Transcript #528

QAV 528 CLUB

Cameron  00:07

Wel­come back to QAV 528. I’m back in Bris­bane and hap­py to be here. You are still on the ark. Is that right?

Tony  00:17

Yeah, that’s right. Flood­ing, some­what sub­merged on the ark. I can’t believe it. This weath­er in Syd­ney is crazy. We had prob­a­bly four nice days over the week­end, and it’s back into under­wa­ter world again.

Cameron  00:30

Was that enough to squeeze in a lit­tle bit of golf?

Tony  00:32

It was, yeah. I checked the fore­cast on Sun­day night and Mon­day was the only dry day for the fore­see­able future, so I rearranged things and jumped on the course.

Cameron  00:42

That’s good. Was it sog­gy?

Tony  00:45

Oh, yeah. Yeah, pret­ty mud­dy. But still bet­ter than noth­ing. It’s good. So, I actu­al­ly played Fri­day and Mon­day, this last week, because Fri­day was good too. Rained all week, last week until Fri­day, just fit­ting it in when I can.

Cameron  00:58

That’s good. And I guess in after-hours we’ll talk about the Open and, uh, a boy from Bris­bane, I think, was­n’t he? A boy from Queens­land? Any­way.

Tony  01:06

Yeah, from Bris­bane — North­side.

Cameron  01:08

We were com­ing home from Kung Fu before and I saw, you know, some golf stores out near their with big signs say­ing “Con­grat­u­la­tions Cam.” I was like, thank you very much. I appre­ci­ate that. My first kung fu class in a month, and I sur­vived.

Tony  01:23

It must have been, like, I’m just try­ing to think… Was it Cameron Diez who was around when you were a lit­tle boy? Every­one’s called Cameron from fifty years ago.

Cameron  01:32

They’re all named after me. They’re all named after me.

Tony  01:34

Ah, right.

Cameron  01:35

I’m the orig­i­nal.

Tony  01:36

Espe­cial­ly in Bris­bane. These are all your ex-girl­friends hav­ing kids.

Cameron  01:40

The last thing my ex-girl­friends are gonna do is name them after me, I tell yah. Alright, let’s get into the show, TK. I think it’s gonna be a quick one this week. We don’t have a of ques­tions. Not a lot to talk about. Although, I did look at the port­fo­lio, the DP this morn­ing — which stands for dum­my port­fo­lio and not the oth­er DP, in case any­one was won­der­ing. It’s not doing great for the finan­cial year. We’re, I think we’re up 0.97% for the finan­cial year, two weeks in, what­ev­er it is, ver­sus the ASX 200 which is up five point some­thing per­cent. I can’t see here on my thing. It’s too small. Oh, there we go. 5.84%. So, the ASX 200 is kick­ing our butts in the first cou­ple of weeks of the finan­cial year. We’ve had a cou­ple of good win­ners: NHC up 14% this finan­cial year, AMO up 13% and ECX up 13%. So, they’ve had a good cou­ple of weeks.

Cameron  01:41

Hang on, I’m get­ting dif­fer­ent num­bers to you.

Cameron  01:41

Sor­ry about that.

Tony  02:00

Dum­my port­fo­lio, first of July to, goes on to 30th of June 2023. I’m get­ting we’re up 5.35, mar­kets at 1.0… Oh no, we’re up 1.32%, mar­kets up 5.35%.

Cameron  02:58

I did this this morn­ing, so we must have gone up a lit­tle bit since this morn­ing.

Tony  03:02

Okay, but you’re right. We’re under­per­form­ing the mar­ket, yeah.

Cameron  03:04

It’s from incep­tion, though, which for new play­ers is the 2nd of Sep­tem­ber 2019 for our dum­my port­fo­lio. We’re up 16.4% per annum, CAGR, and the ASX 200 is up 5.08 per annum over the same peri­od of time. So, we’re doing about three times. Now, I think last week or the week before when I looked, we were doing five times bet­ter than the ASX 200 since incep­tion. So, it’s caught up a lit­tle bit in the last cou­ple of weeks. But it reminds me what you’ve always said that, you know, we’re going to have years where we out­per­form and years when we under­per­form, and years when we are at the same lev­el as the bench­mark, the index. No sys­tem out­per­forms con­stant­ly, and it reminds me of a sec­tion from James O’Shaugh­nessy’s book What Works on Wall Street, which I dug out and had a look at again this morn­ing. He wrote, “find­ing exploitable invest­ment oppor­tu­ni­ties does not mean it’s easy to make mon­ey, how­ev­er. To do so requires an abil­i­ty to con­sis­tent­ly, patient­ly, and slav­ish­ly stick with a strat­e­gy, even when it’s per­form­ing poor­ly rel­a­tive to oth­er meth­ods. Few are capa­ble of such action. Struc­tured invest­ing is a hybrid of active and pas­sive man­age­ment that auto­mates buy and sell deci­sions. If a stock meets the cri­te­ria, it’s bought, if not, not. No per­son­al emo­tion­al judg­ments enter the process. Dis­ci­plined imple­men­ta­tion of active strate­gies is the key to per­for­mance. Tra­di­tion­al man­agers usu­al­ly fol­low a hit and miss approach to invest­ing. Their lack of dis­ci­pline accounts for their inabil­i­ty to beat sim­ple approach­es that nev­er vary from their meth­ods. Don’t sec­ond guess, don’t change your mind, don’t reject an indi­vid­ual stock,” even if it’s Apol­lo Tourism and Leisure, “if meets the cri­te­ria of your strat­e­gy…”

Tony  05:00

O’Shaugh­nessy was also an investor, was he?

