Welcome back to QAV episode 529. Recording this 26th of July 2022. How’re things in Sydney, Tony? Are you underwater today?
No, we’re sunnier today, it’s good. We’ve had three days of sunshine.
Yeah, there’s a few grey clouds around, but I’ll I’ll take that over a deluge of rain. So, otherwise its been good.
What else has been new with you this week?
Oh, not a whole lot. I got a COVID booster last week and then I had a couple of quiet days after that. My arm swelled up but I was generally okay. We were supposed to go to the Archibald to see the Archibald portraits before it shuts, but was just too unwell to go. So, we’re going in two days time. We’ll go along and see the portraits before the museum shuts down the exhibit.
Ah, my portrait’s still not in the Archibald this year. I’ll tell ya. Why are you finding that amusing?
How long ago was that painted?
Eh, five or six, seven years ago? I don’t know.
You can’t resubmit it, can you?
I don’t know. I don’y know what the rules are.
Well, first of all, is it meant to be somebody of a public profile, of public note?
Yeah, the media.
Oh, not just the media,
You know, film director, something, something… was on the front cover of the bulletin twenty years ago? I don’t know, not enough? Okay. Well, we’re gonna start with a sad note, I guess, this week. I want to give an RIP for our Melbourne QAV member and subscriber, QAV Club member Darren Lunny. He passed away at the end of June, we were advised yesterday. Photographer, former chief of staff and head of Channel Nine Specialist Investigation Unit passed away of pancreatic cancer, I believe, at 55. So, our thoughts go out to his wife Mel and their children, family and friends, of course, everyone in QAV Melbourne who knew Darren. I only met him once, I think, at dinner we had down there in May last year, and I looked at the emails and he said, “oh, I’m gonna be running late. I’ve gotta have a CT scan and they have to inject me with some stuff that makes my eyes go puffy and I don’t know if I’ll be able to drive.” But then he was fine, and he turned up and we did talk a little bit about his health issues then. I don’t think it was as serious as it became in the course of the following year. So, it’s always sad when we lose one of our members. So, yeah, shout out to Darren’s friends and family and hope you’re all doing okay.
Yeah, very much so. I’ll echo those sentiments and remarks, Cam, thank you. I just wanted to add to that, too, and I don’t know Darren’s situation, or his wife’s or his family’s situation, but it’s certainly a reminder to me to make sure that things are set up. Just review what I’ve got set up so that if something happens to me, Jenny can pick it up, or Alex can pick it up. So, check the password vaults, check the documentation on where things are, make a list of who to trust, who to ask for advice and help, how to access things. You know, the Ord Minnett website where our portfolios documented, document a plan. I don’t know, again, what Darren’s wishes were, but maybe someone in the family wants to continue with investing themselves in some particular way. Maybe not the way Darren was dealing with QAV, but there are, of course, other ways. Otherwise, I’d probably have to decide what to do with the shares, because our process is fairly actively managed. We can’t just let be ignored, it could go well, or it could wither and die. So yeah, I’m hoping that Darren did take the time to outline what his plans were. You know, I’ve always said to Jenny to take the money and put it into a large listed investment company like AFI, but even that’s not straightforward, Cam. I was reading in the Fin Review today because AFI are just releasing their — I don’t think it’s their annual results, but certainly their unaudited figures — and they’re trading at a 20% premium to their underlying assets, so it may not be the right time to put money into a LIC like AFI. And also too, I know that if you put AFI into the Brettelator it’s a sell at the moment. So, you know, I think I’ll probably have to review what I’ve written down for Jenny and just tell her to go through a couple of steps first before she does something like that if I go tits up. And there’s other things to take into account, like the capital gains tax position of whatever Darren had invested and what the superannuation situation is. So, I don’t know if Darren’s family are listening, but they should take this as — when things settle down, anyway — take this as a chance to seek professional advice on those kinds of issues and what to do. And the other thing with LICs which I know has happened to some of the larger ones — it doesn’t tend to; I can’t think of a case where it has during my lifetime — but there is corporate activity which can happen. So, they’re not always just set and forget. And the same with superannuation funds and managed funds, all those kinds of things: from time to time they will have reason to raise new funds, you know, put out a rights issue, there’ll be a merger and acquisition that might take place between two large listed investment companies or between superannuation funds, for example. So, decisions may need to get made along the investing lifetime of the person who takes over the funds. So, it’s not always just set and forget. So again, it causes me to review and just say, well, let me try and map out what to do and all the contingencies I can think of that might take place after I go. Yeah, so I echo your thoughts and it’s sad to hear of Darren’s passing, and I hope his family is okay and that he has taken the time to work out with them what needs to be done.
Yeah, it was suggested by one of our QAV Melbourne members who advised me of Darren’s passing that maybe one of us — somebody from Melbourne or myself — should try and reach out to his widow, Mel, and just not only offer our condolences, but say, listen, if you have any questions about what to do, you know, we can’t give financial advice but we can point you to someone who can. Or you know, here are the things that you might want to think about, you should talk to a professional about, et cetera, et cetera.
Yeah sure. That’s a good idea, I think.
All right, well, moving right along. Gold became a sell since our show last week.
