QAV 536 CLUB BEEP

Fri, 9/16 4:31PM • 1:09:36

Cameron  00:06

Welcome back to QAV, TK. Episode 536, we’re recording this on the 13th of September — what is it? 2022. 2:38 in the PM. How are you TK?

Tony  00:19

Yeah, good mate. How are you?

Cameron  00:21

Oh, I’m good.

Tony  00:23

You’re looking knocked around.

Cameron  00:24

I am knocked around. I got tagged a few times at Kung Fu on the weekend. Tony and I have just been ranting about the Queen and other things for forty minutes off air. I thought we’d better sit down and record an actual show. My big news I want to open this week’s show with, Tony, is Ralph Macchio, The Karate Kid, is sixty.

Tony  00:40

And why is that good news?

Cameron  00:43

Well, I didn’t say it’s good news, just big news, because that makes him older than you, and he’s doing karate on television. Have you seen how good he looks? He looks like he’s forty, this guy.

Tony  00:55

Okay, cool. Well, he’s a Hollywood star and I’m an on-air podcaster, so there’s a bit of difference in our genes.

Cameron  01:02

When he made the Karate Kid in 1984, he was twenty-two and he was playing a fifteen-year-old. Now he’s sixty and he’s playing a — I don’t know how old his character is supposed to be, but he looks forty/forty-five. The woman who he’s married to, the actress who plays his wife on the show… Have you seen Cobra Kai yet?

Tony  01:19

No.

Cameron  01:20

It’s great, you’re missing out. It’s great.

Tony  01:21

Okay.

Cameron  01:23

She’s like, forty, the actress who plays his wife, he’s 60. He’s really good. I gotta hand it to him, he’s looking good.

Tony  01:29

That’s pretty standard Hollywood fair, though, isn’t it?

Cameron  01:32

Well, it is.

Tony  01:32

The male never marries an older female, it’s always the other way around.

Cameron  01:36

Yeah, yeah. Jack Nicholson would be, you know, dating twenty-year-old’s when he was seventy.

Tony  01:42

So, what’s the point of the story? If I do karate, I’ll look like a forty-year-old.

Cameron  01:46

That’s it. You got to do more Karate if you want to look good like Ralph Macchio.

Tony  01:51

I’m looking at you, mate. You’ve got a busted lip, bruises everywhere.

Cameron  01:56

Yeah, you should see the rest of my body.

Tony  01:58

No, thanks.

Cameron  01:59

I’ve got no nipples left, because we were training today. We were doing this technique slamming our elbows into people’s chests. Chrissy was sparring with me, and she kept hitting my nipples with her very pointy razor-sharp elbows, just sheared them right off, bleeding. I’m like David Bowie in The Man Who Fell to Earth. Just no nipples. Sorry for that visual everybody.

Tony  02:23

That freaked me out when I was a kid, that scene in The Man Who Fell to Earth when I was about fourteen.

Cameron  02:27

Yeah, it still freaks me out when I watch it. Alright, enough about that. I gather you’re not interested. Following up on our musings on last week’s episode about which stocks have been driving up the ASX over the last six months, I ran a report on Stock Doctor. I don’t know why I didn’t think of that when we were doing the show the other day, it took me like one minute. I don’t know if you had a look at it, but yeah, it’s interesting. Like, these stocks that are driving the ASX up, I haven’t heard of most of them.

Tony  02:55

I don’t think they are driving the ASX up. I had look at what you did, by the way, I don’t think they are driving the ASX up.

Cameron  03:01

No? Well, they’re up.

Tony  03:02

Yeah, they are, but their contribution to the market cap is really small.

Cameron  03:07

Right. Newhope Corporation is on the list.

Tony  03:12

Yeah, but, okay, so what I did in response to what you did was to do another download, but also include the market cap.

Cameron  03:20

That’s smart, yeah.

Tony  03:21

And then get the weighting of that share in the market cap multiplied by the contribution. So, New Corp, if you do that market weighted contribution, contributed, like, 0.18%.

Cameron  03:32

So, did you work out what’s driving the performance of the All Ords?

Tony  03:36

I’d say nearly half of its CSL.

Cameron  03:39

Wow, really?

Tony  03:40

Which contributes 0.88% That’s the biggest. And then something called Pilbara Minerals is 0.39%. But we’re only talking about, like, over the last six months, my analysis is saying the All Ords is up 2.8% on an accumulated basis, which is similar to what Navexa is saying for STW. I think it’s saying 2.5. I had a couple of fudges in my analysis because I’m using Stock Doctor for the last six months price change, and I don’t know whether that’s, like, today, six months from today, or from the closing of last month, or whatever. So, it’s going to be out slightly compared to Navexa. Because when I ran the Navexa report it was today, six months ago, like, the 13th of march up to the 13th of September. Plus, the dividend yield in Stock Doctor just gives you the annuals, so I had to do a fudge and just divide it by two to add it to the capital gain as well. So, I think that’s, you know, a fudge and it’s slightly out. But anyway, I’m getting 2.8% for the All Ords and Navexa is 2.5 for the last six months, so they’re in the same ballpark. But when you market weight it, like, there’s a whole lot of ones which are just up a little bit. Like I said, the biggest one, CSL, 0.88% on a market weighted basis, it’s up 14.5% plus a dividend — so 15% roughly — over the last six months, but then when you blend it into the All Ords, it’s contributing less than 1%. Whitehaven Coal 0.36%, Mineral Resources 0.36%. So, there’s been some big moves. But yeah, it’s just up 2.5 to 2.8%. Most of its dividends to be honest. We don’t have CSL in our portfolio, so that drags us down. I haven’t analysed our portfolio; we’ve had a lot of chopping and churning and a lot of rule ones. So, I think that’s probably part of it as well.