Cameron  05:01

“… If it meets the cri­te­ria of your strat­e­gy because you think it will do poor­ly, don’t try to out­smart.” So, I think that’s as good an encap­su­la­tion of what we do as any I’ve read.

Tony  05:14

Cor­rect. Yeah. I agree with that whole­heart­ed­ly. And yeah, I mean, we are sub­ject to pres­sures, but not the same ones as fund man­agers who have to make their quar­ter­ly num­bers and there­fore do sec­ond guess them­selves and try and manip­u­late things, but we don’t need to do that. You said before there’ll be times we under­per­form, I just want­ed to clar­i­fy that that’s in the short term. Over the long term, we still expect to get dou­ble mar­ket.

Cameron  05:40

Yeah. But there will be quar­ter, halves, years where we under­per­form.

Tony  05:47

Oh, yeah.

Cameron  05:48

But I feel bad for peo­ple that start­ed their invest­ing careers in the last three or four months since the major cor­rec­tion, it must be demor­al­is­ing a lit­tle bit for them. But as I remind­ed some­body yes­ter­day in an email, when you sell some­thing… This per­son emailed me and said, you know, “I’ve ruled one a bunch of stocks and then I go back and look and they’re up 25%, from where I sold.” I was like, well, that’s rule num­ber 1.5, is don’t go back and check your rule num­ber one.

Tony  06:20

Yeah, well, you can always buy them back if they’re back on the buy list and they’re back above sen­ti­ment.

Cameron  06:25

Well you can’t, because it’s asset wash­ing.

Tony  06:29

Well, if they sold them before June 30, yeah.

Cameron  06:31

So, just let me ask you about that. And we did have a bit of an email thread the oth­er day. So, I assume that when I’m doing our port­fo­lio stuff, the things that are at risk of asset wash­ing of those that we sold, what, in June, or in the last cou­ple of weeks of June, or how close to the end of finan­cial year is it? Because there’s been a cou­ple that we sold in May, and I’ve bought them back now. I’ve gone well, that should be okay, but I don’t know where the line is. What do you think the line is?

Tony  07:01

There is no line, that’s the prob­lem. To the tax office, there is no law around asset wash­ing except for the famous, or infa­mous, Part 4A of the tax act which says you can­not do some­thing with the sole inten­tion of avoid­ing tax.

Cameron  07:16

It’s like what that Supreme Court jus­tice in the US said about pornog­ra­phy many years ago. “I know it when I see it.” I can’t define it. But I know it when I see.

Tony  07:23

Yeah, that’s quite a smart law, real­ly. If you go into a lawyer’s office, a tax lawyers office, at least one wall is cov­ered with tax leg­is­la­tion. And I think it was in the Howard years, they worked out, yeah, let’s short cir­cuit all this to just have part 4A: you can­not do some­thing to avoid tax. It’s how the ATO applies that and what stands up in court and all those kinds of things, but it’s gen­er­al­ly — and please peo­ple, get your own advice, this is not advice — the rules are used that if you sell in June, wait until the next num­bers come out before you rebuy because then you can point to the tax office and say, “hey, new fig­ures, it’s a new deci­sion.” I can make a con­struc­tive case to say I’m re-buy­ing on the basis of my invest­ment pol­i­cy. And so the tax office would find it hard to say, okay, you sold in June and bought back in Sep­tem­ber just for the pur­pose of avoid­ing tax. But whether it’s June or whether it’s May/June, I mean, all those things are just grey. So, I’ve always used June and avoid­ed July and August before I re-bought. Well, sor­ry, July any­way. August we’ll start get­ting new num­bers out, so some­time in August we can start to rebuy.

Cameron  08:32

Well, that’s a shame because it knocks a bunch of things off our list.

Tony  08:37

It does, I agree. But also, too, I’m sure if you had a good tax lawyer they can say, “well, you’re fol­low­ing your strat­e­gy. It was nev­er your inten­tion to just make that sale for tax rea­sons. Here’s the rea­sons why you sold it.” So, you’d prob­a­bly get off. But the advice I got a long time ago from an accoun­tant was, don’t do any­thing which is gonna put you under the mag­ni­fy­ing glass with the ATO because even if you win, you’ll lose. Because it’ll cost a lot to do audits, they’ll keep check­ing you every year, and you’ll have to spend mon­ey with accoun­tants prepar­ing spe­cial returns and all that kind of stuff. So, it’s not worth it.

Cameron  09:09

Yes, well, that’s the way it is with our port­fo­lio. So far does­n’t look very excit­ing. But yeah, these are the dark times.

Tony  09:20

It is, and the oth­er point, too, is I know what you said before about peo­ple who start­ed invest­ing in the last six months. It’s def­i­nite­ly hard for them, but it’s also has­n’t been easy for us. Our port­fo­lio per­for­mance is down from 21% down to, what did you say before, 16%?

Cameron  09:36

Yeah, but we’re still above water. Peo­ple who start­ed in the last few months, prob­a­bly, have lost mon­ey because they’ve had to pay bro­ker­age and they’ve lost 10% and all that kind of stuff.