Yeah, and I’ve been watching it every day because it’s just dropped below its sell price and it hasn’t gone above it again, so I have been selling my gold stocks. But it crossed the sell line and started to edge up and then go sideways and it’s been hovering just below it sell price, so I am watching it. And I can’t get out of my gold stocks all at once, it’s taken me a couple of days to sell them off and buy other things, so I’ve had that ability to watch the gold price. While I finished up dealing with the gold price, because sometimes just drawing a line on the chart wasn’t all that accurate, I went back to the very old three-point trendline calculator — the pre-Brettelator one — which allows you to put in an L1, L2, the dates, the stock price for L1 and L2, and then it tells you the sell price. I worked that out for gold and then have been checking that, and the gold price is below that by a couple of hundred bucks, so just watching it. It may cross above it again, but I am selling my gold stocks and buying other things like Macquarie Bank, JB Hi-Fi and National Australia Bank. I was buying Woodside, but it’s gone a bit below its second buy line, so I’m just paused on that. As you know, I’ve been kind of hanging on to gold for as long as I can because economically if interest rates are rising, if inflation persists, if we go into a recession, it’s usual that the gold price takes off, but that isn’t happening and rules are rules, so I’m selling.
And it’s very convenient for a certain QAV club member who will remain nameless who called me before we decided it was a go, and he said, “mate, I just screwed up. I just bought PRU, and it hasn’t crossed its second buy line, what should I do? Should I hold it? Should I sell it?” And I said, “well, let’s have a look at the gold price. I think you’ve got an out, I think you can say I gotta sell it because golds become a sell.” So, I think he did. He got a get out of jail free card there, he didn’t have to make a hard decision about whether to sit or buy.
I did say, though, I thought that if it was you’d say, “listen, if you’ve bought it and it’s going in the right direction,” it was going up, “probably just wear it and hold on to it. If it turns around, get out.”
Yeah, I probably would have but it’s different if the gold price is a sell, the underlying commodity’s a sell, I think.
So, that was very convenient for said person, whose name I will not reveal because I don’t want to embarrass him too much. All right. Iron ore not a sell, but close to the fudge line. Now, depends what chart you look at. If you look at the Stock Doctor 62% CIO China futures, it’s not quite a sell. The one I normally look at though, which is on some other website, “trading view” or something like that, it does look like a sell, but I think that’s the physical, not the futures.
I tend to look at the physical, but I must admit I use Stock Doctor which in this case… yeah, so it’s called Iron Ore 62% FE CFR China (TSI), which I think is a code, TR#. I think that’s actually an actual as well, but it might be a different grade, or something like that, to what you’re using.
Doesn’t it appear under the “futures” section of Stock Doctor, though?
No, it’s under the commodity section of Stock Doctor. There is another two which are futures second and futures third, TR#2 to and TR#3. Yeah, but regardless, that’s the one I’ve been using. Sounds like we’re not too dissimilar.
No, not too dissimilar, but one’s a sell and one’s not quite a sell. See, if I go into Stock Doctor in advanced charting, I go into folders… Oh, there we go. Okay, so under commodities?
No, it’s not. Oh, it is sorry, TR#. Yeah, that’s interesting. Because I’ve come into it from a different way, I’ve come into it from the front screen, the home screen, where it’s got the iron ore price and you click on Advanced, and it takes you to this one.
Okay, right. Well, I think it’s a future, so maybe the difference between that and the one that I normally use is future versus physical. So, which is the best one for us to use when we’re trying to determine if it’s a sell?
Well, I use physical — I should use physical, I thought I was using physical.
“Let’s get physical”
Do you have your link to the physical graph there? What’s it called?
So, we’re in US dollars here, aren’t we? US dollars per tonne? So, I’ve got a price of $104 on the graph, is that what you’re seeing?
Yeah. Versus Stock Doctor, which says for this future one, TR#, 105. So, there’s not a lot between them as you’re saying.
Yeah, no, Cam, I might have to take it offline and have a look at it further.
That’s all right.
Happy to use the physical, I thought I was using the physical on Stock Doctor, but that’s fine, I’ll have a look. Look, I think the iron ore price has been declining, so I’ve always felt like it’s not very far away from a sell anyway. Especially with all the things that are going on in China with the COVID lockdowns and now with the property market teetering on the edge. It’s really interesting to watch. I mean, the stories about the Chinese people who are refusing to pay their mortgages because the apartments haven’t been finished, which has also created cracks in the banking system over there. It’s very interesting. All right, I’ll check out trading economics for iron ore.
Okay. Interesting article in the Financial Review about a week ago by Jonathan Shapiro, “How pump and dump has duped penny stock investors.” “The corporate regulator said that more than 80% of share market traders who took part in organised social media pump and dump schemes realised the financial loss or zero benefit and collectively burned about $6.3 million a month chasing overhyped stocks. In an extensive reporting of the pump and dump activities of micro-cap securities released late this week, the Australian Securities and Investments Commission said it was able to quickly intervene and disrupt misconduct in the smaller end of the market after identifying suspicious behaviour. ASIC took the unprecedented step of posting on telegram chat rooms to alert users they were being watched and possibly breaking the law, an intervention that it says has put the brakes on potential market manipulation. It said smaller investors who were lured into penny stocks through social media campaigns generally lost money from day trading, highly volatile and illiquid shares that were only traded amongst themselves.” Oh my god. Now listen, we’ve talked a lot about this over the years, pumps and dumps. “Around March of 2021, ASIC estimated that around twenty-two pump and dump schemes a day were being operated involving stocks with market capitalization below $60 million.” You know, I’m sure this happens all the time, just with people taking advantage of amateurs and people that are greedy.
Well, yeah, I mean, my first thought was, is ASIC going into HotCopper and monitoring all the posts there?
They probably are.
They possibly are, yeah.
They probably are, I imagine so.
Yeah, but I mean it’s different versions of the same story. I mean, this story’s as old as time. Many years ago, it used to be gold prospectors with a vial of gold in their back pocket who’d pour it over the pan before they’d get the results, and it would look really good, and everyone would say, “wow, this is fantastic. It’s going to be the biggest gold deposit in Australia.” And of course, all the old hands were saying, “yeah, it doesn’t make sense that there’s a big goldmine outside of Sydney.” But of course, enough people get caught up in the moment to boost the shares and then lose their shirts.
