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


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


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


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


Cameron  36:36

And a shout out to the people at 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.