Cameron  05:25

The stock that came up the top of my list is WYX, Western Yilgarn NL, up 4,500% in the last six months. You got that one in your portfolio?

Tony  05:39

No, it’s not even appearing. It’s not appearing in the ASX 200 when I look out at Stock Doctor. WYX? Not part of the ASX 200.

Tony  05:54

There’s a see of red in Stock Doctor, too, when you look at their financials. Negative operating cash flow, negative return on assets, negative return on equity, but their share price is up 4,500% in the last six months. Now, it’s trading at 16 cents, so, you know.

Tony  06:13

Yeah. What’s its market cap, though?

Cameron  06:15

Well, it’s huge. It’s $1,573 average daily traded.

Tony  06:23

Yeah, so it’s not going to, even if it was in the ASX 200, it’s not going to contribute much to the improvement in the ASX 200.

Cameron  06:29

It was trading at 0.003 cents back in May. Now it’s trading at 16 cents. So, congratulations to anybody that got in on that. They’re a mineral exploration company focusing on bauxite, located in Western Australia. So, there you go.

Tony  06:44

So, the NL usually means it’s a Netherlands company, doesn’t it?

Cameron  06:48

North Perth is where its head offices.

Tony  06:50

Oh, okay. Well, I don’t know why its got the NL after it’s name.

Cameron  06:53

Formerly Pacific Bauxite NL. Yeah, I don’t know about that. But anyway. So, having a look at these lists of these companies that have been performing well, is there anything to be gained for us from that? Or is it just not our game?

Tony  07:09

Yeah, not our game. I mean, it’s an interesting analysis to do. Like I said, I think CSL and maybe one or two other ones — Mineral Resources — have done well, and we don’t own them. But that’s always going to be the case. And like we said, I think in Navexa, I think from memory, it’s the ASX 200 accumulation index is up 2.5% and we’re down, I think, around three. So, it’s a short-term comparison. There are going to be periods when we underperform, it’s the long term that’s the important thing.

Cameron  07:39

All right, no problem. I just thought I’d throw that up there for conversation. You sent me something during the week, “the making of a millionaire study.” You want to talk about that?

Tony  07:48

Yeah, I do. I thought that was really interesting. And people might find it interesting too. So, found it on the interwebs. And it’s, if people want to read it, they can just google “themakingofamillionaire.com”. So, it’s a US study. It’s a study of over ten thousand US millionaires and it was done a couple of years ago, November 2017 to January 2018. It was looking for commonalities between America’s millionaires. But a couple of interesting things: so, the person who wrote the article went into the analysis thinking that “aren’t most millionaires just inheriting their money?” But that’s not the case, 79% of the millionaires in the States received no inheritance money, 21% received some but not enough to make them a millionaire, and only 3% inherited more than a million dollars. So, you know, being born into a rich family was one pathway to wealth, but not the overarching pathway to wealth. A couple of other things that came out of the study: “are most millionaires attending college? Yes.” So, only 38% of the general population graduated from college — which I find quite amazing anyway as a stat — but a whopping 88% of American millionaires did. So, quite a skew towards attending college. And I think that bears out in the next one: there is an even stronger correlation between higher education and wealth building. Then the person doing the analysis says, “but what about the cost of college?” But apparently, 62% of the millionaires in the study graduated from public state schools, while only 8% went to a private school. And if people don’t know the gap between them in America, a private, higher education can cost sort of $50-70,000 a year in the States versus a lot less for the public state schools. So, again, to me some of these things are kind of self-evident after the fact. So, it would make sense to me that if you’re not inheriting money, you’re going to college and getting a good job and then becoming a millionaire, you’re probably not going to saddle yourself with a lot of debt to go to college. So, that makes a lot of sense to me; the ones that are saddling themselves with debt, bearing that load, it’s impeding their ability to earn money. So, it’s not about the degree itself: the top five most common careers of millionaires surveyed were engineer, CPA accountant, teacher, management and attorney. So, most of those are professional careers. The survey is saying though, that they’re not people who are running a large amount of money. Only 31% of the participants salaries averaged $100,000 a year or more. So, you know, two thirds or more were less than $100,000. In fact, one third of participants never made a six-figure salary at any point in their career. So, how did they become millionaires? Well, 93% reported their wealth as a result of hard work, not because they had a big salary. Eight out of ten invested in — in America it’s called their 401 K, which is like our Super funds, which would be probably 8 out of 10 in Australia, for sure. But three out of four invested independently in addition, and said that they regularly, consistently invested over a long period of time, and that led to their success. 94% said they live on less than they make, and almost 75% reported they had never carried a credit card balance in their lives. So, potentially had credit cards, but paid them off every… So, this all rings true to me. Other notable mentions: many of the millionaires reported intentionally watching expenses, spending less than $200 a month at restaurants, and using coupons to save money when shopping. So, what does it mean? I think it rings true for me, it rings true with a book I read many years ago called The Millionaire Next Door, which I recommend to people. Again, it was a similar sort of survey — funnily enough commissioned by one of the big prestige brands in Europe, I think it was Louis Vuitton or one of those types of brands, but I could have that wrong — and they wanted to know more about the people who they thought were buying their product. But it turns out, most millionaires were living next door and driving a Subaru and were quietly going about their lives amassing money for their retirement. And that struck me as being the type of people who are listening to our podcast as well, and certainly how I did it. Just earn a decent wage, certainly, some of our listeners run their own businesses and have money to invest from time to time from that… But yes, start young, invest, keep it up. Don’t be bold. One of the things about the study was saying that people haven’t just put it all into one stock, they’ve invested and spread their risk a bit, have a system and keep going. And that’s, you know, going to get you to the Millionaire Club, which is, you know, it’s it’s something we all aspire to, I guess. There’s no trick in there. It wasn’t inherited, it’s just slow and steady. And the other point is, it didn’t happen overnight. So, it’s slow and steady winning the race, which has been my experience and now borne out by survey.