I think it’s in the first or second episode of Deadwood, were Alma Garrett’s husband — some rich New Yorker who’s gone out west to be adventurous and make it rich — and Al is sort of working with a couple of cut-outs to con this dumb rich guy from the big city into buying a plot, a gold plot which is completely useless. But he’s got EB Farnum lined up to act as the other buyer who’s pushing the price up and, you know, playing him off against this guy deliberately to create a sense of urgency and push the price up and yeah, it’s just you know, fresh meat, right? Fresh meat comes to town, wants to get rich, and the old timers just rape and pillage.
it’s the old story, isn’t it? And it’s not just here too, it was the classic ones we talked about in America; the meme stock to the moon shares for, I think it was called Game Stock, the stock that they were pushing in that.
Yeah, Gamestop and AMC. Yeah. I went into a Gamestop just to see if I could buy some diamond hands. They didn’t, they weren’t selling them.
You didn’t ask for any stock tips while you were in there, did you?
I didn’t, it was a bunch of fat nerds talkin’ about fat nerdy shit.
You should have taken a video and posted it for all the millennials to see before they bought any more shares in Gamestop.
Yeah, but look, I think, you know, it gets back to the psychology of investing that we talk about a lot. There is definitely a sense of FOMO that we saw with lots of punters during the last bull run. If it’s not day trading or tech stocks or crypto, all that kind of stuff, people just get sucked into the stories about “oh, you can make 100% on your money very quickly,” or “1,000%” or whatever it is, and my hairdresser’s son knows a guy who, etc., etc.
Yeah. Luckily enough, we’ve been around long enough to know all the ways that behavioural psychology, or we probably don’t know all the ways, shouldn’t be so assuming, but we know a lot of the ways that behavioural psychology can work against us and we’re on the lookout for it. But I mean, apart from the fact that young males do have different wiring to older type males and are more risk taking than we are — particularly young males get carried up in the momentum of things and don’t know that it’s very risky if you’re taking stock market tips from the Uber driver and not from someone who’s an investor.
Yeah, take it from a podcaster. You know so much about the tricks of human psychology that it took me years to figure out how to trick you into doing this podcast.
A few cut outs and then…
Yeah. My twins, my twins were the cut-outs.
Yeah, got it, right.
I wanted to finish that segment by saying those times will come again, obviously.
All the time.
It will come back and those sorts of ridiculously high returns that you can get if you just listen to my quick three tips kind of thing. I don’t really know how we’re different from that apart from we tell people don’t listen to us, do your own work, follow the process. Don’t listen, you know, we might be wrong. Don’t listen to anything that we say, do your own work. Do your own research.
Yeah, apart from the fact that it’s a podcast, right? You could be listening to it in six months’ time, so what we’re saying is gonna be out of date as well as irrelevant to what you need at that time. So, yeah, do your own research. We’re teaching you how to do your own research. That’s what we’re trying to do.
And look, if you don’t think the system that we’re teaching makes sense to you, come up with your own system.
And modify it, change it if you want. I mean, you know, we’re just saying that “here is a system that has worked.”
Yeah, and I think equally as important as following a system slavishly is understand the underlying principles. I saw a quote just the other day which said, “if you can’t put the thing down in numbers, it’s opinion, it’s not fact.” So, it’s the underlying principles of what we do. We take the numbers, we crunch them, we spit out a list, we apply a couple of filters, and we decide that it’s okay to buy based on past performance and statistics. we’re not listening to CEOs spin their stories, we’re not listening to meme stock/crypto pushers and all that kind of stuff, we’ve got a process. Take that framework on board and if you need to modify it, modify it for yourself, but it’s the framework that’s important.
And the framework very simply is look for the businesses that are performing better than the other businesses, and that you can buy at a discount to what their valuation might be on a share basis. And your chances of them doing better are probably higher than the other companies. So, it’s not overly complicated, all the numbers in the spreadsheets are just a way to work out which businesses are doing better and are valued at a discount.
Correct. Yeah. And it’s directional, right? Like we said before, you’re better off buying from the top of the buy list but you don’t do badly if you buy from the bottom. So, you can make too fine a point of it, but the system’s really about the underlying framework rather than the actual mechanics of what the numbers have spat out.
But I’m sure a year from now or eighteen months from now we’ll have people saying to us: *”it is different every time. It’s always different, Tony, it’s never the same.”* (audio of Alan Kohler)
Well, yeah, you can sort of almost spot them. I mean, it wasn’t long ago people were asking me should they buy into lithium stocks, lithium mines, and I used to say, “yeah, about two years ago.” By the time it reaches your ears, it’s been through every other wallet in the investment community first, so it’s always something.
Well, one of the stocks that appears on our buy list fairly regularly is Beach Energy as they are now, used to be Beach Petroleum, BPT, now called Beach Energy. They came out with some results just in the last week or so. This is from ShareCafe: “the Kerry Stokes dominated Beach Energy yesterday revealed its best quarterly earnings off the back of the surge in global oil and gas prices since the invasion of Ukraine in late February and the harsh sanctions being applied by the West to Russia on many of its exports and finances.” La di da di da… “Beach said revenues during the June quarter of 2022 totalled $504 million, up 10% on the $458 million the oil and gas company reported in the third quarter of 2021/22.” So, what do you think about Beach’s results, TK?
Yeah, well, they’re just the quarterly numbers. So, don’t forget we’re in confession season, so they’re obliged to come out with their — I think, actually, resource companies and mining companies are obliged to come out every quarter with their top line numbers anyway. So, we’ll still have to wait and see what the actual numbers are as they hit Stock Doctor next month. We’re not too far away from that. But yeah, Beach Energy is doing really well. I hold it, it’s been good. I read recently that the sneaky Russians are thinking of constricting the pipeline to Germany even more. So, they shut it off for maintenance then they opened it up to 40%, then they found another problem and are now shutting it down to 20% again for more maintenance. So it’s just Putin playing games with the EU economy. But unfortunately for Germany, it’s gonna keep the gas prices up which will benefit Beach. It’d be great if the world was a happy place, I can’t see it getting there in a near future, so I suspect Beach will continue to perform well.
