Cameron  00:07

Episode 531. We’re recording this on the ninth of August 2022. It’s about 2:20pm. The market’s having a good day I think, is it? The Fin said it was gonna go down this morning but I’m not sure that that happened. I haven’t had a look, but I wanted to start anyway by giving our apologies… yeah, market’s up today: 0.28% so far… Give our apologies to the family and friends of Olivia Newton John. Two weeks ago, we did an episode, I sang Let’s Get Physical, I called the episode Let’s Get Physical and I think someone told her and that killed her. It was too much, my rendition of Let’s Get Physical, and she passed away today or yesterday, one of the too.

Tony  01:05

We even shot that video of me in the gym.

Cameron  01:11

I was listening to the song over the weekend before she passed away, it came on, and I was just thinking, like, when you listen to that song, it’s all about having sex. It’s a very, very, very direct “I want to have sex with you song,” and the film clip being this Richard Simmons/Jane Fonda and Jazzercise kind of thing, it’s a classic piece of 80s misdirection.

Tony  01:38

That’s why the song was banned.

Cameron  01:41

Was it?

Tony  01:42

In some states in the US, it was, yeah.

Cameron  01:44


Tony  01:45

So they said on the ABC this morning. We actually met her very, very briefly five or so years ago; she was in Melbourne at a thing called, I think it was called the Young Presidents Association, that we knew someone who was in who invited us along-invited Jenny along, I went along as well, and Olivia was there. She was a tiny, tiny thing. We’ve got a history of producing singing budgerigars in Australia. But look, yeah, I mean, it’s not great news. She’s battled with breast cancer for a long time, which is a cause near and dear to our family, and she’s done a lot of work to help in that area so good on her.

Cameron  02:21

Indeed. I read in the ABC this morning that she turned down the role of Grease originally because the role was supposed to be an American and she didn’t want to do the accent, and so they said, “oh, that’s fine. We’ll just change it make it Australian.” And she was twenty-nine when she shot Grease, seven years older than John Travolta was at the time. Supposedly playing a high school student. Didn’t matter, it was great, she was great in that. Awesome.

Tony  02:49

Yeah. And Judith Durham also passed away, as well.

Cameron  02:54

Judith Durham, that’s right. Two Australian singing legends.

Tony  02:58

Yes. And I’d probably have earlier memories of Judith Durham, I mean, the Seekers were very, very front and centre in my early childhood, memories of Morning town Ride and all those kinds of songs, New Day Dawning, Carnival is Over.

Cameron  03:16

Pretty sure the songbook that I had in primary school where we’d sing songs every morning had a couple of Seekers songs in there. Well, moving right along, let’s talk about the portfolio, Tony. Well, the markets had a good week, more or less. It had a bit of a bad day on the third, but it recovered. We’re still underperforming for the financial year; I think we’re up about 5% versus the All Ords 200 up 10% for the financial year. Normally it’s up 10% in a whole year, it’s like 10% a month in. Our top performers for the financial year are IGL 28%, BFG 21%, AMO 19%, TRS 90%, and LAU up 15%. But from inception, it hasn’t changed much from last week. We’re up about 18% over the, what is it? Two and a half years more or less. No, nearly three years. We’re up 18% per annum roughly over the three years versus the ASX 200, which is up about 6% per annum over three years. So, we’re doing about… we’re not up at our 19.5% goal, but we’re doing three times as good as the ASX 200 versus twice as good. So, we’re beating it on that metric. Best performers since inception, including closed positions: GRR up 184%, C6C 177%, FMG 87%, IGL 63%, and CAA 59%. So, not bad. Not bad with those guys. A couple of double baggers there over a couple of years.

Tony  05:12

Yep. And just echoing what you said in the last week or so, AMO is up 10.6%. On the flip side, the biggest downturn was for New Hope Coal, down 7.7%.

Cameron  05:24

Coal’s taking a bit of a beating.

Tony  05:26

Yeah, it’s coming off a little bit. A lot of the commodities are at the moment, we don’t have much on the sell list for commodities at the moment — that isn’t a Josephine, anyway.

Cameron  05:34

Yeah. There’s a lot of things coming out of Josephine status. I picked up about eight or nine things that I could buy this week, filled up and portfolio. But still a lot of things as we’ll see when we get to the Q&A, a lot of people are really itching to buy into C6C again now that aluminium — sorry, copper is not a buy, but it’s going back up. We can’t buy it, unfortunately.

Tony  06:02

No, that’s right. We are pre-empting the Q&A. No, it’s not quite a buy yet, I don’t think. Although, BHP thinks it is, they launched a takeover bid for OZ Minerals, largely to get their hands on some copper mines that OZ Minerals has.

