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.