Well, I don’t know if he is playing games. I mean, the story is that they have turbines that need maintenance and they sent one to Canada, I think for maintenance, but the Canadians can’t send it back to them now because of the sanctions.
You think they would have checked that first, hey? It’s like, “ah, we’re gonna send you a critical part of our infrastructure to fix for us.” “Oh, yeah, sure. Hey, how are ya? Oh, yeah, send it over.”
They might have sent it before the sanction regime, before the invasion, I don’t know. Yeah, well, I mean, these things, you know, this is the side effects of the sanctions, right? Whether it’s deliberate on behalf of Russia or not, you know, these sanctions are going to have massive consequences — already are and are going to continue to have. Beach’s share prices is not doing too badly, like it peaked a week or so ago at a $1.86, its back down to $1.79 now, so it has spiked again in the last couple of days since this news came out. But it’s not exactly skyrocketing either.
It’s up 4% today.
Well, that’s good.
What did you say the price was? I’m getting $1.79?
Yeah, $1.79 today, but it was a $1.82 last week, and it was a $1.88 back in June. So, it’s crawling back up there.
Yep, we’ll see. I certainly can’t predict share prices and I can’t predict geopolitical events, but I would think given the way things are that Beach will continue to perform well. Anyway, I’ll await their numbers in Stock Doctor next month.
Well, I’ll tell you who else can predict things: Warren Buffett’s. There’s a story in Business Insider I read this week: “Warren Buffett’s Berkshire Hathaway has ploughed nearly $10 billion in Occidental Petroleum stock over the course of just twenty nine trading days this year, the famed investors conglomerate has amassed 182 million occidental shares so far, giving it a nearly 20% stake in the oil and gas company.” He goes on to say, “‘we’ve bought it in two weeks or there abouts, 14% of Occidental Petroleum. I find it just incredible.’ Buffett said. The ninety-one-year-old investor emphasised how absurd it would be to attempt to buy 14% of the nation’s farms, apartments, auto dealerships or anything else in just two weeks. Moreover, he noted that around 40% of Occidental’s outstanding shares were held by index funds that weren’t actively selling in the period, making Berkshires rapid accumulation of shares even more extraordinary. Buffett attributed Occidental’s huge trading volumes to ‘an unprecedented number of people treating the stock market like a casino and shares of America’s largest companies like poker chips. It defies anything that Charlie and I have ever seen, and we’ve seen a lot,’ he said.” What do you think about all that?
It’s pretty hard to argue against the guru, isn’t it, really? So, I think what he’s saying through all that is that he could buy a lot of shares in Occidental, because there are lots of retail investors prepared to sell them to him. And then I guess, in a kind of roundabout way, he’s saying, “oh, I’m a really successful investor, perhaps the best successful investor of all time, and you guys want to sell to me? Yeah, you might be treating this like a casino.” But the point he’s making is, there was a lot of money in the share market, and yeah, retail investors are trading in and trading out a lot.
The casino aspect of it in the years that we’ve been doing this, it’s the thing that comes back to me over and over when I talk to people outside of QAV. You know, I have a conversation with people in the street, man of the street, and they say, “what do you do?” And I say, “blah, blah, blah… oh, and, you know, we have an investing podcast,” and we get talking about investing. The sort of things that people usually talk about, which are tech stocks, and crypto, etc., etc. there’s really like a gambling casino mindset out there. Most amateurs that you talk to about investing, it’s very much casino mindset. And the first thing that you taught me, I think, when we started doing the show — certainly one of the first things that really sunk in — was the difference between an investing mindset and a gambling mindset. And I think that’s just a really fundamental starting point for anyone looking at investing in the stock market, is to understand the difference between an investing mindset and a gambling mindset.
Yeah, absolutely. And I’ve always told people who’ve come to me for financial advice that I can make them richer than they are, I just can’t do it overnight. And that’s the number one thing that people have to come to terms with. Because for a long time I would get people contacting me saying, “hey, I’ve just got this extra $5,000, what should I do with it?” It’s like, well, you can buy one share and it may or may not work, and I’ve got a 60/40 hit rate, so that’s the odds. But that’s like going to Flemington and putting it on the favourite in the last race. It’s like, that’s a different mindset to saying, “I’ve got this much money to commit for the rest of my life, this is how I’m going to do it. This is my system for doing it. I’m not just asking people for tips.” They’re very different mindsets.
And, you know, when I used to run a marketing strategy business, one of the things I would say to clients, new clients all the time when I’d asked them what their business strategy was, and they would mumble something under their breath because they didn’t have one. Like, nearly every business owner I ever worked with didn’t have a strategy for their business. It was like, “oh, well, you know, people call us and we sell them stuff, and that’s kind of it, right?” And hoping things will be better this year than they were last year. Like I used to say all the time, “hope is not a strategy.” And it’s the same with investing; just hoping that there’ll be a bigger fool than you down the track that will pay more for something than you pay for it is not a strategy. You might be lucky, but apparently according to ASIC with the pump and dumps that people follow, 80% of people lost money on them. Good luck to the other 20% that didn’t. I don’t know what they did differently to the 80%.
Well, you know what they do. Again, it’s just statistics, but the problem is those 20% will go and crow about how good they are at investing and the other 80% will go, well, next time I’ll know that when I do it again not to make those mistakes.