Tony  07:55

And living relatively simply while you’re on the journey; saving as much as you can, investing as much as you can.

Tony  11:40

Yeah, that’s right. And well, you know me, I’m not driving around in Ferraris. I mean, we have a great lifestyle and we do eat out and I drive a good car and have a beach house and go overseas for holidays and things, so we’re probably past the age of scrimping and saving, but for a long time Jenny and I would travel when we had a work reason to travel and try and fit a holiday around that. Didn’t have an extravagant lifestyle, we always lived within our means — we still do. Our credit cards are paid off every month, and I basically run credit cards now for the Qantas frequent flyer points so I can take flights and not pay for them. So, yeah, I guess you pay for it indirectly because of merchant service fees. But anyway, yeah, it’s pretty much how we did it. And it’s just being smart over the years and not trying to be extravagant.

Cameron  13:34

You know the hacks because you invented frequent flyers, didn’t you?

Tony  13:39

Not frequent fliers. I didn’t invent it. Flybuys. I came on just after it started, the day it started.

Cameron  13:45

Yeah, you know all the secret backdoors and the hacks.

Tony  13:49

Well, one of the hacks is don’t use your points for flights, because that’s the worst redemption.

Cameron  13:53

Really?

Tony  13:54

Yeah. So, occasionally I do, you know, when something’s on sale, buy some of their merchandise, which is the best redemption. But yeah, I mean, I still generally just through laziness don’t want to pay for flights so I’ll try and do points plus play when I can. And then that’s pretty frequent.

Cameron  14:09

She’s talking about living simply while you’re on the journey to becoming rich. You’ve been rich for a long time. You still live, much to Hunter and Taylor’s disgust, you still live relatively simply.

Tony  14:23

Well, you should’ve seen Hunter’s eyes when he walked into the apartment, though.

Cameron  14:28

First time, he hadn’t been before?

Tony  14:29

No, that’s right. Yeah.

Cameron  14:30

Taylor had. My boys caught up with Tony in Sydney last week. Yeah, but they’re always like, “oh, I’ll just get Tony to buy a Lamborghini and take photos in front of the Lamborghini. That’s your QAV marketing right there.”  I’m like, “yeah, he’s not gonna do that.”

Tony  14:44

No. And it’s not the way to riches, it really isn’t.

Cameron  14:48

But even after you’ve had wealth you still don’t like that kind of stuff. You sneer at it.

Tony  14:55

Well, yeah, I mean, again, I give myself the indulgence of driving a Merc and changing it over every four or five years, but it’s like the question you asked me when I told you I drank an expensive bottle of wine. Like, how much better is it than a cheaper bottle of wine? You’re already driving a Merc, what’s a Maserati or Ferrari gonna do for me, really?

Cameron  15:16

Yeah. It’s an ego thing, right? It has to be.

Tony  15:19

It is, yeah. And plus, the worst stereotype you can see is a sixty-year-old guy driving around in a Ferrari. Probably Ralph Macchio drives around in a Ferrari.

Cameron  15:30

Well, in Cobra Kai he owns a luxury car dealership. That’s he’s goal. Good article. So yeah, that’s themakingofamillionaire.com if you want to look that up and read it for yourself. More news: congrats to QAV club member, long-time QAV club member, Murray Bruce, for his performance in the warm-up Mooloolaba Ironman the other day, and he’s heading off to Kona in Hawaii. He placed a hundred and eleventh out of a thousand blokes, four hours and thirty minutes it took him to do his Ironman. So, well done, Murray. I won’t say who tipped us off, but it was Richard. Good luck in Hawaii. I hope you get your sell alerts while you’re over there, because you don’t want to take your eye off the ball right now. I don’t care what you’re doing. But that’s impressive. “Ironman Murray”.

Tony  16:17

That’s incredible. Well done, Murray.

Cameron  16:18

He puts it all down to QAV. He said QAV made in the Ironman he is today. So, there you go.

Tony  16:25

Well, it gave him the time to spend training.

Cameron  16:27

That’s what it was. He listens to the podcast when he’s training, I believe. That gives him the motivation to keep going.

Tony  16:35

Well, he can be the Ralph Macchio of QAV.

Cameron  16:40

Portfolio updates. Wow, gee. Well, we’re still, we’re doing okay: we’re up, the dummy portfolio is up as it was last week. Not much has changed. We’re up a couple of points. Still lagging behind the sexy for this financial year. But, you know, I think we’re still two and a half times better since inception than the ASX 200. It’s going to be a struggle to catch up this financial year unless something big happens.

Tony  17:13

Oh, yeah.

Cameron  17:14

We’ve got ten months.

Tony  17:16

Yeah, we’ve got plenty of time, but I’m not worried. Again, I’m not worried, it’s short term. That’s just how things have gone. We don’t own CSL, CSL has done well. It’s gonna happen. It’s the revenge of, what’s that, Rudy?