Cameron  06:16

Not paying attention to the 2BL. They need to pay more attention. As Cosmin posted on the QAV club group yesterday, following the rules is important. He was talking about rule one. I think he’s kicking himself for not paying more attention to rule one on a couple of trades. For the record, the stocks that I found above the 2BL that were on the buy list this week — this isn’t all of them, these are just the ones that I didn’t already have in a portfolio — ASG Auto Sports Group, HLS Healius Ltd, GMA Genworth Mortgage Insurance, SKT (and I want to talk to you about that moving forward), Sky Network, NZM which is NZME, SM1 Synlait Milk (talked about them recently, I think), REG Regis Healthcare, they were the ones that I picked up that were barely above there 2BLs — most of these, barely. In fact, I’m actually looking at the chart I have for NZM now, it’s not above it. I don’t know what happened there. Okay, double check NZM before you do anything. I thought that was above. Now I’m looking at the chart and it says it’s not. Oh, no, it is above. It’s coming down, but it’s above. Yeah, yeah. I’m good. I’m good. Let me ask you about SKT, Tony. I sent you an email about this, but I don’t think you replied to me. So, SKT, Sky Network. One note, because I learned from my mistake last week and I Googled all of these before I bought them this week to see if there was anything in the news about them. And there was one thing about SKT: they have said that they’re currently negotiating to buy Media Works’ as radio and out of home advertising business. And the share price took a bit of a hit when they announced, when they confirmed that in the last week or so. I think it took a hit of about 6%. Still above the 2BL though when I looked at it, still on our buy list. You know, I don’t see that as a bad thing. It could go either way, but if they’re not being acquired, they’re making an acquisition, is that a risk factor for us that would stop you from buying it. Or steady as she goes?

Tony  08:27

I don’t think so. It sounds like it’s been factored into the share price. So, if the share price was down 6%, I think I’d be waiting anyway because I don’t like buying when the share price is trending down. I’d wait for it to turn up a little bit anyway, even though it’s above its second buy line. But no, as the acquiring company it’s not like they’re being acquired and have a fixed price in the market and the markets met that price, so there’s not much upside risk to that deal. This is a bit different. So, no, I think given the fact it’s been announced, it’s in the share price, the markets adjusted to that, if it’s still a buy, it’s still a buy.

Cameron  09:02

It dropped by 6% but then it started going back up. When I looked at it yesterday it was going up. I think it was 215 when I looked at it yesterday, its 220 today. So, yeah, it’s continued to go in the right direction. That’s good. Thanks for confirming that.

Tony  09:19

I can cross that email off my list without reading it.

Cameron  09:21

Yeah, there you go. 3PTL. Now Brett Fisher of the Brettelator…

Tony  09:27

*Crunching noises from Tony*

Cameron  09:31

That’s a loud crunch you just made then, Tony. Tell us about the loud crunch, Tony.

Tony  09:36

Oh, I will as soon as my mouths free. Very sticky. Thank you, Cameron. Cameron bought me a box of See’s Candy peanut brittle, which I assume came back from the US.

Cameron  09:49

It did.

Tony  09:49

Got through customs okay.

Cameron  09:51

Yeah, they don’t care about that. No, it’s packaged food, its shrink wrapped, it’s all good. It’s fine.

Tony  09:57

Yeah, it’s lovely. I feel like Charlie Munger here answering questions eating peanut brittle.

Cameron  10:04

I brought back a box for us and a box for you. I did think about keeping the second one and eating it myself, but Chrissy said, “no. Send it to Tony.”

Tony  10:15

Thank you, Chrissy.

Cameron  10:16

Its surprisingly good stuff.

Tony  10:18

Very tasty.

Cameron  10:20

And not overly sweet, it’s got a really nice flavour to it, you know, very nutty.

Tony  10:28

Yeah, a little nutty. Just hard to do when I’m trying to do a podcast. It’s very sticky as well.

Cameron  10:35

Sticky and nutty, your two favourite things in the world. Brett of the Brettelator sent an email. I think this was about HZN from memory.

Tony  10:44

It was, we were questioning the second buy line.

Cameron  10:47

Yeah, so I had been looking at the second buy line and the way that… We have an alpha version of the Brettelator that’s attempting to draw second buy lines which isn’t publicly available yet because we’re still beta testing it, I guess. I wasn’t sure about the way-I didn’t like the way it was drawing HZN and so I sent it to you, and you sent it to Brett, and Brett replied, and his reply was interesting. I was drawing its line through two points, and it was coming down in a certain way and the share price was already above it, and he said the problem is it’s not intersecting with the line, so there’s no third point. So, that’s a two-point line, not a three-point line. And that’s done my head in this week. So, let’s talk about that if we can.

Tony  11:37

Yeah, well, sure. So, the good thing about the Brettelator is it’s coded all of our discussions in the past, Brett and I, on three-point trendlines. So, you know, when we get real Poindexter questions about how to draw a line it’s good to have the rules, so to speak, in code. Not to say that we can’t change them if we think there’s a better way of doing it, but it’s good to go back to the rules and check it. So, I think Brett’s right; what he’s saying is that there hasn’t really been a trend established if we only have two points. So, if people can visualise the Horizon, this is the Horizon Oil share graph, there was a very late H1. The high point on the graph is late in the day, and then it dropped and then it went back up again. So, it’s kind of like half a “v” or a Nike tick or something like that. But we don’t have three points. So, we have an H1 and an H2, but they’re the only two points that we’re looking at. And I think Brett’s right, we need a third point. Typically, we want two peaks and then we can see the trend when it crosses, or to two troughs and then we can see the trend when it crosses. We haven’t been able to do that. There have been cases thinking back where we’ve had almost a straight line and then there’s been a turn up, so we’ve actually got three points on those lines. I’m thinking about oil in particular, going back to the COVID days where we had, again, an H1, steep drop off, there was a point there at the end of that month, and then another steep drop off and another point before it turned up. So, we did have three points there. So, there’s kind of at least two months’ worth of data to establish the trendline before it turned up.