Those 20% have already got a podcast out, they’re already on Tik Tok. “How I got rich.”
They think they’re on Fin Tok. What’s it called?
Fin Tok, yeah. Here’s a story from the ABC I read this week: “profits, not war or weather, may be driving inflation and price hikes as more Aussies report financial pain.” Did you read this story?
I did. Yeah.
So, basically for everyone out there, what The Australia Institute I think it was that did this study says, they’ve crunched the numbers and most of the inflation that we’re seeing isn’t being driven by higher supply side prices or interest rates or anything like that. It’s mostly just by businesses taking advantage of the fact that prices are going up, so they’re pushing their margins up as much as they think they can get away with, which is driving inflation even higher than it would be otherwise.
Was it most of it or a good portion of it? I can’t recall the article.
It says, “behind much of the inflation,” “profits of behind much of it,” so I don’t know if that’s most or just a big chunk.
Yeah, it’s hard to comment without seeing some solid data underneath it. But yeah, of course business are trying to push their prices up, that’s what they’re in business to do. And that may sound sinister and in some respects, it is, because some people are trying to use any excuse to put their prices up. But I was thinking about it again a bit more after reading that article and it’s also I think a bit of risk management. Like, If I’m in business, I’m putting an order in — if I’m the coffee shop manager, right, and my coffee bean price is going up every time I put an order in, I may try and rise prices a little bit more than that to cover the next order because it’s going to be more expensive. So, there could be a little bit of risk management going on too. But, yeah, it doesn’t surprise me at all that as prices rise, people try and put their prices up even more for whatever reason. And the banks are the classic example. We’ve spoken about those in depth, right? Interest rates are rising, they’re not going to rise the deposit interest rates as fast they’re gonna rise the mortgage interest rates, which means their margins are widening. So, yeah, that’s definitely part of the cause/driver of inflation that’s going on for sure.
The article later on does say it’s the majority of it actually, it goes so far as to say, “the majority of the increase in living costs is due to companies marking up prices as much as they can. Profits have accounted for 2.5% points of the increase in the GDP deflator, about 60% of the total, The Australia Institute reported.”
Wow. And that could be, a large share that could be banks as I said. They’re going to increase their margins while they can, for sure. It’s no surprise to any listener of this podcast from Australia that we have four major retail banks, two major supermarkets, two major department stores, four or five major oil companies. It’s not hard to send price signals in the Australian retail space.
So, this is why we need a Marxist centralised price setting mechanism, Tony, where we get to tell everyone what the prices are, and they get locked in.
Well, that’s kind of what the heads of those companies do. Allegedly, allegedly.
They used to be called “safety meetings” in my past life.
Yeah. They’d have an industry safety meeting, just happen to talk about price while you’re there.
The safety of your profits is what you’re talking about, right?
The lawyers used to tell me if you go to a safety meeting like that and they start talking about price fixing, you’re meant to stand up and say “I’ll have nothing to do with this” and take your pants off and walk out. The reason you’d take your pants off is that everybody remembered you left the meeting before they talked about price fixing.
I like it. So, how many times did you take your pants off, Tony?
Oh, I never went to those meetings, Cam.
No, of course you didn’t.
I was reckless when it came to safety meetings, I didn’t go to them.
“‘I’m shocked that there is gambling going on in this establishment, shocked I tell you!’ ‘Here’s your cuts, sir.’ ‘Thank you very much.'” One of our very clever QAV subscribers Duncan sent me an email about asset washing during the week: “Cam, I’m currently listening to the comments you and TK made this week about asset washing. I have a background in tax advice and have some views on Part4A of the tax legislation and asset washing that I thought I would share. After all, everyone is entitled to my opinion 🙂 This is a part of the plan to put the fear of God into taxpayers. However, it is actually quite difficult for the ATO to make a watertight case barring blatant invasion activities. Part 4A is frequently…”
Sorry Cam, Its “evasion activities.”
Is that what it is?
Evasion. You’re saying “blatant tax invasion.”
What did I say, invasion? Yeah, yeah, well in that too. They want to stop invasion activities. I thought you were saying part 4A, IVA, stands for invasion.
Well, part 4A is about tax evasion, yeah.
But that’s not short for invasion with an “i”, is it?
Sorry. They don’t care about your invasion activities, just your evasion activities. “Part 4A is frequently considered when taxpayers do things like pre-paying their insurance, etc., in June to bring forward as a deduction into the current year. However, if there is a justifiable explanation of why you have done the thing in question and it makes commercial sense, like getting a reduced premium in the above example, then the ATO would have a hard time proving the balance of your motivations was weighed towards tax minimization. In other words, it is only likely to be applied in a situation where something did not make any commercial sense other than achieving a tax advantage, which does not in and of itself qualify as a commercial rationale for doing something. With asset washing, if you have a valid reason for the trades then I would not be too concerned by the prospect of being accused of asset washing, not that the ATO has sufficient compliance resources to apply to the likes of mere mortals like me. Though it may be a different case for people of TK’s girth.” I think he just means your walle, the girth of your wallet, TK.
Oh, right. He wasn’t fat shaming me there?
No, just your wallets being fat shamed. “But it is probably unlikely even for him, as I suspect he may not be in the top five thousand wealthiest Australians who are currently attracting scrutiny from the ATO after the top five hundred have been through the wringer. Happy for TK to correct me on this assessment though. The most important ally to have in your corner in such situations is self-serving documentation. In a situation where you have a documented QAV investment Bible containing rules and triggers for buy and sell decisions, and you can point to 3PTL related decisions and change profit figures of forecasts, etc., there will be plenty of documentation to justify the commercial motivations behind buying back a company that you’ve recently sold. If you feel particularly concerned about certain transactions, then record a journal note in your files jotting down the reason for your decisions; even better if it’s electronic and you can prove the date that the file note was created. Hope this provides some clarification. happy to clarify if there’s any further interest. Sincerely, Duncan.” What do you think about all that, TK?
