be gov­ern­ment reg­u­lat­ed. So, infla­tion usu­al­ly ratch­ets their price up because of the CPI index, etc., to their pric­ing. But also, the oth­er big thing about Mac­quar­ie is a lot of its earn­ings come from over­seas. So, as the Aus­tralian dol­lar has been drop­ping and pos­si­bly will drop fur­ther if we go into a reces­sion, Mac­quar­ie’s earn­ings just keep get­ting big­ger and big­ger when con­vert­ed back to Aus­tralian dol­lar. So, his pick was Mac­quar­ie, and I don’t dis­agree with that. Of the Aus­tralian big banks, he thought CBA had the best fortress and I don’t dis­agree with that either, but CBA often trades at the high­est price mul­ti­ple. So, it got onto our buy list about a year ago, but it did­n’t stay on for long, where­as the oth­er banks have been on and off for a while. So, no dis­agree­ment with him on that one. But he’s raised a cou­ple of inter­est­ing insights, which I’ll just go over quick­ly here. 30% of mort­gages have been tak­en out in the last few years. Most of those are on fixed inter­est rates, and a lot of those are on two-year fixed inter­est rates. So, they’re going to be com­ing off a very low rate going on to buy high vari­able, and that inter­est rate could dou­ble for these peo­ple. So, that’s one of the things he’s wary about with banks, and poten­tial­ly reces­sion induc­ing if there are peo­ple who can’t pay their mort­gages and we’re flood­ed with hous­ing sales at the wrong time. That’s not good for the econ­o­my. So, he’s warned against that. I think the mit­i­gat­ing fac­tor is that APRA has been aware of that — that’s the bank­ing reg­u­la­tor — has been aware of that, and they’ve been ask­ing the banks to use stronger stress test­ing before giv­ing peo­ple mort­gages. They often talk about giv­ing your mort­gage out to some­one whose abil­i­ty to pay can’t ser­vice a mort­gage of 5 or 6%. So, we might be okay on that basis. But, you know, it just depends how, often­times the banks can play it a bit fast and loose with those rules if they’re chas­ing vol­ume. I’m not say­ing they have in this case, but they can. So, we’ll have to wait and see, that might be an issue. The biggest com­ment I found that he men­tioned, and I found quite scary, is he’s wary that we could be enter­ing into a peri­od of cred­it rationing. And for peo­ple who haven’t expe­ri­enced that because we haven’t had a reces­sion in Aus­tralia for a long time, when the banks find it hard to raise funds because the mar­ket is uncer­tain or the mar­ket even freezes in the bond mar­ket, or con­tracts, which he’s say­ing is start­ing to hap­pen now, the banks just sim­ply can’t lend as much as they haven’t been. So, even if you want to bor­row to buy a house, you can’t, or you want to bor­row to expand your busi­ness, you can’t, that can be reces­sion induc­ing, as well. So, he’s say­ing he’s start­ing to see that kind of sit­u­a­tion in the bond mar­ket, and what he’s say­ing is hap­pen­ing is that as the yield curve inverts — and we’ve spo­ken about that before, where short term inter­est rates give a bet­ter return than long term inter­est rates if you’re a bond investor — and there­fore, the buy­ers are start­ing to dry up into long term bond mar­kets, it means that the banks may not be able to get a hold of all the long term bor­row­ings that they need to be able to then add a mar­gin and pack­age them up into retail mort­gages and lend them out to com­pa­nies and busi­ness­es. So, that’s quite scary. I’m not say­ing it’s gonna hap­pen, but cred­it rationing is not a good thing. So, yeah, there’s quite a bit of a good analy­sis if peo­ple want to get a deep dive into banks and into what may hap­pen with the econ­o­my. He’s say­ing that he thinks it’s a 60% chance, I think, or 50%-60% chance of a reces­sion in the next six months. So, that’s not good, but again, it’s a pre­dic­tion. So, who knows?

Cameron  53:21

Right. Thanks for that. Thank you for the ques­tion, Dun­can. Last ques­tion is from Richard. He says, “I’d be inter­est­ed in a dis­cus­sion about broad under­ly­ing indi­ca­tors for retail, but like under­ly­ing com­modi­ties for mate­ri­als. Fig­ure plen­ty of head­winds for retail; Aussie dol­lar costs, squeez­ing mar­gins, et cetera.”