Cameron  13:14

Okay, so when I’m looking for these 2BLs in particular, I need to make sure that the price line is cutting through whatever that buy line is that I’m drawing.

Tony  13:28

Yeah. I guess the point is you ideally want to have two peaks. So, an H1 and an H2 peak, and then the price line intersects the line drawn across those two peaks. We’ve had cases, though, where we’ve had three, maybe even more points on an almost straight line, and then an upturn, and that’s also breaking the trend as well.

Cameron  13:52

Okay, good reminder.

Tony  13:55

Yeah. Well, in Horizon’s case, the Brettelator goes back to an earlier date to draw its buy line, so it’s been above a second buy line the whole time.

Cameron  14:05

Since, sort of, late February, I think. Anyway, okay. Thank you to Brett and yourself for clarifying that for me. For people who are listening to this going “I can’t follow this because I can’t see it,” I’ll post it in the Facebook group so you can see it. Catchphrases: I did say at the end of the last show in the club edition that we needed a catchphrase to end out the show. Simo emailed me a couple of suggestions. He’s obsessed with time travel, apparently. He said “QAV won’t change your past, but it will change your future.” “It’s not a time machine, but thanks to QAV my future looks goood.”

Tony  14:51

They’re both good, well done Simo.

Cameron  14:53

I played around with a bunch: “if it is to be then it’s QAV.” Rhymes — doesn’t make a lot of sense — but it rhymes. I went through, “it’s not about intelligence, it’s about a system.” “It’s not about your IQ, it’s about your IQAV.”

Tony  15:10

Yeah, that’s not bad.

Cameron  15:11

“What is your IQAV?” The one I came down to, though, is “slow and steady wins the race.” When I think about QAV, when I’m trying to boil it down to what the core principle of QAV is, I think that’s one of them anyway. “Slow and steady wins the race.”

Tony  15:31

Yep. Yeah, no, they’re all good.

Cameron  15:33

Did you come up with any?

Tony  15:35

Oh, just the one I’ve always used, which is “I can make you a millionaire, I just can’t do it overnight.”

Cameron  15:42

I thought it was “goodnight from him, and good night from me.”

Tony  15:46

I thought that’s what you meant last week when you said we need a catchphrase. I thought it was a sign off catchphrase.

Cameron  15:51

Well, it is. It is a sign off catchphrase. Yeah. “And remember, as we always say…” We need something to put in there that’s unique and original and clever and can’t rip off the two Ronnies. Even though you are wearing Ronnie Barker’s glasses.

Tony  16:09

I like Simos: “QAV won’t change your past, but it will change your future.”

Cameron  16:13

Well, okay, good stuff.

Tony  16:15

It’s hoping for the better.

Cameron  16:17

We’ll go with that one for now unless somebody comes up with a better one. There’s a coffee mug in it for whoever comes up with the best catchphrase.

Tony  16:27

How are the coffee mug giveaways going?

Cameron  16:30

Oh, good. I’ve given out a few this week, I sent out a few to people. I sent them out the same day I sent out your peanut brittle. They didn’t get peanut brittle. I’m sending about now to people who refer a friend who puts their name down. When you sign up to QAV Club you get a little pop-up box that says “where did you hear about us? If it was a friend, tell us who it was, and we can send them a little gift.” I’m sending those people a coffee mug. Sometimes people go “I heard about it from a friend,” but they don’t give me a name so I can’t help you there. But if they put your name down, I’ll drop a coffee mug in the mail to you as a little token of our appreciation.

Tony  17:10

It’s not as good as the peanut brittle.

Cameron  17:14

Next time I’ll come back with a caseload of peanut brittle, and I’ll send people a box of Warren Buffett’s peanut brittle. What have you got to talk about this week before we get into the questions, Tony? He’s pointing at his mouth.

Tony  17:31

Maybe peanut brittle wasn’t a good idea. Not a whole heap. I’ve been almost glued to the commodity charts for oil and for gold — the Australian gold chart — because they’ve been bouncing around a bit and getting close to actionable breakouts, or the reverse. Oil has been flirting with its sell line, which I peg at about $88.80. I did see it’s gone up again today, so it hasn’t quite crossed. It got as low as $92 or $93 at the end of last week, so it’s getting pretty close. So, I’m watching those. And on the gold side, the AUD gold chart is no longer a sell. It’s back into buy territory but it’s still Josephine, so I’m not going to rush out and buy any gold stocks. But I did put the brakes on selling West African Resources. I was working through — over the last week or so since the Australian Dollar gold became a sell — selling out, and I just put the brakes on that now because it’s climbed up above that sell line again.

Cameron  18:29

And how far away is it from crossing 2BLs?

Tony  18:33

A long way. It’s just a few dollars about the sell line. I think from memory the figures are the sell price is $2,550, and the price today was like $2,560, something like that. So, it’s very close.

Cameron  18:47

And you’re going to do a pulled pork for us today.