Cameron  17:28

Yeah. He was plugging CSL and we were laughing at him because it was massively overvalued from where we sit. So, this financial year we’re up 1.94% CAGR, the sexy 200 is up 12.57%. By the way, I’ve been speaking to this new portfolio, Aussie portfolio platform, called Nosis who want us to move over to their platform. They don’t have CAGR, and I said, “well, I need CAGR” and they go, “okay, we’ll implement CAGR,” and then they looked at Navexa and they said, “well, that’s not CAGR.” I said “what?” He goes, “no, we just did the CAGR, and that’s not CAGR. It’s not the same as our CAGR.” I was like “really?” He was like, “no. CAGR should all be smoothed out. Yours isn’t smoothed out, it’s all over the place.” So, I don’t know. He’s gonna do a CAGR comparison and then we’ll have to figure out who does the best CAGR.

Tony  18:25

Yeah, okay.

Cameron  18:27

We’ll have a kegger while we look at the CAGR. In the last one year, Tony, the dummy portfolio is up… No, is down 5.78%. And the ASX 200 is up 0.53%. So, it hasn’t been a good year for the dummy portfolio.

Tony  18:53

It hasn’t been, but it’s not terrible. Like, it’s 5%-6% below the All Ords. And like I said, we’ve had a lot of churn and rule 1d out of a lot of things, we had the iron ore sell off end of last year — which is probably the main reason for it, but anyway.

Cameron  19:09

So, in the words of Catherine Tate, you’re not bothered? “Am I bothered? Do I look bothered to you? Does I look bothered? I’m not bothered.” You’re not bothered?

Tony  19:21

No. I’d like it to be better, and it will get better, but I’m not bothered. No.

Cameron  19:26

Well, as I said, since inception, we’re doing two and a half times the sexy 200. So, that’s what matters. I’m sure we will recover. What else do you want to talk about before we get into the Q&A, TK?

Tony  19:39

Yeah, so making people aware of the interest rate rises, that happened last week. So, I think you put out something to people to tell them to update their spreadsheets. But yeah, there’s been two cells that need to be updated in my spreadsheet, and I guess in the Flitman model, which is the RBA rate rise which affects our IV calculations and I’ve taken a survey of the banks and the mortgage rates are up, which affects the dividend, the hurdle rate for dividends that we want. Two changes there. Just did a quick, I’m going to call it commodity corner here, because I did a quick run through of commodities, because I’ve been checking them because oil is close to a sell, but it seems to be holding up at the moment, but it’s only a couple of bucks off a sell. I’ve been focusing on watching Brent Oil for that. Iron ore dropped below a sell yesterday, but I think today it’s just above that sell line again, so it’s back to being a buy, but it may well drop again.

Cameron  20:33

Buy, or Josephine?

Tony  20:34

Sorry, yeah, it won’t be a buy, it’s just not a sell. So, it’s still a Josephine, for sure. It will take a long time for iron ore to be a buy, I think.

Cameron  20:43

Everyone would have sold all their iron ore stocks when it was a sell a while back, and it’s a long way from being a buy again, so don’t get excited, everybody.

Tony  20:51

Yeah. Steel is a sell. I’m having a look at nickel and it looks like it’s no longer a Josephine. So, we have nickel as a fudge sell based on a two year cycle, but the longer term, five year graph is still a buy. But again, it’s not really a second buy line again, so it’s something to watch, but it may become a buy soon.

Cameron  21:13

Are you saying it’s Nickelback?

Tony  21:14

Nickel’s back, yeah. Nickelback.

Cameron  21:18

I was trying to think of a Nickelback song to sing, and I honest to god do not know a single Nickelback song. I don’t think I’ve ever heard a Nickelback song. All I know of Nickelback is it’s a punch line. That’s all I know about Nickelback.

Tony  21:30

It is, yeah. Most hated band in the world. So, few interesting things to watch. It’s a good time to keep an eye on commodities, people. Couple of other things. So, JHG is back to being a buy again, this is Janus Henderson group. It was a sell last week, it’s back to being a buy again. But I wanted to talk in detail about one called Terracom, TER is the code. And it looks interesting. So, it’s been showing a qualified audit in our buy list for a while so we haven’t included it, but when I did a bit of a deep dive into it in the last few days — I did that because it came back onto our buy list except for the fact that it has a qualified audit, just something I check from time to time — and its stock price has taken off in the last week, I suppose, since its results came out. So, when I had a look, the qualified audit was from the last year’s full results, which is when they do an audit. The current numbers are unaudited, so that’s something we have to be aware of, but the qualified audit was based on a material uncertainty for going concern. And the question was raised because of the fact that current liabilities exceeded current assets by some $250 million, and so the auditors were concerned — as was management — that they may have problems if they didn’t refinance. But in the current half, that gap has reduced from $250 million to $27 million, and the total assets exceed total liabilities by a wide margin. So, I’m guessing they either refinanced or got their shit together in terms of financing, anyway. They haven’t come out with another audit report yet, because the half yearly results aren’t audited, but it looks like it’s out of the woods. So, people might want to have a look at it. I’m tempted to remove the qualified audit, and the QAV score if you do that is 0.38, and it’s a high ADT of 3.6 million. Certainly, it’s the market thinking it’s okay now, because the share price has turned up.

Cameron  23:28

So, that’s TER, Terracom, yeah, if people want to look at it? TER.

Tony  23:33

Yep. So, that’s pretty much me for the week, and I’ve got to pulled pork request from Nick on ALO, which I’ll go through now. Interesting one, thanks, Nick, for bringing this to our attention. ALO is Alloggio Group. Small company, market cap of $35 million, small ADT of $8,700 so this won’t suit a lot of people. But thanks to Nick, it needs to come to our attention. So, it should have been added to the buy list before this when its results were released. So, if people are using my spreadsheet, they need to add ALO to the Manually Entered Data sheet because it’s a company which wasn’t part of that before. It’s only fairly newly listed. And, maybe to the Flitman model.