Yeah, it’s great advice. Thank you, Duncan. And I agree with it wholeheartedly. The only additional point I’ll make is that, maybe I’m a special case, but yeah, the ATO just “having a look” can be a time-consuming affair to say the least. And I haven’t had that experience with the ATO, I had a minor experience with the Canadian tax office and the Canadian tax office is very similar to the Australian Tax Office. When I was living over there, I used to have to pay tax, I think their financial year ended 31st of March. So, I’d do a tax return in Canada, a tax return in Australia in July, and then I’d get a credit. I’d pay tax in Canada first, get a credit for the Australian one. All kinds of tax treaties would allow that, but there were some slight differences and I fell afoul of the Canadian taxation agency because in one of my returns they picked up that I was claiming for an accounting fee, which you were allowed to do unless they were accounting fees that pertain to preparing your tax return — which was allowed to be done in Australia. And so, I had to make a case, talk to someone, explain myself, and pay an accountant to prepare all the documentation to support our case and to deal with the tax office over there in the first instance. So, look, it wasn’t that difficult, but it did cost me money and it did cost me time. So, my argument isn’t that if I sold something in June and bought it back in July that I was tax washing, because Duncan’s right, I’m applying a methodology and I can point out to the tax office where I’m doing that. My point is, I don’t really want to spend my time justifying myself to the tax office and having them focus on me and ask questions about every line in my tax return, even though I can substantiate it. It’s a lot of time and effort and probably accounting fees to do that. So, that’s why I take a bit of a conservative view, and that was the advice from my accountants when I was using one of the big six accounting firms a little while ago to take that approach. So, yeah.
So, you’re Caesar’s wife, is what she’s saying, basically?
Have to be seen to be whiter than white?
Wasn’t a racial thing, Tony, but yeah. Caesar’s wife must be beyond suspicion.
Yeah. Right. So, it’s a good advice, thank you, Duncan. It might put other people at rest, and I think it might also mean that the dummy portfolio can just buy and sell according to our plans rather than taking into account wash previsions too, Cam.
Yeah. Okay. I think moving forwards we’ll do that then. Good, good.
Thank you, Duncan. Much appreciated.
Had a look at the portfolio this morning. For the financial year, the dummy portfolio is up about 3.8%, I think, versus the 200 which is up 7.37%.
Yeah. So, it’s kicking our ass for the first few weeks of the financial year. Since inception, though, the DP is up 17.78% per annum versus the 200 up about 5.5% per annum over the same amount of time. So, three times better we’re doing over the long haul, but not very good so far for the financial year. Some of the best stocks in this financial year, though: I’ve got IGL’s up 22% In July; KOV, Korvest, up 18%; New Hope Coal is up 15%; AMO up 14; TRS up 14; ECX up 12 and BFG up 12 in July. So, they’ve all had a really stellar couple of weeks, but not enough to pull our portfolio up above the All Ords for some reason.
I’m guessing our iron ore stocks haven’t been doing so great, is probably what’s holding down the portfolio. And it looks like we’re getting close to selling them anyway, so that might rectify itself fairly soon, I think.
Anyway, what have you got on your list of notes? Got a pulled pork?
I do. Yeah. So, I’m gonna do a pull pork on ACL, which was requested. So, thanks for the requests, we’ve got three, I think, now. So, I’ll do one today and then one next week, and one the week after to catch up with people’s requests. But keep them coming in, it’s good to have interest from people and we can answer their questions. But the pulled pork is on ACL, which stands for Australian Clinical Labs, which is the third largest pathology provider in Australia by revenue. They have something like just under a thousand collection centres, thirty clinics, and eighty-six accredited labs. We will all know ACL, I’m guessing, from getting blood tests done or COVID tests done and having the results sent back to us. So, that’s the business model: collect the test and send it to a central hub, have it checked, and then the results are sent back to your doctor or to yourself. That’s pretty much the company in a nutshell. There’s been a bit of a history in the pathology area, and I’m probably going back now at least ten years, maybe even longer, where pathology companies started to aggregate and then list, and then roll up. So, probably the other two big players in the market went through that process and they had stellar returns on the share market while they were in that roll up phase, and then they’ve kind of plateaued off from then. But certainly, there are some tail winds for this industry, because with an ageing population, and now with COVID and things like that, the pathology business has always been a good business. This particular company is on our buy list though, so it’s not only a good business, but we can pick it up for a good price, too. So, a couple of things that I just wanted to highlight. They have been growing through undertaking acquisitions but not on any sort of accelerated growth path, so its part of their growth business but it’s not the be-all, end-all of this company from what I can tell. It’s only been listed, though, for one or two years, so it may well continue down the roll up path. That’s something which I like in the early days because the growth is fantastic, but once they reach maturity and people start to work out there’s less and less companies they can acquire, then the share price comes off and the PE rerates down. And then once they reach the stage where they can’t acquire any more businesses and they become mature, yeah, they rerate again. So, it’s a well-worn path, but I don’t know if ACLs going down that path just yet. It has a female CEO, a lady by the name of Belinda McGrath. So, going back to what we said before about these companies statistically performing, or companies statistically perform better with a female CEO, that might be of interest to people. It certainly has benefited from the COVID bump, so in the last two years, their revenue is up tremendously. They do call out their non-COVID revenue in their last results, which were back in February, and the non-COVID revenue was up but only by 