Tony  09:46

I know what you’re say­ing, but if you think about it, we’ve lost mon­ey as well. The dum­my port­fo­lio’s down, so it’s still down mon­ey even when giv­en some back for some­body else. So, I guess I’m just say­ing that it’s not just the peo­ple who are new to the mar­ket who are prob­a­bly hav­ing sec­ond thoughts about all this, it’s the peo­ple who have seen their port­fo­lios drop as well. But again, this is just the way the mar­ket works. It’s one step back, two steps for­ward.

Cameron  10:09

Well, I think the advan­tage that I know I feel because I’ve been doing this now with you for three years, is that it does­n’t real­ly faze me at all. I mean, I know it’s come back. I know it will prob­a­bly come back fur­ther until it turns around, but then it’ll turn around, it’ll go back up, and we’ll make it all back, and then it’ll come back a lit­tle bit. So, I’ve been around long enough that it does­n’t stress me out. I know you’ve prob­a­bly lost-you’ve seen mil­lions of dol­lars fly out the win­dow.

Tony  10:38

I have.

Cameron  10:39

But easy come easy go.

Tony  10:45

Yeah, well, I would­n’t say “easy come” but yeah, it was “easy go” the last six months, that’s for sure.

Cameron  10:51

Half right, then. But you know, I know you know It’ll come­back. Once you’ve been around for a while you don’t stress over these things, you just know it’s part of the cycle, right?

Tony  11:03

Yeah. And we’re going to cash at the right time, too. I think we’ll be able to rede­ploy that at the right time. And just on that, too, I noticed peo­ple should — well, peo­ple should be check­ing the com­modi­ties at least, prob­a­bly, week­ly at the moment because Aus­tralian dol­lar gold dropped just below its three-point sell on the week­end. I checked it again today and it’s right on it, so I might just watch it for a cou­ple of days before I sell my gold stocks because it’s trend­ing along the bot­tom of the trad­ing range, and it may rebound from here, but I’m pret­ty close to sell­ing my gold stocks. Iron ore’s get­ting close because of all the prob­lems in Chi­na. So, I think it’s about $5 or $6 a tonne above its sell price. So, we may have anoth­er round of sell­ing com­ing up, as well.

Cameron  11:45

Well, rules is rules. That’s what you say to the ATO if they pull you up for asset wash­ing: you say, “rules is rules.”

Tony  11:52

And then they put you on the shit list, and every year it costs you $50,000 to hire a tax lawyer to argue your case.

Cameron  12:02

Is Elon out to destroy Twit­ter, Tony?

Tony  12:08

I think he might be. It’s inter­est­ing, isn’t it? I mean, he’s play­ing some strange games. And I don’t real­ly know much about Musk or Tes­la or Twit­ter or any of those sorts of stocks, but just from afar look­ing at what he’s doing: he makes a gen­er­ous offer to buy them out, then he’s tried to walk it back. Then, he starts to point out all the prob­lems with Twit­ter bots and that kind of stuff, and now he deter­mined­ly walks away from the sale when the mar­kets crashed. So, like, there’s no oth­er buy­er for Twit­ter. They’re scram­bling to try now and enforce the orig­i­nal deal, which will be hard for them to do because it’s hard to put a gun to a head when some­one’s walked away. Yeah, so he’s pret­ty much watched the val­ue in Twit­ter decline dra­mat­i­cal­ly and point­ed out all the prob­lems with its busi­ness mod­el and spent a lit­tle bit of mon­ey, but not much to do it.

Cameron  12:55

Yeah, I’ve had a look at their share price and it’s sort of been going up since he tried to pull out, which is inter­est­ing. I mean, if you go back a year ago, they were trad­ing at $71 us a share. They’re cur­rent­ly trad­ing about $38, so they’ve halved in val­u­a­tion. But, you know, they were down as low as $34 in March, then I think when he talked about buy­ing it it shot back up to $50 and then came back down and now seems to have been bounc­ing back. It did drop a bit after his announce­ment, so maybe it’s just recov­er­ing from that. But yeah, he’s fun­ny, Elon, I do feel that he just trolls peo­ple from time to time. Like with the Bit­coin and the cryp­to stuff, and the Game Stop and all that kind of non­sense that was going on a year or so ago, he did seem to just drop lit­tle tweets every now and again just to troll peo­ple and get them all excit­ed. And then he’d say some­thing neg­a­tive about it a cou­ple of weeks lat­er and it’d crashed, and then he’d say some­thing pos­i­tive, and it’d go back up. He’s just the pup­pet mas­ter out there, which is maybe fun for him. Not very nice for the peo­ple that are get­ting sucked in and buy­ing and sell­ing and los­ing mon­ey along the way, though. There’s col­lat­er­al dam­age to him trolling, if that is in fact what he’s doing.

Tony  14:16

No, I agree, but inter­est­ing to watch. And you might won­der how it’s all gonna wind up for Tes­la as well. I mean, do you put Tes­la in the After­pay camp? Is it always going to be a hyped busi­ness but when it becomes mature it’s not going to have any prof­it? Or do you put it in the Ama­zon camp, which is going to be around for a long time?