Tony  18:49

I am. I’m going to do a pulled pork on Kelly Partners. That was a request from one of our listeners two weeks ago, and actually having gone through it today its quite a good one to do. It’s a very interesting company again — well, in a different way to Soul Pattinsons last week, but that was also an interesting one to research. So, Kelly Partners isn’t on our buy list, although I’m pretty sure it was early on. I can remember looking at KPG a year or two ago. The company itself is essentially a roll-up of accounting firms, chartered accounting firms. They basically have, I’ll call it a franchise mode; it’s a partnership model anyway, where they provide the back-end systems and the brand and the marketing, and then go and take 51% share in local accounting firms and aggregate them into a network. It’s mainly based in New South Wales, but they have one or two in Victoria, and they even have one overseas, one accounting firm overseas in Hong Kong. They focus on the SME market so they’re not trying to take over or not trying to muscle in on the Big Four accounting firms’ territory, the PWCs and KPMGs and that kind of thing. But they’ve been pretty successful in starting partnerships with these small accounting firms and they currently have twenty-nine businesses which they’ve acquired since listing, which is only in the last couple of years. So, basically, they’re taking over tax accounting firms, but they are branching out and offering other services that the accountants can, I guess, bolt onto their businesses like audit, corporate advisory and acquisitions, support for acquisitions. So, they’re able to offer additional services to just the straight tax accounting, which is, I guess, part of the attraction of selling out your business to Kelly Partners. It looks almost like a franchise relationship to me but they call it a partner-owner driven model. So, they’re basically becoming partners in the business, even though they take 51%, and keeping existing accountants in place, and then improving the local business with their back-end systems marketing and these additional services. Some of the strengths of this model is because they are accountancy and tax accountancy businesses, most of the revenue, in fact, something like 99%, is recurring. So, that’s a nice stable business model to have; you’re not spending a whole heap of cash going out trying to find new business or even retain your existing business. Essentially, this company, Kelly Partners, looks like a roll-up to me. So, we’ve talked about roll-ups in the past where someone is attempting to consolidate a pretty fragmented industry, and at the moment this company has like less than 1% of the market share in the SME accounting branch business. So, it’s a large market, there are heaps of operators from one-man-bands through to small teams of people. The interesting thing about this company, which I think is why it was referred to have a look at for a pulled pork, is that the owner, Mr Kelly, is applying a lot of Warren Buffett’s philosophies in his business. So, they’re not issuing shares to acquire new accounting business, which I think is an interesting strategy because it means they have to raise debt. We’ll come back to that in a little while, but he’s taken the Warren Buffett philosophy of not issuing new shares so you’re not diluting your current shareholders to buy out these accounting firms. And he’s also not selling the businesses once they’re acquired. So, once they’re in, they’re in for life. Some of the benefits of this model are the business systems are provided by Kelly Partners and that improves the efficiency and services of the accounting firms they’re acquiring, which means that their profitability and sales go up. There’s no doubt that taxation business is never going to get any simpler, it’s certainly becoming more and more difficult with compliance regulations and increasing complexity. So, I can’t see there being a shortage of need for accounting firms going forward. They’re creating, I guess, a version of the network effect which we’ve heard about before in discussing technology stocks, where if you have enough eyeballs it becomes a sort of self-perpetuating machine because they can cross sell other services into the accounting networks, there’s economies of scale. And as more accountants become part of this business model and like it they provide more referrals, and so the business becomes bigger. The owner of the business talks about building an economic moat, which is something that Warren Buffett talks about. But he’s essentially saying this network effect allows them to build a moat because as their economies of scales get better as they provide more and more services, then it becomes harder for someone else to compete against them. You basically got your big four which is a space they’re not playing in, and then your individua one-man band operations, and then you’ve got someone in between like these guys. If someone tries to replicate the model, they’ve got to invest quite heavily to do it. The business has been growing quite healthily and they’ve actually, on a revenue basis anyway, achieved 30% revenue increase CAGR in the last five years. So, it’s growing quickly. One of the interesting things about the business is if people want to go and check out Kelly Partners’ website, they’ll see an ownership manual, or an owner’s manual on the website, which talks about a lot of the things I just had, but also goes further and talks about some of the philosophies of the business. And in this ownership manual there’s a couple of slides on some of the philosophies of Mr Kelly, including a checklist he’s put together from The Outsiders, the book that we have spoken about before which was written to talk about companies with outsized returns who don’t play by the rules. And The Outsiders checklist talks about having the founder and CEO making your capital allocation decisions, having a determined hurdle rate for those capital decisions, and in this case, they want a 20% return on invested capital after tax. They calculate returns for all internal and external investment alternatives and then rank them. They’re always on the lookout to repurchase their own stock and they’ve done a little bit of that, and they prefer to do that rather than to issue new shares. They focus on after tax returns and run all transactions by their tax council. Being tax accountants, they see obviously opportunities in doing that, because they can maximise the taxation position. They determine acceptable conservative cash and debt levels, which they have. Although I question whether they have conservative debt levels, but I’ll come back to that when we go through the numbers. Some of the important things: they consider a decentralisation organisational model, and Kelly Partners has fifteen central people in their services team, and they have three hundred accountants in the overall group so it’s very decentralised. 