2.8%. So, it’s a much smaller growth for the rest of the business. So, that’s going to be an issue when and if we ever come out of COVID or something like COVID where we’re not doing as much testing as we have in the past, their sales certainly will come down a little bit. I think that probably is enough on the business side of things. On the numbers, the company is certainly large enough for most of our listeners to have a look at. The ADT’s $1.243 million, so that’s quite a large size. I’m doing my numbers on the share price of $4.77 which was on the weekend., but I noticed today, though, that the share price has gone up above that. So, people may want to do their own download and check the numbers. But it’s still, I think it should still be on the buy list. Going through the various items on the checklist: the price is below its consensus target. Just as an aside, I’m still reviewing what to do about that part of our checklist, as a listener raised with us a month or so ago that most stocks are trading below their consensus target because that’s the way the broking industry works. So, I’m just still deciding whether to remove or change that particular part of the checklist. But for now, this company is below its consensus target, so it gets a point. It does have a yield, a dividend, but it’s not that high. It’s 2.5%, so it doesn’t score on that metric. Financial Health, though, is strong and steady, so it scores on both of those. As an aside again, this is a high ROE company at the moment, it’s returning 39% on equity. So, I know that’s of interest to some people, it’s not part of our checklist but it’s certainly a good return on equity for this company. Pr/OpCF is 3.69 times, but the PE is 26 times, so this is a cash hungry business. It’s trading at a low multiple to the cash it’s throwing off, but then a lot of that cash gets absorbed in the running of the business and the PE is at 26 times which is earnings at the bottom of the statement of income, whereas the cash flows at the top. IV1 is below the share price. IV2 is $13, which is not just way above the share price, but more than two times share price, so it scores double for that. Earnings per share growth is very strong at the moment: 426% forecast, which means the growth over the PE is 16 times, which is like ten times above our threshold. So, it scores well for that, too. Interestingly enough, directors only hold 2% of the company, which was surprising to me given that it floated recently. This kind of fits the mould of a classic owner-founder company which has grown by aggregation and then listed, but that doesn’t seem to be the case. Although, I did look into the bio for Melinda McGrath, and she does have a very strong CV of running these sorts of companies in the industry. But the directors are only holding 2%, so it doesn’t score for an owner founder there. It’s the highest PE in the halves that we have — I think we only have a couple of halves, so it gets a minus one. That may be a little bit unfair given that we’ve only got a short-listing history. Anyway, rules are rules. It’s a new upturn, so it scores one for that. It has consistently increasing equity again, but only for a couple of halves. But all in all, it scores 12 out of 16 for quality or 75%, and a QAV score of 0.2. So, scores well.
Thank you, TK, ACL. Wonder if its big enough for me to put in my Superfund. Is it a top 300 stock, do you think?
I think so, yeah.
Alright, well, if you don’t have any other news, we’ll get into the Q&A?
Yeah, sure. I’m good.
Well, that’s debatable, but we’ll get into the Q&A anyway. Ed asks, “Cam, question. In previous shows TK has mentioned that with legacy stocks, to know when to sell them we should treat them the same as a QAV selected stock and let them go when they cross their three-point trendline.” Legacy stock obviously is a stock that he owned before he started doing QAV. “Does that rule apply to index tracking ETFs as well? For example, IOZ.” He sent a chart showing where it’s at. It’s below its sell line. Do you use that for ETFs, Tony? 3PTL?
I would. I don’t own ETFs, but I would. I’d use it for LICs for sure. So yes, I think the three-point trend line works for commodities. works for stocks and works for funds as well. Or ETFs. Definitely.
There you go. Ed. That was quick, hope that helps. Sam: “bonsoir, Cameron. TK asked for pulled pork ideas,” and he’s suggesting SOL here, which I guess we’ll do at a later point. He says, “I like this company because it’s like a Berkshire Hathaway based in Aus. It recently dropped about 40% in value or so, and over the same period increased its cash and cash flow significantly, so I’m thinking it’ll be close to QAV value when the next figures come out. But it’s not on the QAV buy list, but still a quality company at good value, so a good pulled pork candidate.” Do you know where it is, why it’s not on the buy list? Have you had a look?
I had a look today. It’s like a 0.9, so it’s almost on the buy list — or a 0.09, sorry. It’s almost on the buy list, so we can do a pulled pork on that. Yeah, I haven’t followed this company for a while. I know it merged with another big listed investment company called Milton, I think last year, so that may be why the operating cash flow went up, because it combined with another company. So, it will be interesting to see what the next results are like for Soul Pattinson.
Well, speaking of suggestions for pulled porks, Lee has suggested Kelly+Partners as a pulled pork candidate. He says the CEO openly talks about how the business is modelling Berkshire. Aren’t they Chartered Accountants, these people?
Yeah, I think so. Yeah, we can do a pulled pork on that one for sure. I’m not sure if it’s on the buy list at the moment, but it has been in the past. So, definitely, we can talk about it. Interesting how all these people are saying they’re the antipodean Berkshire Hathaway.
“No, I’m Spartacus. I’m Spartacus.”
And of course, Hamish Douglas always said he was the Warren Buffett down under as well.
Well, he’s not buying their shares, so…
Not like the guy that Charlie did buy the shares of.
Yeah, true. Maybe he’s the Warren Buffett down under. Anyway, happy to do that, Lee. No problem. I’ll have a look. Might be two weeks away, though.
Reg: “Question for Tony. Over the years, does he think he’s generally done better out of mining or industrial stocks — or other sectors for that matter? It seems to me that maybe mining stocks can have more volatility depending on the commodity price and economic conditions, and thus may be more potential upside if you can pick it right.”