Cameron  14:33

Look, I don’t know. But I told you this six months ago when I talked to my old mate Robert Scoble the tech evangelist/blogger/Twitterer/podcaster — what­ev­er he is these days over there — who’s, you know, very close to all of these sorts of things going on. He reck­ons Tes­la’s not a car play, it’s a data play, because all the cars are dri­ving around grab­bing all of the data. They’ve got cam­eras on them; they’re cap­tur­ing every­thing that’s hap­pen­ing on the streets. Every­one’s util­i­sa­tion of it, what’s going on, feed­ing all that back to mas­sive data cen­tres — super­cooled data cen­tres over the ocean some­where. He said, “no, peo­ple don’t under­stand Tes­la. The long-term play is it’s a data aggre­ga­tion play, and he’s going to do stuff with all the data.” So, who knows?

Tony  15:26

It’s like West­world. They build a theme park to gath­er infor­ma­tion about the human psy­che.

Cameron  15:32

Was­n’t it just a big black­mail play in West­world? They were just black­mail­ing all the rich peo­ple went there to rape com­put­er bots.

Tony  15:38

Well they were, but it’s the twists and turns, and now there’s some tech bil­lion­aire who’s worked out that there’s all the data about the human mind that he can recre­ate the human mind from it. So, he’s going after “the pearl”, it’s called.

Cameron  15:39

Why would you want to recre­ate the human mind? The human mind is hor­ri­ble. Build a bet­ter mind, you don’t want to recre­ate ours.

Tony  15:57

I think he’s try­ing to recre­ate it so he can, you know, manip­u­late stock mar­kets and that kind of thing. Make mon­ey off it.

Cameron  16:02

Oh, okay. Well, that’s cun­ning, yeah. We should do that.

Tony  16:07

Build West­world?

Cameron  16:08

Yeah. You can afford it. Let’s build West­world.

Tony  16:14

Okay. QAV World.

Cameron  16:16

Yeah.

Tony  16:19

Come and hunt growth invest­ing bots in QAV world. Any­way, that’s Tes­la. Who knows. I mean, if it’s gonna be a data play, why don’t they call it a data play? That’s just clas­sic bait and switch evan­ge­list stuff from the dot­com era: “oh, it’s not real­ly about sell­ing books. It’s about eye­balls. We’re gonna con­trol the world.”

Cameron  16:40

Jeff Bezos pulled it off, man.

Tony  16:42

Yeah, but he’s the only one.

Tony  16:42

And Google pulled it off, too. I mean, it was­n’t real­ly about search, right? It was about data.

Tony  16:51

It’s about ads.

Cameron  16:53

Well, even the ads, ads were just a way of fund­ing and I think it’s about data. Any­way, keep going.

Tony  16:58

No, I was gonna say, so, enough about the growth stocks. The one good bit of news in all the down­turns recent­ly is Michael Hill Jew­ellers, one of our buy list stocks, and it’s been there for a while, had strong quar­ter­ly sales. So did JB Hi-Fi, actu­al­ly, so that came out today — which is the 19th of July 2022. So, two retail­ers have had some good num­bers, and they’ve both been on our buy list. They’ve both grown up a lit­tle bit. And it’s kind of sur­pris­ing, and that’s just what hap­pens in the stock mar­ket. Peo­ple wrote off retail­ers after COVID, and I guess maybe that’s the rea­son they’re hav­ing good sales, is because the ana­lysts wrote off the retail­ers after COVID say­ing every­one was stay­ing at home buy­ing things online which was great for retail. Now COVID’s gone, they’re not gonna do that. Well, “has COVID real­ly gone?” Is the first ques­tion. And sec­ond­ly, they prob­a­bly over­sold the stocks on that the­o­ry and now they’re actu­al­ly say­ing, “our retail stores are going well, and we now have large online busi­ness­es we did­n’t have before, too, which are still going well.” So, ana­lysts got it wrong and the stocks are rebound­ing.

Cameron  18:03

MHJ was a good one for me last year. I think it was one of those ones that we made like 50–60% on in a year dur­ing COVID. So, nice to see that it’s back. I don’t know who’s buy­ing jew­ellery though at the moment. What’s dri­ving that?

Tony  18:19

I haven’t delved into their num­bers, but I know they’re expand­ing. So, I think they’ve just opened a net­work of stores in Cana­da in the last year or two.

Cameron  18:26

Oh, okay. We should get Kane on; Kane can come on and tell us what’s going on with the jew­ellery busi­ness.

Tony  18:31

Yeah.

Cameron  18:32

Well, there you go. MHJ. I don’t own it any­more, do you? Is it too small for you?

Tony  18:37

Too small, yeah. I have owned in the past, many years ago, but too small for me now.

Cameron  18:43

Well, any oth­er news? Are you gonna do a pulled pork for us today?