Cameron  24:22

It has been in the official buy list that we put out each week for a few weeks, yeah.

Tony  24:26

Okay, good.

Cameron  24:26

In fact, I added it to one of our portfolios a couple of weeks ago.

Tony  24:29

Okay, sorry. Well, my download didn’t pick it up. Okay, so that’s good. Small ADT. The company is a manager of four-star hotels and short term rentals, and it’s based in Newcastle. And it has properties under management from Noosa down to the Great Ocean Road, so it’s spanning a lot of holiday destinations. Things to be aware of, I guess: the management of highlighted risks in that if there’s another COVID downturn, there’ll be affected. People can’t move around and take holidays. And they are having this, I guess, well, I’ll call it normal supply chain issues due to COVID, but they’re probably abnormal in the longer term, but they are highlighting these risks. I guess staff would be an issue for them as well. So, small company. There are some risks, but on the numbers, really attractive. I’m doing my analysis of the price of 16 cents, and there’s no broker coverage for this, which is something I like, because it gives us a bit of an edge that there’s no competition in there investigating the company. So, I can’t give a consensus forecast or a consensus IP for this, and there’s no dividends, so it doesn’t score for yield. But it does score under Stock Doctor for financial health: it’s strong and recovering. And recovering is one that we like, so it scores a two. The price to operating cash flow is really reasonable with this one, four times, so it’s great for that. We can calculate IV 1 which is only six cents, so it doesn’t score for that, and it just misses out on net equity per share plus 30%. So, price to book plus 30%, which comes out at 14 cents per share, but the share price is 16, so it doesn’t score for that. It scores really well for owner-founder. So, directors hold 34% of this company, which is really good. And on the manually entered data, we only have a couple of halves of data, but it is the lower of the two PEs. Its not a new upturn, it’s been around for a little bit — although that’s kind of borderline because it looks like it became a buy back in June, which is close to the end of the financial year. It does have increasing equity again, but only for two halves, but we’ll score it for that. So, just based on a few of the metrics we look at, the quality is actually over 100%, 109%, because a couple of the scores are getting twos rather than ones, and overall, a QAV score of 0.27. So, thank you to Nick for pointing it out. If people have a small amount to invest, they should have a look at ALO.

Cameron  26:54

Very good. Thank you, Tony. I just got one more note, to tell a rule one anecdote. So, I got a sell alert from Stock Doctor this morning for a stock called REG, and when I had a look at it, I noticed that it had plunged through its rule 1 sell trigger and hit its three-point trendline trigger. I was like, “holy hell, how did I miss that?” Then I went to check it and realised I actually did sell it a couple of weeks ago when it hit its rule 1 alert. Anyway, I’d just forgotten to remove the three-point, because I have two alerts always in Stock Doctor. But here’s my point, I sold it when it hit the rule 1 and it’s fallen another 10% since then. People are always telling us about rule 1 sells where they turn around and go back up. I just want to point out that that isn’t always the case. Sometimes rule 1 does save your bacon, but you just probably don’t pay attention to those as much. I know Glenn or somebody did an analysis recently. I think it’s in the notes today actually, we’ll be talking about it. He might be our QAVerick of the week, talking about rule 1 sells. But yeah, that was one instance where I was like, “oh, thank god I sold that a few weeks ago.”

Tony  28:15

Yeah, right. Does QAVerick of the week win an F14 from behind enemy lines?

Cameron  28:21

Yeah, you have to crash it into enemy lines and then somehow escape miraculously unharmed.

Tony  28:29

Luckily, it’s fully fuelled, ready to go.

Cameron  28:31

Yeah, yeah. And nobody noticed when you were running across the field to get in it and taking it off. No one tried to shoot you down or go “hey, hey you!” After the rest of your airfield had just been bombed, luckily that one didn’t get bombed.

Tony  28:45

And no one thought on the other side to fly it, and all heard these two massive jet engines firing up while it was warming up.

Cameron  28:53

Completely plausible. Don’t think too hard, it’s a Top Gun film. Alright, questions of the week. First ones from Mark: “hi Cam. What criteria should we use to look at Renko charts? Still five-year monthly?”

Tony  29:07

Yeah, it is, but I’m still playing around with Renko charts. In Stock Doctor anyway, if you look at a five-year monthly for a company, it’ll give you only a few numbers of bars because all it’s doing is taking the all-time period — like, the longest data it has — doing a Renko chart, and then just giving you the last five years. If the last five years haven’t moved around much, you might get only one box in it. So, it does make more sense in Stock Doctor at least to look when you select Renko charts, it usually defaults to give you a long time period. That’s what I’ve been using to look at these stocks. I haven’t had much fiddling around with commodities yet, but stocks. And then if you select five years it gives you just a couple of boxes. It should be five-year monthly, I haven’t worked out how to do that in Stock Doctor yet, but at the moment I’m using “all” which may be better.

Cameron  29:59

Okay. Thanks Mark. Darryl: “I’m not sure if this has been discussed recently, in which case I missed it, but the RRL chart in the QAV checker is really weird. Not only is it ignoring the 8% rule, but it’s not taking into account recent lows. Does anyone know why? I would have thought the correct L2 would have been the one at 30th of April ’21, since it’s just before the buy line was breached.” I had a quick look at it, and it seemed to me that it hasn’t really been a buy since it breached that sell line. But I thought I’d get your take on it for Darryl.