So, yes, he’s right about that. But no, I haven’t had a favourite industry over my investment career and things go in cycles and industries will change from time to time. So, currently, in the last couple of years, it’s been dominated by commodities; first of all gold, and then iron ore in particular. But looks like that might be coming to an end now. But that’s only been in the recent past. I mean, iron ore did have another upturn, I remember buying Fortescue Metals Group when it was a buck and selling it when it was about five or six bucks. So, it’s not unusual to go through cycles like that, but, you know, I’ve been through cycles where airlines were predominant or had a larger part of my portfolio than their industry waiting in the ASX. Banks, definitely. I can remember back to the days, probably just before the GFC, when mining contractors were doing really well, and they were overrepresented in my portfolio. So yeah, it’s just different strokes for different cycles, really.
So, you don’t really have any sense that any particular sector’s done better than any others, they just have all done well at different stages?
Correct. I think that’s one of the strengths. I mean, you can wind back the clock and say buying and holding CBA from the float was a good investment or buying Amazon after the dotcom bust was a good investment. But they’re kind of one off, and to put a whole methodology around waiting for that to happen again is pretty tough. So, I feel like, and I’m pretty sure I’ve made money by playing the cycles, and as one cycle comes to an end, look for the one that’s emerging and get on to that. I don’t look for the thematic, it just happens that on the buy list you get more and more stocks in one particular industry which had been out of favour, but they’re just starting to turn.
Yeah, you just listen to the numbers. They tell you that this company is doing well, but it’s priced at a discount to its valuation.
Yeah, and if you think about it, usually the stories that are coming out for that industry are all bad. I bought Santos and Beach, and the dummy portfolio did too at a time when the oil market was grinding to a halt and people were saying, “oh, it’s the end of oil,” and you had all the problems with oil tankers afloat off the shores of California and Texas not being able to get their cargoes unloaded. When the problems beset the oil industry, of course, everyone jumped out of the tree saying, “oh, it’s the end of oil. We should all be investing in wind farms,” and “who wants to invest in oil anyway?” So, all that just played into our hands really, it turned out to be a good time to buy oil stocks.
You dropped your mate Vlad an email and said, listen, if there’s anything that you can do, I’m holding all these oil stocks.
No, I didn’t. I mean, it was the same thing back when airline stocks were cheap, even though they were good quality stocks, again, the market commentary about the sector is full of doom and gloom. There are plenty of stories being posted in the AFR about how Warren Buffett says he’ll never touch a an airline stock, and if he had a time machine the best thing he could do for investment was to fly back to Kitty Hawk and shoot the Wright brothers, and all this kind of stuff. So, all those articles get trotted out when the aircraft industry isn’t doing very well, the airline industry is not doing very well, but Qanas and New Zealand were big parts of my portfolio during their upswing. So, yeah, that’s just the way it goes.
Some horror stories about airlines in the media at the moment.
There are, aren’t there. Not looking forward to flying.
No. And prices are ridiculous. Taylor was telling me he’s been trying to book airfares to Melbourne for a couple of weeks and it’s like $400-$500 bucks each way they were trying to charge him.
Yeah, Jenny said the same thing just last night. And it’s even worse for business class flights, too. Its like going back to the 90s when it used to cost me 500 bucks each way to fly home for Christmas from Melbourne to Brisbane.
Yeah, I remember those days.
Or the 80s. When you had a paper ticket kids.
Yeah. And you could smoke on the plane.
With a carbon, carbon back to it, carbon copy in triplicate.
Like one of the old credit card swipey machine things.
Last question is from Ali. She says, the average daily trade on a share based on total share portfolio, a reminder of how to calculate it and the purpose of it, she would like?
Yeah, sure. Good question, Ali, and kind of fundamental one too. So, the reason for it is that we are trying to not hold on to stocks which are too big to get out of quickly.
No, too big. So, it goes back to the story that was in Nicholas Talibs book about whenever he walked into a movie theatre, he would check out the fire escape door or the exit doors and make sure it was big enough to get people out quickly, otherwise he wouldn’t feel comfortable. It’s the same thing with this. If we buy… oh, I see what you’re saying, sorry. Yes, the company is too small, the ADT is not big enough. Gotcha. Yeah, you’re right. If I bought into a small company I’d buy a large portion of it, and if it was larger than the ADT it could take me days to get out — or weeks, which I’ve learned the hard way. And you’re either pushing the price down as you sell or you’re not able to sell, you just can’t find the volume to get out. If that company’s share price is going down, it can be a horrible feeling trying to get out, forcing the price down and then not being able to get volume to be able to match your, your selling position as well. So, so that’s the reason for it. And I guess the reverse happens on the way up; if you’re buying into a small company and you have a lot of money to spend on the small company, you’re gonna drive the price up and it’s going to defeat your own purpose. You’ll stop buying it once your position has fallen, and the price will probably resettle back to where it was. So, you’ll nurse a loss. The rule of thumb is, again from Talib’s book, is to buy a position which is only 20% of the ADT. So, you want five times coverage so in an emergency, in a fire sale, you can get out. You can still have problems, of course, because there might be ten people trying to sell that day with a similar sized parcel, but you’ve got a better chance of getting out in a cleaner fashion than if you had 100% of the ADT, or 200% of the ADT, and you’re trying to get out quickly. So, that ties into portfolio construction, which we’re trying to hold fifteen to twenty stocks in our portfolio, which seems to be about the right blend between not holding too many so that you become more like an index and track the performance, and not holding too few so that the volatility can be stomach churning. So, fifteen to twenty stocks, take the amount of the total portfolio you have to invest, Ali, divide by at least fifteen, probably twenty, and then look at how much you have to spend on each share, and then find shares which have an ADT which is five times that value. That’s a good way to set up a portfolio and also to find shares which are big enough and liquid enough to not be that affected by your trading.
And you get the average daily trade figures straight out of Stock Doctor.
I do. Yeah.
Thank you, Tony. Thank you for the question, Ali. That’s it for Q&A this week, kids. After hours. Tony, what have you been doing for fun…
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