Tony  18:47

Yeah, so I’ll do a pulled pork on a small com­pa­ny called Ambertech. And just a shout out to peo­ple, if you have a com­pa­ny, you want me to do a pulled pork on, let us know. I’m just gonna work down the list, but I’m get­ting towards the bot­tom of the list now because either a, they’re all Josephine’s, or b, we’ve done them before. But this is one we haven’t as far as I can recall. Ambertech, AMO is the stock code. I don’t know much about this com­pa­ny except for what I’ve done for research today, but it’s a an importer and dis­trib­u­tor of film and TV equip­ment, and, in par­tic­u­lar, home pro­jec­tors for home the­atres. So, small com­pa­ny though, it’s 32 mil­lion mar­ket cap which makes it a micro stock. Its ADT is just under $19,000, so it won’t suit every­one. But for some small investors out there, it might be worth hav­ing a look at. The chart looks good, if peo­ple want to have a look at the chart. They’ll see it’s turned down over the last twelve months, but it’s had a very sol­id upturn in the last lit­tle while, so some­thing’s going right with the com­pa­ny. This analy­sis is based on the share price of $0.34, and I guess the first thing to note is it’s pay­ing near­ly a 9% yield, which is quite juicy, quite high. It’s finan­cial health in Stock Doc­tor is strong and steady. Its price to oper­at­ing cash flow’s get­ting up there; it’s cur­rent­ly 6.63 times. A Stock Doc­tor haz­ard is 5.6, and gen­er­al­ly when Stock Doc­tor dis­agrees with the num­bers, I cal­cu­late in our spread­sheet it’s because there are options which haven’t been exer­cised yet, which would­n’t sur­prise me. A small com­pa­ny with own­er founders, they prob­a­bly do have lots of options out there. So, Stock Doc­tor takes those into account in work­ing out it’s Pr/OpCaf and I don’t, I just use the shares which have been issued already. So, that’s some­thing that will be a fea­ture of these kinds of com­pa­nies. Does­n’t real­ly make much dif­fer­ence to me, I don’t think, and it actu­al­ly scores well for us because we do have own­er founders out there with skin in the game. So, that’s a good thing I think over­all. No ana­lysts are cov­er­ing the stock, so we don’t have con­sen­sus fore­casts. And that’s because it’s a small mar­ket cap, you’d expect that, and there­fore we don’t have IV2 and we don’t have growth over PE to score these two things on. But I often find that these small caps which aren’t cov­ered by the ana­lysts give us the advan­tage. So, we do have a slight­ly dimin­ished set of num­bers to crunch, but we’re the only ones crunch­ing them, so we can uncov­er some real good growth sto­ries here. Going through the man­u­al­ly entered data, it’s not the low­est PE. It has been on a bit of an upturn recent­ly, so not the low­est PE, but its upturn is since the last finan­cial results, so it’s a recent upturn. It scores well for that. Equi­ty has been con­sis­tent­ly increas­ing, so it scores well for that. And it has own­er founders, which I said, so it scores well for that. So, all in all, we can score twelve met­rics, and it scores eleven out of twelve which is 92% for qual­i­ty, which is real­ly nice. But only 0.14 for QAV, so it’s towards the bot­tom of our list, and that’s because of the price to oper­at­ing cash flow get­ting up towards sev­en.

Cameron  22:01

So, do you often see a cor­re­la­tion between a high yield and high board own­er­ship? Is that them pay­ing them­selves the div­i­dend?

Tony  22:10

Yeah, quite pos­si­bly. Not always. I mean, Berk­shire Hath­away’s the clas­sic one where they don’t like div­i­dends, they’d rather rein­vest the mon­ey. But yeah, you’re prob­a­bly right, they’re prob­a­bly hav­ing to serve and ser­vice loans and things like that they put mon­ey into the com­pa­ny with. So, I don’t know this com­pa­ny very well, but that’s poten­tial­ly what’s going on.

Cameron  22:28

Just as soon as you said it was a 9% yield, I imme­di­ate­ly thought “tight­ly held”. I mean, I know there are some com­pa­nies that always pay, you know, a rea­son­able div­i­dend that aren’t tight­ly held, but some­thing that high, there’s got to be a rea­son why they’re giv­ing that much mon­ey back to share­hold­ers.

Tony  22:44

Yeah, quite pos­si­bly.

Cameron  22:45

It could be mul­ti­ple rea­sons, of course, but yeah, okay. Inter­est­ing. Thank you for that: AMO.

Tony  22:49

Yes.

Cameron  22:51

All right. Is it time to get into Q&A, the lit­tle that we have? The first one is from Steve, this was a week or so ago, I think, from Chair­man “Mao” Mabb. Sor­ry, the oth­er Chair­man Mabb. He says, “I see MQG is back on the buy list this week. One of the tools Lee and I’ve been play­ing around with is to take a ten-year view of the over­all busi­ness per­for­mance of a stock and look for those that are con­sis­tent­ly grow­ing and reach­ing high­er per­for­mance than the mar­ket over­all. A bit like tak­ing all the bad apples out, etcetera, to then only own the best apples. Of course, val­u­a­tion would be impor­tant as always when you enter this kind of stock. But any­way, below is what MQG looks like. Real­ly good growth on most met­rics over a decade, how­ev­er cash­flow seems to be super lumpy and has sky­rock­et­ed in the past year. Any insights on why, and is that a con­cern for the QAV sys­tem?” And below, this is what MQG looks like. He’s got a table here going over ten years: rev­enue growth, net prof­it growth, return on equi­ty, earn­ings per share, oper­at­ing cash per share, div­i­dends per share, book val­ue per share, and share price — which, by the way, has gone from $28 in FY12 to $182 in FY22. It’s been on a stel­lar ten-year run, has­n’t it?