5% works in head office and the rest work in the branches, so to speak. Their return on invested capital is greater than 20% since IPO and they don’t like paying out dividends, so the yield on the stock is only 1%. So, they prefer to reinvest in their business while it grows. Their preference is to permanently own the businesses that they acquire. So, interesting that he’s put down in writing distilled wisdom of the book The Outsiders, which if people haven’t read, I recommend. It’s on our website. There’s a second checklist there as well about the common traits about The Outsiders, which is fed into the checklist. So, dividends are shunned, the founders are still owners in the business, they like buybacks, they like acquiring new businesses, decentralised organisational structure, no Wall Street guidance, so no guidance to the stock market. They do their own idiosyncratic measurements of the business, their own metrics. So, for example, he’s listed Buffett as having a metric of how much float they hold, and they have a focus on taxation. In the same owner’s manual, there’s also another page which I won’t go through, it’s a similar sort of page, but it comes from a book called 100 Baggers, which I haven’t read yet, so I might go and pick that one up. And again, it lists ten checklist items from that; like, for example, operating in an unpopular and fragmented industry, high gross profit margins — Kelly Partners has 60% — owner-founder, etc. And there was also a reading list at the back of the owner’s manual. Most of them we’ve covered, like The Outsiders, Common Stocks and Uncommon Profits by Philip Fisher, The Little Book that Beats the Market, Damn Right by Charlie Munger, Titan which was the Rockefeller story, Dando Investor, The Snowball, The Intelligent Investor, the Warren Buffett Way. So, it’s actually a good little thing to read through. So, Kelly Partners is trying to implement these principles, and I applaud them for that. However, it’s not a QAV stock. It has been in the past, but currently it’s not. Just to run through some numbers: it’s currently a small, thinly traded stock. The ADT is only 77,000 which will suit some people, but not a lot. The market cap is $225 million and I’m doing this analysis on a $5 share price. The yield as I said before is less than 1%. This is one of the few stocks that we have, that we look at, which has the share price above the consensus target. So, the people who do cover this, and there aren’t many, think it’s overvalued. And its Pr/OpCaf is 12.8 times, so on our basis we think it’s overvalued too. The financial health I wanted to spend a little time talking about; so, the financial health for this company is marginal, and it’s been marginal for the last couple of halves. So, it’s a steady financial health but it’s not liked by Stock Doctor’s system, and the main reason I could see while having a quick look at the Stock Doctor financial health ratios is there’s a fair bit of debt. Liability to assets, liabilities as greater than assets, which is something stuck up to focuses on, and the quick ratio is low, so they can’t find cash quickly if they need to. And the company looks like it’s about a bit over 70% geared. Burrowing into their balance sheet, it seems to be the case that what they’re doing is they’re borrowing to acquire these individual chartered accounting businesses to bolt on to Kelly Partners, and that’s an interesting way of doing it. I do question whether that’s a mistake or not. I get the whole, “I don’t want to issue new shares and dilute current shareholders,” but the classic business model for a roll-up is to do exactly that: to leverage off the high PE ratio. So, in this case, the PE ratio for Kelly partners is 30 times, which is quite high. So, you’re issuing less shares to take over a small accounting firm, which I would guess on the market might be getting a PE of 5 to 10. Small businesses that aren’t growing dramatically tend to be sort of around 4/5/6 PE ratio. So, in a nutshell, if you could do this, one Kelly partner share could probably buy four or five accounting companies. It actually traditionally makes sense to issue shares in Kelly Partners to take out these other smaller companies, but they’re not doing that. It does, I think, weaken their financial position, and Stock Doctor thinks that as well. So, they are fairly heavily indebted. Just quickly run through the numbers. Stock Doctor actually has them as a negative NTA, which will be because they’re carrying goodwill, but the net equity per share is 98 cents against the share price of $5. So, they certainly are nowhere near book plus 30%. The PE is also hampering their growth over PE score, it’s currently 1.08. Even though they’re achieving 21% growth projected for the business, the PE of 30 makes that metric fail on our checklist. On the positive side, they’re still 52% owned by directors, so very much a founder-led business. On the manually entered data side, there’s no record low PE. The stock has been going up for quite a while now, but it’s not a new upturn, and they just fail on consistently increasing equity; it was close, but there was one period where it was a little bit below. All in all, five out of fifteen for quality 33% and a QAV score of 0.03, so well below our cut off. And I think my summary is two issues: potentially too much debt, they’ll probably argue if they were here talking to us that the company is growing enough to reduce that quickly, but at the moment the metrics are too much debt. It also fails on the valuation metrics. So, again, it’s a growth company and people are factoring in growth until the end of days in giving them a PE of 30, so that’s an issue. The question with roll-ups is always what happens when they get to a mature stage, and they can’t find any more accounting firms to acquire. I think in this case, given the fragmentation in the market that’s a long way down the track, but it’s still going to happen at some stage. That’s one issue and the other issue is debt. You know, if they ever asked me for any advice, I’d probably like to see them issue some shares and to take out some of the accounting firms that they want to acquire next and pay down some of the debt.