Tony  30:40

Yeah, sure. Good question, Darryl. I probably should let Brett speak for how he’s coded it, but my understanding is the coding in the Brettelator charts the buy line following the sell line. So, it’s the last sell line and then the buy line is drawn after that and there’s been no more sales since then. So, the chart for RRL has been on a decline for at least a year now. I think what Darryl is looking at is the most recent. The second buy line’s been drawn by the Brettelator, and it’s now past that second buy line, so he could make the case to then draw a sell line across the lowest point and the second lowest point, which would be kind of recent. So, you know, Brett and I’ve been going to and fro on whether that’s the right way to do things or not. Brett produced some evidence which suggests using the second buy line as the buy line and then drawing a sell line after that cross is a better way of doing it. And I must admit, I haven’t had time to go through and convince myself that’s the way it is. So, we haven’t changed the Brettelator, but currently, what Darryl is seeing is the buy line following the sell line.

Cameron  31:50

Right. But that buy line, it crosses that buy line well below the sell line.

Tony  31:56

Correct. So, it’s not a buy.

Cameron  31:57

It’s a Schrodinger. It’s above the buy line but below the sell line.

Tony  32:01

Yeah. And you can see from the chart that that’s probably the right thing to do, because it’s been in decline since the middle of 2020.

Cameron  32:07

Yeah, it sticks it’s head up every now and again, but then it falls even further quite rapidly.

Tony  32:12

Yeah. And the other thing I’d just make Darryl aware of — he probably is already — is that it’s a gold stock, Regis Resources, and its commodity is certainly not a buy.

Cameron  32:22

Hope that helps, Darryl. Glenn has a question about taking profits off the table: “following on from last week’s podcast discussion on sell lines for stocks whose current price is far above the sell 3PTL, consideration could be given to a percentage decline. Tony in the past has rejected this approach because price may advance again after a percentage drop. This is of course true, but it is also true of the number one sell rule and conditions of the 3PTL configuration. We use opportunity cost logic for not losing capital, why not, not losing profits? Back testing shows at about 50/50, but I’ve found that it helps with my confidence levels by occasionally banking a profit on parabolic price advances. Perhaps limiting its use to where prices have gone parabolic might be considered. Also, the question arises on when to buy again. We could wait for a second 3PTL buy to be crossed if and when it advances again.” What do you think about Glenn’s analysis, Tony?

Tony  33:24

Yeah, I think he’s probably similar to me: it’s a 50/50. Whenever I’ve tried to do a hug line or a more recent buy line, it’s 50/50 as to whether when it crosses you sell it whether it goes up or down, I think that’s the case. I too have thought long and hard about parabolic charts, and I guess what we mean by those are ones which are curving up very steeply and suddenly. Twenty-twenty five years ago I used to take money off the table when shares did that, and nothing grows to the sky, so they do often have a pullback, but then, you know, again, a lot of them keep going. They just pull back for a bit and more numbers come out, or there’s corporate activity or whatever, and they go back up again. So, yeah, my experience is that even though it is hard when they come crashing down to our sell line, that’s still, to me, at least anyway, the way I’ve been doing it, the best way to do it. Otherwise, it’s fairly volatile and you risk missing out on that second upswing. I do take Glenn’s point that you can always buy back into it, so that’s a possibility. I guess where I’m at with this kind of thinking at the moment is I’m hoping the Renko charts might be a, you know, a saviour in this kind of situation, where if they have been going up strongly and then turn down that might be a time to look at a sell. But, you know, I plan to do a lot more research on that and probably just test it going forward to see how it affects our…

Cameron  34:50

In my mind, if something goes up and you sell and you take that money off the table, you’re going to reinvest that money in some other stocks, where you’re again facing the issue of, “okay, these companies may perform, they may not perform.” You’re putting that money back into the market, and you’re running the regular risks there. If you’ve already got it invested in a company that fundamentals are good, should be good, should do well, you’re just moving it around and putting it back into the same situation.

Tony  35:25

Well, yeah, I mean, we’ve run through scenarios like that. It’s the age-old question, I’ll throw this back to Glenn: “when do you sell?” Is it when it’s gone up 30%, 40%, 50%, 100%. And inevitably, whatever number you take is either going to be too soon or too late. So, if you take 100%, it might start crashing down at 90% and then you’re gonna regret that, and if you take 20% it might kick on to 100%. I found it very hard to find the right rule to sell out when something’s going up other than the three-point trendline sell. But I’m not saying it’s perfect, and I think we can improve it. But yeah, I’d be interested to know what Glenn’s experience is. And you’re right, if you do sell out, if you do happen to make a killing and sell out at the right time… Which is really hard to do, I mean, everyone says “buy low, sell high.” So, if you set the bar too low and start selling at 20% but you’re not getting that one that shoots the lights out and pays for all the rest. And as you say, you’re putting it into another investment, and my experience is you’ve got a 60/40 chance of that being one that continues to make money for you or against having to rule one it or 3PTL it. So, yeah, it’s trying to optimise that sell out at the right time that is the important thing, and I haven’t been able to do it.

Cameron  36:43

And every time you trade, you’ve got brokerage and CGT and all that kind of stuff, right?

Tony  36:51

And the old saying from Warren Buffett, “why bench Michael Jordan?” Because, you know, like we saw before, something like Fortescue Metals Group which was a good earner for us — I think it was a three bagger from memory — there’s probably a couple of times we could have sold out because it started to turn down a bit with a more recent hugline to sell it.

Cameron  37:10

In theory, anyway. I mean, my tiny brain doesn’t understand mathematics very well, but if I’ve got $100 invested in stock A and let’s say I bought it at $10 and it’s gone up to $100, right, I’ve got a big profit in stock A, but it’s invested in stock A. I sell out of stock A; I have to pay CGT on my profit and I’ve got brokerage costs to get out. Then I take that money and I put it in five stocks, I’ve got five lots of brokerage costs. After I’ve, you know, factored in the CGT, I’ve got a bunch of money left over, let’s say 60 bucks left over. I put that in five stocks or six stocks, $10 each, got brokerage costs for each of those, then got a 60/40 chance. So, some of those are going to do well and some are going to fail. But 60/40 for doing well, as you pointed out a minute ago, the success of your system over the years, like most systems that work, is predicated on every now and again getting one or two or three that shoot the lights out. And if you’re taking profit off the table too soon, you may miss that one that takes the lights out.