Tony  24:15

Yeah. And I think one of the things you don’t see in that is volatil­i­ty. So, you can see it a lit­tle bit in one of the years it went from 78 back to 67 the next year, and then 87 the year after, but that is one of the issues with a com­pa­ny like Mac­quar­ie group, it can be quite volatile. But over­all, it’s been one of Aus­trali­a’s suc­cess sto­ries, it real­ly has. When I was first start­ing to invest, Mac­quar­ie Bank was just get­ting going and seemed to me to have all the best research to retail investors and there was­n’t much out there back in the 90s, late 80s/early 90s. And it’s just grown and grown and grown and it’s been well man­aged, it’s been a great investor of cap­i­tal, and now the retail banks only a minor part of the whole com­pa­ny. But the rea­son to get back to Steve’s point, the rea­son why the cash flows high for the last half of last year is Mac­quar­ie Group is more like an invest­ment bank than a retail bank, and so it has lumpy cash flow. So, in the last lit­tle while they made a lot of mon­ey out of com­mod­i­ty trad­ing along the same trades that we did. When oil got down to $28 a bar­rel, they loaded up and then sold it — or used futures, or what­ev­er they did — sold it when it start­ed to rise, and then made a squil­lion dol­lars which was straight cash prof­it com­ing in. And that’s only one of their invest­ment arms, there are all sorts of busi­ness­es that can gen­er­ate that kind of wind­fall prof­its for them. They do smoot it because they are hav­ing a greater share of the com­pa­ny invest­ed in infra­struc­ture and I think that’s, again, good man­age­ment on their part. They’ve said, you know, over the years, we’ve, as an invest­ment bank, we’ve had lumpy cash and lumpy prof­its, let’s try and smooth it. And so, they invest in infra­struc­ture which is more reg­u­lat­ed and more cer­tain in terms of its pay­ments each year, like toll roads and bridges and elec­tric­i­ty gen­er­a­tion and things like that. Or at least the infra­struc­ture for it. So, yes, it can be lumpy, they do try and smooth it, but I guess in terms of QAV, I don’t mind that some­times they come on the buy list and some­times they go off the buy list. If they haven’t had a big wind­fall prof­it for a year they go off the buy list, because I know when they come on they invest the cash wise­ly. They’ve got a track record as Steve and Lee’s analy­sis shows, that, you know, the book val­ue per share has gone from $34 to $77, so it’s dou­bled in that last peri­od of ten years of analy­sis. So, yeah, they do invest wise­ly. So, it won’t always be on our buy list, but when it is, it’s good. Again, the pros and cons of Mac­quar­ie Bank, and it’s just come back onto our buy list recent­ly. The pros are for all the things I’ve just said; they’ve been a great man­ag­er of cap­i­tal, they’re an invest­ment bank, they do good deals, and it’s known as the mil­lion­aire’s fac­to­ry. Their busi­ness mod­el used to be a lit­tle bit unplanned, if some­one goes to them and pitch­es them an idea like, “hey, invest in my busi­ness,” they’ll invest in it with you, and they’ve made lots of peo­ple mil­lion­aires doing that, and then that becomes part of Mac­quar­ie Bank going for­ward — or Mac­quar­ie Group going for­ward. So, they’re good at that. The oth­er real big pos­i­tive for them is that they earn a lot of income, prob­a­bly the major­i­ty of their income over­seas and when the Aus­tralian dol­lar is as low as it is now. That’s, you know, pret­ty much a 30% tail­wind to their prof­it com­pared to the local banks, who’s prof­its are in Aus­tralian dol­lars. So, that’s a free kick for them at the moment, if the Aus­tralian dol­lar ris­es that will turn against them. But the neg­a­tive is def­i­nite­ly around their lever­age to the eco­nom­ic cycle. So, if Aus­tralia does go into reces­sion, or if more impor­tant­ly for them, I guess, if Amer­i­ca goes into reces­sion or Europe, then they will come off dra­mat­i­cal­ly. And I remem­ber dur­ing the GFC it was good and bad. Their share price was very volatile, I for­get the exact num­bers, but it kind of went down by two thirds when the GFC hit, but then com­ing out it went up three times. So, that’s the kind of volatil­i­ty you can expe­ri­ence with this kind of stock.

Cameron  28:17

Yeah, I’m look­ing now, GFC. Oh no, it does­n’t go back — my chart only goes back to 2010, so I can’t tell you. So, what do you think about this ten-year view that Steve and Lee are hav­ing a look at?

Tony  28:31

Yeah, I said sounds good. I mean, the first ques­tion is why ten years are not five or not 20? But yeah, it’s com­pa­nies like, I mean, I think I can prob­a­bly put the list togeth­er now; It’d be Mac­quar­ie Bank, it’d be CSL, it might be the major banks, at least Comm­Bank of the majors. The super­mar­ket’s will prob­a­bly be in there. So, that’s pret­ty much going to be the ASX 20. That’s often­times how com­pa­nies get to be on the ASX 20, right, they start off small and they con­sis­tent­ly grow. So, it’s a bit of hind­sight bias. And I think we should buy McQuar­rie at the moment. Not a rec­om­men­da­tion, but it’s on our buy list and it’s a good com­pa­ny, so it’s well val­ued for us to buy where­as some of the oth­er things on the ASX 20 aren’t at the moment. But yeah, I I’m inter­est­ed to see what their list comes out as, I think it’ll prob­a­bly be a large cap list. The inter­est­ing thing will be is if they find some­one who’s not a large cap, that’s prob­a­bly the com­pa­ny to invest in because with this kind of tail­wind behind it, this is kind of, you know, good stew­ard­ship, good man­age­ment over ten years so that the book val­ue in par­tic­u­lar has been grow­ing — which is a bit like our con­sis­tent­ly increas­ing equi­ty — I think that’s a real­ly impor­tant part of our met­rics that we look at. Yeah, if there’s com­pa­nies out there which a) have been around ten years, and b) haven’t grown to the extent that they are on every­one’s radar, then that would be a good one to get into.