Cameron  33:02

And why did you do this? What is the pulled pork? Was this a request from someone?

Tony  33:05

It was, yeah, we had a request about two weeks ago to do it. Someone suggested this. I think it’s — I’m not sure of Mr Kelly’s first name, John Kelly — is talked about as being the Warren Buffett in Australia.

Cameron  33:18

Oh yeah, well, it certainly sounds like it from what you read out, the sort of approach that he’s been doing.

Tony  33:24

Certainly been influenced by it. It will be interesting if there’s some kind of downturn in the business or in the economy and their PE comes down, it might come back on the buy list for us.

Cameron  33:33

It was Lee, Lee Gant who asked for that one. So, there you go, Lee, it sounds like a really interesting and well-run business.

Tony  33:43

Yeah, it does. There’s a question mark on the debt levels, but certainly everything else looks very interesting and they’re trying to do the right thing.

Cameron  33:49

Yeah, I really liked that: publishing the owner manual, and the list of the books and the philosophy and the checklist, and “this is how we run our business.” That’s terrific.

Tony  33:58

Yeah. Very transparent and very upfront with someone who might want to sell their business to them, they know what they’re getting into. Yeah, that’s good. And I urge people to go and have a look at it because there is a list of books there, which if they haven’t come across before, I’d certainly endorse each of those books to read.

Cameron  34:15

We should try and get Mr Kelly on the show.

Tony  34:17

Yeah, he can you can tell us why he prefers debt to issuing shares.

Cameron  34:21

It’d be an interesting conversation, for sure. All right. Thank you for that, TK. Kelly partners, KPG. Let’s get into some Q&A. Kush wants to know if you would mind doing a pulled pork on CIA at some stage?

Tony  34:37

Yeah. Have we done CIA?

Cameron  34:39

I’ve done a very long series on the Cold War show about The CIA. I think we probably have done CIA at some point.

Tony  34:49

I think we have, I’m happy to do it again though. That’s fine.

Cameron  34:53

I searched in my notes on CIA, I’m getting a lot of stuff about black torture sites in the middle east and stuff.

Tony  35:01

Champion Iron is the company.

Cameron  35:03

Yeah, but I wouldn’t have written that in my notes.

Tony  35:05

Oh, okay.

Cameron  35:06

I can’t see them as a pulled pork in recent history.

Tony  35:12

I have a vague recollection.

Cameron  35:13

Oh, here we go. January.

Tony  35:15

I was gonna say, I was a Cape Schanck when I did it, I’m pretty sure.

Cameron  35:17

There you go, January. So, QAV Episode 500, Kush. Check that out, have a listen. If you think it needs an update, let us know, but probably not a lot has changed since then apart from if their reports have come out. Probably their half year report come out after that, and the full year report should be out now, or soon to be out. Graham asks, “when AFIC reports on value of net asset backing, is this the value of the shares they have in the portfolio or is it the net asset value within the shares in their portfolio?” AFIC you’ve talked about many times before: Australian Foundational Igloo Company, is that it? They make igloos, I think.

Tony  36:07

Yeah, the other one. Australian Foundation Investment Company.

Cameron  36:10

Oh, not the igloo business. The igloo business last time I looked was struggling.

Tony  36:16

Sales were melting down. Yep.

Cameron  36:18

Well, they always said their salespeople were so good they could sell igloos to Eskimos, and that’s their entire business. Well, turns out, they weren’t that good. They couldn’t sell.

Tony  36:28

It turns out they’re still looking for Eskimos in Antarctica. It’s the other end.

Cameron  36:33

And they don’t like to be called Eskimos, or do they?

Tony  36:36

True, no they don’t. They’re Inuit.

Cameron  36:38

Inuit people. AFIC, Australian Financial Investment Company. They’re basically a LIC?

Tony  36:44

They are a LIC, probably the largest and the oldest. I think they’ve been around for almost as long as the stock market, and for a long time they were managed by JBWere, a storage stock broking firm in Melbourne. But JBWere were bought out by NAB, so they’re probably now being managed by an independent… well, they’ve always been an independent board of directors comprising of JBWere staff, but they would just be like any other publicly traded company now. But still, yeah, been around for a long time, large listed investment company. Generally seen as an index fund, but they don’t operate necessarily as an index fund. But they do try and keep pretty close to market weight of the companies they own. But to answer Graham’s question, the net asset backing is the value of the shares in the portfolio plus whatever cash and dividends they receive, not the net asset backing of the shares individually in the portfolio, if that makes sense. It’s the market price.

Cameron  37:41

Can you explain it to me again?

Tony  37:43

Yeah okay, so they will own a certain percentage of BHP as Australian foundation investments. So, the net asset value as far as Australian Foundation Investments is concerned is the share price of BHP. So, that’s the asset they hold, is a marker for the share of BHP. But BHP itself will have a different net asset value, which will be the underlying assets of BHP; the value of the iron ore mines, the equipment of whatever else they got, which will be different. So, BHP share price is usually always disconnected from its NTAs, net tangible assets, or its net asset value. But it’s the share price which Australian Foundation Investments uses to calculate their NTA.

Cameron  38:30

So, it’s just the sum of the prices of the shares that they own at any given point in time.

Tony  38:37

Yeah, and that’s one of the benefits of owning LICs, is because by law they have to tell you once a month what the value of their portfolio is. They mark to market. And then they also add in any cash they’re holding or any dividends they’ve received as well. And some LICs will have non listed assets and they’ll have to get those valued independently, too.