Cameron  38:26

Correct.

Cameron  38:27

And you never get that. So, you’re throwing the money back on the table, got the same risks, the same odds, and always pulling out just before you impregnate.

Tony  38:39

When you say you have the same odds, you don’t, because the the odds of 60/40 and getting 19.5% per annum are based on holding onto the stock and wearing the ones that come back with a very low three-point trend line or a rule 1 and turning those over. So, like I said, it’s a system and we apply it mechanically, because if we don’t apply it mechanically, all the emotions get to us and then we start second guessing ourselves. And we start doing things like, “oh my god, it’s up 30%, I should sell.” Then it goes up to be a three bagger.

Cameron  39:09

So, you never get the three baggers that drive the 19.5%. That’s the three baggers that you’re counting on, right?

Tony  39:18

Yeah. And you might have to sacrifice a couple of ones that go up and come back along the way.

Cameron  39:21

Yeah, yeah. And that’s like, it’s really hard. It’s really counterintuitive. This is quantum mechanics shit right here. Like, this is double slit experiment stuff. It’s really, it is, it goes against everything. It’s really counterintuitive to just watch paper profits disappear in the belief that you just gotta lose a couple every now and again, but it’ll pay off long term. Until, I guess, you’ve been doing it for thirty years and you just know how it works. You’re trusting the system.

Tony  39:54

Look, you know, I’ve been through it all. When I discussed it with some of the people I used to talk to about this, they’d say, “oh, sell half and keep half.” And like, okay, that’s an option, but again, you’re getting 1.5% bagger rather than a three bagger, and you’ve got the 20% you took off the table. So, again, overall it’s not as optimal as riding the moon-shot, the big one.

Tony  39:55

And the three baggers, how often do you think you get those in your experience?

Tony  40:13

Oh, it’s a good question. You know, there’s usually always one in the portfolio somewhere. Probably not at the moment in mine because, you know, I’ve been rule 1’d a lot and turned things over. But yeah, probably always. Well, I couldn’t say always because it’s not at the moment. But yeah, last year there was Fortescue, and probably things like Champion Iron. So yeah, there’s usually one or two in there.

Cameron  40:44

All right. I get people’s pain on this man.

Tony  40:49

Yeah, I do too.

Cameron  40:50

It’s really complex to get your head around. You just gotta take a couple of those every now and again, take a couple of punches to the belly in order to poke somebody’s eye out. My sifu said today as we were doing some sparring, we were talking about close grappling, he goes, “oh, I’ll let go of his arm and let him whack me in the chin, but I’ll get a thumb in his eye when he’s doing it. So, I’ll take a tap to the chin in order to get a thumb in his eye.” I don’t know how that’s relevant to investing, but you’ve got to take a couple of body shots in order to win the fight, you know. You’ve got to prepare to give up a couple of body shots.

Tony  41:25

I’m hoping that, like I said, I’ll continue to do some work on Renko charts. That might be our saving… I don’t know how yet, like, whether we do three-point trend lines plus Renko charts, or whether we do Renko charts only or, or what. I did some analysis before we came on the show and compared my portfolio, which is based on three-point trend lines, to Renko charts, and four are differences. So, you know, I have AMP in mine, Eclipse I’ve held for a long time, JBH and QBE, which are all sells according to Renko charts, but they’re buys according to 3PTLs. So, I’m not going to sell them now, I’ll continue to hold them. But, you know, if it becomes obvious after a month or two that those four stocks have underperformed and I should have sold them than, yeah, maybe we do something with Renko charts going forward.

Cameron  42:14

As my sifu said you can’t condition your eyes. Doesn’t matter how much you train; you can condition your eye to take a blow from a thumb.

Tony  42:23

You can wear glasses.

Cameron  42:24

Well, then I’ll just break your glasses and push the glass in your eye Tony.

Tony  42:28

Safety glass cam, it’s plastic.

Cameron  42:31

Next time somebody tries mugging me on the street and happens to be wearing safety glasses…

Tony  42:38

You whip out your squash goggles.

Cameron  42:40

That’s why I have my nun chucks tucked down my belt in the back.

Tony  42:44

Well, I would have thought the easy thing to do was take the glasses off them.

Cameron  42:47

Or that, yeah. There was a great video, a Wing Chun video on TikTok I saw a month or so ago. Some guys just practice sparring, and they’re both wearing glasses, just regular glasses. One hit the other guy on the side of the head, the guy’s glasses flew off, went up in the air and fell on the other guy’s head. Like on his glasses: glasses on glasses. It was pretty cool. It was an accident, not saying it was deliberate. Okay. Chris: “in the past when ideas have been floated that might change the QAV system, TK has mentioned he did some regression testing. Would he be able to provide a high-level overview of how he does this? Is he still using Excel? Does he keep old Excel versions for each Stock Doctor download? How would he actually go about testing, for example, whether adding the cash rate to the IV 2 hurdle or adding financial trend as well as health is a good idea or bad idea?”