Cameron  29:45

And so, we look at five years from a chart­ing per­spec­tive, but when we’re look­ing at con­sis­tent­ly increas­ing equi­ty and the low­est PE, we’re look­ing at three years. Remind me why you’re look­ing at three years? What’s the mag­ic around the six halves?

Tony  30:02

There’s no mag­ic, and you know that I think there’s quite a few PhDs in the process to decide whether the QAV cut off should be 0.10 for the score, whether it should be three years, or six halves, or five years and ten halves, or what­ev­er. It’s just what I found through, I guess, expe­ri­ence, that three years was a good enough time to smooth out any wrin­kles in the indus­try or wrin­kles in the econ­o­my that may have affect­ed things. There’s no real sci­ence to it.

Cameron  30:32

Thank you for shar­ing that, Steve. Last ques­tion is from Samuel: “hi Cameron. I noticed the CFO of ASX Lim­it­ed has announced her depar­ture. This is in con­text of the CEO also leav­ing, which had some­thing to do with the major tran­si­tion to their new trad­ing tech­nol­o­gy next year. So, on the one hand it is announced in advance, so it’s done with some order­ly fash­ion. On the oth­er hand, the CFO did not announce her depar­ture at the same time as the CEO, and instead wait­ed a few weeks. Should we con­sid­er that as unex­pect­ed and there­fore a sell trig­ger, that the two main execs are leav­ing at the same time? Can’t be good news, I think.” What do you think?

Tony  31:14

Inter­est­ing one. If it hap­pened sep­a­rate­ly, I would say, yeah, def­i­nite­ly the CFO resign­ing was a red flag unex­pect­ed­ly. I think in this case, and I could be wrong, again, I haven’t looked into it too far. What I’m see­ing is that the CEO left and that was­n’t a great thing, although they tried to spin it as being a nor­mal suc­ces­sion play. They will replace inter­nal­ly, which is usu­al­ly a good thing because the per­son knows where all the skele­tons are buried, and they know the cul­ture and they’re not going to come in and rad­i­cal­ly change things. But some­times in that sit­u­a­tion, one of the oth­er inter­nal can­di­dates leaves because they did­n’t get top job. So, I sus­pect that might be the case here. There are three things it could be. It could be a red flag; in oth­er words, the CEO and the CFO have both thrown the tow­el in, which is not a good look. That’s door num­ber one. Door num­ber two is the CEO’s gone and gone quick­ly, and so there was a quick step up to the plate for an inter­nal per­son. So, the board would have known who the inter­nal can­di­dates were, and they just had­n’t anoint­ed them. So, per­son A gets the job, per­son B — in this case, the CFO — goes, well, I’m gonna go and try and get a CEO job some­where else, and they leave. That’s not unusu­al. Door num­ber three is the per­son who’s been giv­en the CEO job has gone, “no, I want to put my own peo­ple into key roles,” and so they’ve asked the CFO to leave. So, I think it’s prob­a­bly door num­ber two or door num­ber three, rather than door num­ber one. The only oth­er thing that’s in the back of my mind is the ASX real­ly has a cou­ple of chal­lenges at the moment, and so the CEO leav­ing, I think, was in frus­tra­tion of not being able to solve those chal­lenges. So, whether the new per­son can remains to be seen. The first chal­lenge and the big chal­lenge for them is the CHESS replace­ment sys­tem. So, that’s the paper-based sys­tem that gets mailed out to us every time we buy or sell shares, and I think has to be done once a quar­ter, which tells us what their bal­ances are. And it’s a sys­tem that replaced… you know, when I first start­ed invest­ing it was at the very end of the days when you would receive a share cer­tifi­cate: you were buy­ing a stock in a com­pa­ny and you would get a piece of paper in the mail say­ing, “here’s your cer­tifi­cate”, attest­ing that you owned 500 shares of BHP, or what­ev­er.

Tony  33:18

I thought it was on, like, clay tablets when you were first invest­ing. Chis­el it in in cuneiform.

Tony  33:24

Yeah, well, just one step removed from that but pret­ty sim­i­lar. And then the CHESS sys­tem came in which was a data­base, and it’s worked well. And now the ASX under the pre­vi­ous CEO, a guy called Elmer Funke Kup­per, decid­ed that…

Cameron  33:38

What was that name? Elmo Funky Carp­er?

Tony  33:40

Elmer Funke Kup­per.

Cameron  33:42

Funky Cup­per. That’s a great name.