Cameron  38:59

But we stopped looking at LIC’s in running them through the QAV checklist a while back, you decided that was a little bit tenuous.

Tony  39:08

Yeah. So, particularly for ETFs, because the operating cash flow has more to do about the funds flowing in and funds flowing out: so, the people who are buying shares in the ETF. With the LICs, it’s a little bit different to that but it’s still not like the operating cash flow of a regular business, of an operating business. So, the operating cash flow for the LIC, like, if it’s receiving lots of dividends will look good, or if it’s sold lots of shares will look good. But if it’s chugging along not doing much operating cash flow would be almost zero. Yeah, so we took it out.

Cameron  39:41

Okay, thanks for that. The next question is from Liz, who’s asked “is copper a buy?”

Tony  39:50

And we’ve already answered: not yet. Looks like it’s getting close, but no, we still need to see it go upwards a little bit from where it is now.

Cameron  40:00

Yeah, so I’ve got XCU_ open in front of me on Stock Doctor. Pulling up my segment tool and, yeah, okay, so if I use March ’22 as the new H1 for the 2BL, and I use May ’22. May ’22?

Tony  40:23

Yep, I’ve got May ’22 as the H2.

Cameron  40:27

But May ’22 isn’t a peak, really, it’s a point but not a peak.

Tony  40:31

Yeah. Which is acceptable.

Cameron  40:33

But why would you use that, then, and not April ’22?

Tony  40:38

April’s a trough, part of a trough.

Cameron  40:41

No, its not.

Tony  40:43

Yeah, it is.

Cameron  40:43

How is it part of a trough?

Tony  40:45

One sides lower than the point, so it’s half a trough just like the other ones half a peak.

Cameron  40:51

Half a trough? But yeah, okay, but it’s a higher point than May. Why pick May? It seems a bit arbitrary to me. Why May and not April?

Tony  41:05

Well, first of all, if you use April there’s only two points in that line again. So, it’s not going to provide a great trend.

Cameron  41:11

If you draw it through April it crosses, the line crosses through it. If I extend the line out through March and April, it ends up crossing it, like, well it crosses it on the way down, but it crosses. But yeah, it cuts off the May point.

Tony  41:30

Yeah, so, one of the things we do when we draw these lines is if we have a point that’s outside it, we redraw the line to take that point into account.

Cameron  41:37

Even though it’s not a peak, it’s just a point.

Tony  41:39

Correct. It’s a point, yeah.

Cameron  41:41

So that puts, if we take it through May, as the L2 for the 2BL. Sorry, the H2 for the 2BL. It brings, I think, the point it’d need to go above, the price of copper would need to be about $8220. It’s currently about $7834.

Tony  42:02

Yeah, I think you’re right with those numbers.

Cameron  42:04

It’s on its way up. I mean, if I draw that line, continue drawing it down and look at the direction the price is heading in, it might cross it in the next couple of weeks if it keeps going up.

Tony  42:17

Yeah, I would think so.

Cameron  42:19

But that said, if I look at the MACD lines at the bottom of the chart here, it’s crossed over recently into negative territory. Is that buys or sells, or is that just moving average? That is moving average, right? 12269, okay. Well, I don’t know what I’m reading then. What does the red line and the black line tell me with the moving averages?

Tony  42:47

I’m really not a user of these lines, so I don’t want to venture an answer without looking at it in more detail.

Cameron  42:53

Me either. Ignore all of that about the MACD. Bottom line is no, copper is not a buy yet.

Tony  43:01

Its close.

Cameron  43:02

The next question is from James: “did TK buy a heap of C6C today just to prove that we should buy from the top of the list?”

Tony  43:09


Cameron  43:13

Well, they’re easy questions. We had no questions and I said to people, “give me some questions,” and I don’t think they tried very hard with the question.

Tony  43:20

C6Cs pretty small, too, I don’t think I’ll be buying that one. ADT of $52,000.

Cameron  43:28

Yeah, right.

Tony  43:29

Just on that, I mean, obviously BHP has seen some upside in copper by making this offer for Oz Minerals.

Cameron  43:36

Yeah, but, you know, they’ll regret their decision not to follow the rules of QAV. They have a low IQAV.

Tony  43:46

BHP doesn’t have a great track record of acquiring companies either, by the way. I guess for what it’s worth, and probably not much, market commentary around copper is it usually only turns up when all the cylinders are firing in the world economy. It’s kind of a proxy for world growth because you need copper for wiring, train lines, that kind of thing. So, coppers down for good reason at the moment. The world is not really going anywhere with all the problems it has, so it may cross and happy to buy it, but I’m not sure it’ll be a lasting trend. But I could be wrong.

Cameron  44:23

Well, somebody who think there’s money in copper are the two men who stole about $20,000 worth of copper from a building site in Melbourne yesterday.

Tony  44:35

That’s usually a sign the price of copper is high. Fools, they shouldn’t wait, wait for the cross. Give it back.