Tony  43:38

Yes, so yes, it was Excel for a long time. I currently have three years of buy lists and downloads that we’ve been running since QAV started, so that’s not a bad amount of data to be able to test things through, which I do regularly. But prior to that I had not as elaborate versions of the download sheet from Stock Doctor. It had a lot of the key metrics in it, like price to operating cash flow, and some of the quality ones, but I had about five years’ worth of data there. So, I mean, I used to mechanically run iterations through those spreadsheets, which can be quite time consuming, but it was a good way to do it. Test different things, often as just a one variant analysis. So, you know, “is price to operating cash flow ten times different to five times” and see how that affected the portfolio constructed of those stocks. Things like the quality side of things, how important that was as a metric overall as a score. I remember doing a lot of analysis on whether I should just — in terms of portfolio construction — whether I should just buy the big cap stocks, or buy from the top down in the buy list regardless of how big they were and have a lot of small stocks in the portfolio; which I did once before, had like forty or fifty stocks in the portfolio, but quickly found out that when Fortescue Metals went up 30% that was a much bigger impact on the portfolio than when a tiddler went up 100%. So, got out of that. But yeah, all that kind of modelling can be done in Excel. It is fairly time consuming. On the other hand, I also now subscribe to Refinitiv, and we have ten years’ worth of market data from Refinitiv. And we’ve had Dylan, up until recently anyway, as an intern crunching numbers for me. He’s come up with some good stuff which we’ve folded into QAV, or some things we haven’t folded into QAV, but he was writing in Python on ten years’ worth of market data running simulations which is much easier to do when you’re using code. You can do things like Monte Carlo simulations, which is to just continually crunch different start dates for stocks and folios and see how they go. But I still out of all that kind of number crunching, I still would recommend a process of testing implementation. So, when you have an idea, do your analysis, run it over three years’ worth of spreadsheets, five years’ worth of spreadsheets — or if you have access to Refinitiv, do it there. But then, run a paper portfolio. So, give it maybe six months on paper to see if it actually works. Because regression testing, one of the pitfalls of regression testing, is it may just fit at the timescale that you were using. Even ten years… If we look at the last ten years of data, it didn’t have the GFC in it, now, in 2022. So, you know, you don’t know if it works during the GFC. So, test it on paper going forward. Run it then as a champion challenger model. So, I’ve gone as far as taking some of Dylan’s analysis, and one of those was on rebalancing, he was a big booster for rebalancing a portfolio, but I ran that for a few months with the champion challenger portfolio. So, I’ve devoted 10% of my portfolio to it as a trial, and it didn’t work. It was selling out of things which then went on to make a lot of money. So, I got frustrated and quit. So, went all the way to there before I decided not to go ahead with it. But yeah, if it does work, then change it, totally. So, that’s the kind of process I’ll be going through with these Renko charts, is testing it, running a paper portfolio, maybe doing a champion challenger after that if it still looks like a good thing to do, and then deciding to put it into the model. But that could take twelve months to get there. I’m never in a hurry unless something’s really obvious. Like, if I’m using Renko charts and suddenly go “holy shit, this is great. Much better than what we were doing,” then yeah, I’ll make a change quicker, but it’s worthwhile going slow and steady and methodically before making changes.

Cameron  47:36

There you go, Chris. Hope that helps. This is the last one, came in on Facebook, Tony. We were talking about DDH. Reg brought up DDH, which I did look at yesterday. It looked really good on the buy list, but it was having a down day yesterday, so I didn’t pick it up. It was having an up day today, last I checked. But Murray points out that it doesn’t yet have a sell line and was asking if that matters for the QAV process. Would you buy something that didn’t have a sell line? And I went back to look at ALO that we were talking about earlier, because I thought when I looked at ALO last time it didn’t quite have a sell line yet, but now does. With a newly listed stock, we’ve had these couple before, I can’t remember what it was, one that Steven Mabb was interested in a year or so ago. Occasionally, like ALO and DDH, these relatively newly listed stocks hit our buy list, and quite often they haven’t been around long enough to get a proper sell line in place. What’s your thoughts on the importance of a sell line before we can buy something?

Tony  48:48

Looking at DDH I’d still buy it even though it doesn’t have a sell line yet. It looks like you could draw a sell line in a pinch, because there’s a low point back in June 2020 and there’s another — it’s a point rather than being a trough — on August 31. So, I would buy and, in a pinch, draw a sell line based on that. I think usually with these stocks, it doesn’t take long before they resolve themselves and we get a sell line because there’s another peak or trough — another trough, actually, in this case — can be used. But yeah, I’d take the opportunity and buy it while it’s looking good.

Cameron  49:23

And you’ve got a rule 1 as a failsafe in place, too.

Tony  49:28

Yeah, I’m not familiar with DDH, but I’m assuming its not a resource stock, because we also have the commodity underlying it as an issue but…

Cameron  49:37

DDH1 Ltd. They acquired Swick Mining Services in February of this year. I remember those guys were on our buy list from time to time. Average Daily trade is 753,000, so relatively big — not big enough for you, but relatively big.

Tony  50:00

So, yeah, no, I’d definitely buy it, and I’m thinking back to what else was new that we bought? Not Levisa. There was another… What was the company that sold bath bombs and candles and perfumes and things, that was new when it first came on and we bought it? I don’t think it had a sell line.

Cameron  50:17

I think that’s Dusk. I think that’s the one I was thinking of before that Steven Mabb was talking about. DSK, yeah.

Tony  50:23

Yeah. So, I had no hesitation to buy that. I don’t think I bought it, but I think the dummy portfolio bought it.

Cameron  50:30

Well, hope that answers that question for you, Murray. And good luck in Hawaii, Murray, too.

Tony  50:37

Yeah. Well, that’s amazing, to be that fit to do that.

Cameron  50:41

All right after hours, Tony…

 

 

Cameron  1:08:48

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