Tony  53:45

Yeah, so I don’t know if there’s gonna be one like we can do with a com­mod­i­ty for a min­er. For a gold min­er we can look at the gold price, or a coal min­er we can look at the coal price. Retail is, unless you’re using some kind of reces­sion­ary indi­ca­tor or eco­nom­ic indi­ca­tor, like growth, retails is pret­ty lever­aged to the econ­o­my. When I worked in retail, con­sumer sen­ti­ment was often one that we would look at, and that can be eas­i­ly looked at. It is a good indi­ca­tor of retail. I haven’t actu­al­ly done any sort of sta­tis­ti­cal analy­sis to say whether it’s going to work like a com­mod­i­ty does for a min­er. It’s going to be a fair­ly blunt instru­ment I would have thought, but it does indi­cate when peo­ple are clos­ing their purs­es or when they’re open­ing them to spend in retail. So, that’s one. And I guess we should break retail up into a num­ber of dif­fer­ent sec­tors: there’s food retail­ers, the gro­cery retail­ers, so the big super­mar­kets, and then there’s dis­cre­tionary retail­ers, and they can be bro­ken up into cloth­ing and white and black goods gen­er­al­ly. So, there’s kind of three legs to retail in Aus­tralia. The AUD and where it’s track­ing is going to be a very impor­tant fac­tor for peo­ple who import their goods, which is going to be the dis­cre­tionary retail side of things. So, that might be worth inves­ti­gat­ing. The Aus­tralian Dol­lars going down which will make it more expen­sive for them to be able to import their goods to sell, and it just depends on how strong their fran­chis­es are as to whether they can pass on the cost increas­es to con­sumers. Typ­i­cal­ly, they can’t, because retail is a high­ly com­pet­i­tive indus­try and cut­throat indus­try, and so it’s hard to pass on price increas­es. So, yeah, the Aussie dol­lars one to look at. I’ve spo­ken before about what I call the three-legged milk stool for the econ­o­my, and one of those is the Aus­tralian dol­lar, but also petrol pump prices and mort­gage rates are the oth­er two, and it seems like every­thing’s going south when it comes to that. So, unless some­thing breaks soon, I think we are prob­a­bly head­ed to if not a reces­sion, at least a tough time for the econ­o­my. So, that’s some­thing else you might want to look at. For the gro­cery type retail­ers, pos­si­bly could look at com­modi­ties. So, beef would be one and corn would be one, because a lit­tle-known fact is that corn is often used in a lot of things as a thick­en­er, so it’s not just some­thing you buy by ear in the Fruit and Veg sec­tion, but it’s it goes as an input into a lot of oth­er things. So you know, cans of baked beans or toma­to sauce, or what­ev­er, can often use corn as a thick­en­er or a flavour in those tinned goods and pack­aged goods. So, corns, one to look at. And then cot­ton might be one to look at for the cloth­ing retail­ers, and wool, of course, they’re the two main prod­uct inputs into those. So, I don’t have a clear answer for you, Richard, you might want to play around with some of those and see if you can find some cor­re­la­tions with par­tic­u­lar retail­ers you’re look­ing at. If you do, let us know. Thanks.

Cameron  56:36

God, man, the Labor Par­ty. They’ve only been in pow­er for like a month and we’re head­ing into a reces­sion already. Albo, god I tell you, they’re incom­pe­tent these guys, right?

Tony  56:47

Well, that’s anoth­er indi­ca­tor, isn’t it? I mean, I think if you look at both in the States and Aus­tralia, it’s usu­al­ly the Repub­li­cans who get the good times and the oth­er side gets the bad times — or the con­ser­v­a­tives get the good times, and the oth­er side gets the bad times.

Cameron  56:58

Yeah, because the Con­ser­v­a­tives wreck the econ­o­my and then get vot­ed out, and the oth­er guys have to fix it.

Tony  57:04

Yeah. Well, peo­ple turn to wel­fare pay­ments in bad times, and they know they won’t get them out of the con­ser­v­a­tives, so they vote for the oth­ers.

Cameron  57:12

I’m still wait­ing for mine. Well, that is all of the ques­tions. Thank you for going through all that, Tony. Thank you to every­one who sent us ques­tions this week. It’s after hours…

Cameron  1:16:15

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.