Cameron  44:41

Well, they’re gonna hold, they’re gonna sit on it. The price is going back up so they get to sit on it and just wait. “The two men were caught on CCTV stealing two drums of copper from a construction site on Victoria Parade in East Melbourne. At about 2:15 am on Wednesday July 20th, the footage has shown the pair struggling to load the drums into the back of an older model Ford Ute before they drive away. They fled towards Melbourne West according to police.” Reminds me a) of the scene in Breaking Bad where Walt and Jesse are caught on camera stealing containers of methylamine, I think, and struggling to get them down the stairs and all this kind of stuff. It also reminds me of The Wire for people who are fans of The Wire. One of the addicts in The Wire, Bubbles, was always going past building sites and stealing copper that he would then go back and sell to the building company on site. “Hey, we just found this stuff walking in the street, man. I don’t know, but if you want it, I’ll sell it to you cheap.” And the guy was like, “this is the fifth time you’ve done this to me in the last month.” He goes, “well, you know, if you don’t want it you can go pay retail for it,” and they sell it back to them for 20 cents on the dollar and uses that for his crack habit.

Tony  46:02

Those builders aren’t the kind of builders I know. Go and try that at the CFMEU sites and see how far you get.

Cameron  46:09

How many fingers you have when you walk away and legs that aren’t broken.

Tony  46:12

Yeah sure, come in. Yeah, bring the copper in and we’ll have a good look at it. Yeah, I’ll just close th door.

Cameron  46:18

Have a coffee.

Tony  46:19

Don’t worry. Our CTV cameras are broken at the moment.

Cameron  46:22


Tony  46:23

You won’t be filmed. That’s always a question I’ve got when two guys steal copper, a roll of copper and put on their old ute. Where do they sell it? Is it on a trading post? Two spools of copper, $50.

Cameron  46:38

They melt it down and sell it on Etsy as jewellery.

Tony  46:44

How do you melt copper down? Like, these guys are driving an old ute. Just take it out to the forge?

Cameron  46:51

Yeah, well maybe they have one, who knows? Anyway, good luck with their endeavours. Steven asks, “I’m curious to know the longest period of underperformance TK has experienced over the thirty years he has been investing.”

Tony  47:06

Yes, I went back and had a look. So, two years during the GFC I underperformed, mind you the market was going down as well. So, that was ’07 and ’08, but in ’09 I outperformed by 100% so made it all back. And then there were three other years over the period of my records where I have one year underperformance. So, that’s five years on, I think my records go back about twenty-two years, something like that.

Cameron  47:34

So, five years or three years?

Tony  47:37

So, I had the two years during the GFC and that was the longest period of underperformance, but I had three separate one year underperformance.

Cameron  47:47

Right, and you normally recovered after that one year strongly.

Tony  47:51


Cameron  47:51

And were those periods, the two years was obviously the GFC when the market was down. The other three years, did they coincide with market corrections or were they just…?

Tony  48:01

Just random I think, I don’t know. I mean, it happens. I mean, you know, you can be in the wrong sector, or whatever. It does happen. Just like it’s happening now for our dummy portfolio for whatever reason.

Cameron  48:12

KT has a question: “is TK fully invested currently, or still being cautious?”

Tony  48:17

Well, they’re not mutually exclusive. I am not fully invested, and I’m trying to get back into the market, it’s just taking time. I actually signed the forms to allow my stockbroker to claw money out of my bank account directly, which I’ve resisted for a long time, so now I can transfer big licks across. But it’s just been that the markets are still a bit volatile. So, you know, for example, today I bought some AMP, and I bought some last week, but in between the share price went down a little bit so I put the brakes on. So, it’s just really getting back into the market in an orderly fashion, I guess. Even though I’m still not trying to buy anywhere near the ADT volumes for a stock, I’m still trying to also break it up a little bit so I’m not going to push the share price up with my purchases.

Cameron  49:03

Yeah, right. There was a couple of large caps that came up for me yesterday, one was Healius, and I think GMA was the other large cap.

Tony  49:13

Oh, okay. Yeah.

Cameron  49:14

GMAs probably not large cap enough for you, though.

Tony  49:17


Cameron  49:17

Average Daily trade of $2 mil.

Tony  49:19

Yeah, no, not big enough.

Cameron  49:21

Healius is about $10 mil, though.

Tony  49:23

Yeah, I looked at Healius. I haven’t seen what it did today, but every time I went to buy it last week it was on a down day. Yeah, see it’s down a little bit today as well. So, I’d prefer, like, I’d prefer to see if that trend keeps going down or whether it turns up with some strength. I am trying to buy back into the market, it’s just taking a little while.

Cameron  49:42

Well, that answers that question. Last question from Simo, Simo of the catchphrase: “question for Tony. Can Tony please do a pulled pork on SDG, Sunland Group? It’s been a stock of the week recently. Had a good look, couldn’t see a recent breakdown.” Do you remember doing SDG?

Tony  50:04

Yeah, I do. Pretty sure I did that one. It’s a Gold Coast property developer.

Cameron  50:10

Not coming up in my list but I’ll have another look for you, Simo, and I’ll let you know.

Tony  50:18

Yeah. If we’ve done it, we’ll let you know, if we haven’t we’ll do it for sure.

Cameron  50:22

Okay, added to the list. That’s it for questions. Very light on questions recently, not a lot going on. I think people know everything.

Tony  50:31

It’s a smart group of people.

Cameron  50:35

Yeah. Let’s get into afterhours…

Cameron  1:09:59

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.