Tony  33:45

It is, it’s Dutch. I’ve actu­al­ly met him a cou­ple of time, he used to work with Jen­ny at ANZ back in the day. Yeah, so, he became the CEO of ASX and then had to resign because before the ASX he was CEO of TAB, which was under a cloud for some kind of reg­u­la­to­ry breach which he was even­tu­al­ly cleared of but thought the right thing to do was to step down while he was under inves­ti­ga­tion. So, that was a good thing to do. Any­way, so he was, I guess, far­sight­ed and thought that blockchain was going to be the future and to for­get about data­bas­es, and there­fore the CHESS sys­tem should be built on blockchain. And now it’s get­ting time to deliv­er it, it’s been delayed, I think twice now offi­cial­ly. The stock­bro­kers who are going to use it are throw­ing their hands up say­ing, “you’ve got to be kid­ding,” and the ASX has still got­ta con­vince them that it’s going to work and be trust­wor­thy. I think that on the pos­i­tive side, the ASX were going to be the first blockchain user of this size for a stock mar­ket in the world. I think some­one else may have beat­en them to the punch now that they’ve been tak­ing a long time to deliv­er it. You’re bet­ter to come sec­ond in new tech­nol­o­gy, I think, then be the bleed­ing edge. So, that might help them. That’s what the new CEO has to do, they’ve got to deliv­er this sys­tem. Either deliv­er it or scrap it and take a write down. Its right about now with a new CEO going in, in about nine­ty days they’ll say, “okay, I can deliv­er this” or “nah, for­get it. We’re going back to more tra­di­tion­al IT solu­tions,” and there’ll be a hit as a pro­vi­sion to the ASX. I don’t know which way it’ll go. My gut feel is the CEO called it quits because he was­n’t pre­pared to make that call or put his rep­u­ta­tion on the line in tak­ing the hit. Who knows? I don’t want to cast asper­sions, but that’s one pos­si­ble way to read this. The new CEO’s come in; it’s going to be their call. I sus­pect it could be a bit of both; the CFO may have left for that same rea­son but could have been asked to leave by the incom­ing CEO or could have left because they want the top job and did­n’t get it. So, I’m not over­ly wor­ried about the res­ig­na­tions but I think the ASX has some prob­lems. I think CHESS is the first one that’s got to do. The sec­ond prob­lem the ASX CEO has to solve is, there was an out­age in the mar­ket last year and the ASX just shut down for hours. Then the reg­u­la­tor got involved and start­ed to make nois­es like “there should be a back­up sys­tem here” and start­ed to ask the oth­er peo­ple who were small play­ers in the mar­ket to be ready to have a switch thrown to remove trad­ing from the ASX to their sys­tems in the event of anoth­er mar­ket fail­ure. So, the ASX real­ly has to con­vince the reg­u­la­tor that it’s not going to hap­pen again or face poten­tial loss of mar­ket share to a com­peti­tor who’s using new­er tech­nol­o­gy and is more robust. So, a cou­ple of issues with the com­pa­ny, but not the sort of red flag where you’d sell it because you think the mar­ket is going to drop 20 or 30% quick­ly because some­one’s left.

Cameron  36:29

Well, as you say, the new CEO has a few months to play the three envelopes.

Tony  36:34

Yep.

Cameron  36:36

And a shout out to the peo­ple at digitalassets.com: Marc Sil­ber­strom, the Chief Sales Offi­cer, Yuval Rooz, the co-founder and CEO, Eric Saraniec­ki, co-founder and Head of Strate­gic Ini­tia­tives, Shaul Kfir, the co-founder and Chief Archi­tect, because some­body did a great job. They’re the peo­ple that are the tech­nol­o­gy provider, appar­ent­ly, of the blockchain stuff to the ASX. Some­body sold the shit out of that, I tell ya. Like, you would­n’t get me to put a web­site on blockchain tech­nol­o­gy right now, let alone the entire ASX replac­ing the CHESS sys­tem, so who­ev­er solved that could get a job sell­ing ice to Eski­mos.

Tony  37:21

I’m guess­ing that was a bit of a white­board exer­cise in coloured pen.

Cameron  37:32

Don’t wor­ry, it’ll be fine. It’s the future, you’re gonna love it. It’s gonna be great.

Tony  37:37

So, a few issues for the ASX. But hav­ing said that, I mean, that’s why the price is cheap. It’s baked in. I mean, the ASX would maybe be one of those com­pa­nies from Steve and Lee’s exer­cise that would show it’s been well man­aged over the years. I’m not sure, I haven’t real­ly fol­lowed it close­ly over time, but it’s cer­tain­ly one that’s grown from when it was owned by all the stock­bro­kers and then list­ed back in the, maybe, 90s, I think? It’s grown from there. So, yeah, a few chal­lenges, though. And of course, if we do go into reces­sion it’s going to face an even big­ger chal­lenge. It’s a mar­ket, so it clips a tick­et on the buy and sell but the vol­umes will be down in the share mar­ket. And of course, no new IPOs which is one of the areas that they make mon­ey from as well. So, there’s a few head­winds for the ASX going for­ward.

Cameron  38:22

I just added them to my super port­fo­lio today, Tony, don’t say that.

Tony  38:26

Well, it’s a good, like I said, it’s a con­trar­i­an bet. If this lady solves CHESS and the new CEO solves CHESS — I should­n’t call her this lady. If a new CEO solves the CHESS Replace­ment Sys­tem and con­vinces the reg­u­la­tor that they’re a robust plat­form that’s not going to have any more out­ages, then their share price will rebound.

Cameron  38:45

Fin­gers crossed. Thanks for that ques­tion, Samuel. Thank you for your answer, Tony. That’s all the ques­tions that we have for today. Two ques­tions. I like it. It’s a short day.

Tony  38:59

I’ll ask you a Ques­tion. How was your hol­i­day?…

Cameron  59:27

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