Transcript #538

QAV 538 CLUB

Cameron  00:06

Wel­come back to QAV, episode 538. Record­ing this on Tues­day the 27th of Sep­tem­ber at 4:05pm Bris­bane time for the record. How are you, TK?

Tony  00:20

Good. I was gonna say, is it wel­come back?

Cameron  00:24

Com­mis­er­a­tions.

Tony  00:26

Tough week in the mar­ket.

Cameron  00:27

Very tough.

Tony  00:29

I’m good, though.

Cameron  00:30

That’s good, that’s good. What have you been up to in the last week since we did a show, TK? Apart from sell­ing off all your stocks.

Tony  00:38

Or at least half of them. Yeah, pret­ty social. Thurs­day was a hol­i­day so caught up with a lot of friends; cel­e­brat­ed a birth­day, went out for lunch. Caught up with some friends Fri­day night. I had­n’t been down to Macleay Street Bistro, which is down the road from us, and went there on Fri­day night with some friends. Real­ly good if any­one’s lives in the area or trav­els to the area, I rec­om­mend it. Great place. And then as Roy and HG would say, “Fes­ti­val of the Boot” over the week­end with the AFL Grand Final. We had had a mate around to watch that. And then the NRL semi final Sat­ur­day night. And a bit of horse rac­ing in between. So, very social. You?

Cameron  01:23

Yeah, I’ve been up in Bund­aberg for the last week, just got back about forty-five min­utes ago. Had a great time with vis­it­ing my mom, and Chris­sy and I spent a lot of time on the beach; a lit­tle bit dur­ing the day every­day with Fox, and at skate parks, and then in the night times Chris­sy and I would try and sneak down there and just lay on the sand and watch the sun­set and look up at the Milky Way and just chillax. Which was good, par­tic­u­lar­ly with the mar­ket just col­laps­ing around us. Take my mind off it, go and relax. Yes­ter­day, of course, was Stanislav Petrov Da, the day that I com­mem­o­rate. Sun­day was the anniver­sary 21st anniver­sary of my dad’s pass­ing, my dad’s death, so I made his favourite dish — well, his go-to dish — which is mince and beans. “Cow­boy din­ner” as my Scot­tish grand­moth­er called it. Just minse and baked beans. That’s a bit of a tra­di­tion for me to remem­ber him.

Tony  02:23

Oh, that’s nice.

Cameron  02:25

And then Mon­day was Stanislav Petrov day. Do you do you cel­e­brate Stanislav Petrov day?

Tony  02:33

I think I missed it this year, Cam, and last year as well from mem­o­ry.

Cameron  02:37

Well, you can pour one out for him. For peo­ple who don’t know Stanislav Petrov, he was a lieu­tenant colonel in the Sovi­et Air Defence Forces, Sep­tem­ber 26, 1983, three weeks after the Sovi­et mil­i­tary had shut down Kore­an Air­lines Flight dou­ble oh sev­en. Petrov was the duty offi­cer in a nuclear ear­ly warn­ing facil­i­ty in the Sovi­et Union, and their sys­tem report­ed that a mis­sile had been launched from the Unit­ed States and then five more mis­siles had been launched from the Unit­ed States. He was giv­en orders to launch nuclear weapons against the Unit­ed States defen­sive­ly, and he refused to obey orders believ­ing that the sys­tem was mal­func­tion­ing, as it was, and con­se­quent­ly avoid­ed nuclear dis­as­ter. So, there you go. So, I always try and remem­ber him because if it was­n’t for him, who knows what the world would look like today. So, there you go: Stanislav Petrov.

Tony  03:50

I thought you’re going to talk about the Petrov affair.

Cameron  03:53

Nah, dif­fer­ent Petrov.

Tony  03:55

Or maybe the son.

Cameron  03:56

Pos­si­bly relat­ed. Yeah, who knows? No, his father flew a fight­er air­craft in World War Two. Any­way, he died in 2017, age 77. I think it’s worth­while remem­ber­ing his mem­o­ry, and just to the kids out there, it’s always a good idea to dis­obey orders from time to time. Unless I’m giv­ing them.

Tony  04:19

Espe­cial­ly if they involve Armaged­don.

Cameron  04:21

Yeah. Fox must be a big fan of his, because he nev­er lis­tens to any­thing I ever say. Nor do my oth­er kids for that mat­ter. Any­way, on with invest­ing news, we’ll get to the mar­kets and every­thing a bit lat­er. Some inter­est­ing sto­ries I’ve read this week apart from all the doom and gloom: The Finan­cial Review on Sep­tem­ber 21 had an arti­cle about the fund man­ag­er per­for­mance tables in Aus­tralia. It’s always fun to have a look at. “On a one-year basis, the best per­former was Mel­bourne based Datt Cap­i­tal, whose absolute return fund did 20.63% in the year, most­ly because of bets on White­haven Coal and New Hope,” some of our favourite stocks in the last year as well.

Tony  05:05

Until yes­ter­day.

Cameron  05:07

Yeah, but they must have been heav­i­ly weight­ed on those because we’ve had them and, you know, we cer­tain­ly haven’t achieved 20.63% last year. So, con­grat­u­la­tions to those guys. But when you go down, then there’s Lazard Select Aus­tralian Equi­ty Fund, 20.41% for the year. They have big chunks of their port­fo­lio in QBE — anoth­er good QAV stock — Wood­side, and White­haven, all good QA V stocks. But of course, when you get down the ranks, Aus­tralian Eagle Growth High Con­vic­tion, 14.27%; in ret­ro­spect they weren’t as high­ly con­vict­ed as they thought they were at the begin­ning. And there’s a few oth­ers down there as well. But on a sev­en-year basis, they don’t all do that well when you look at them over the long term.

Tony  06:00

Sor­ry, excuse me, do you have a three-year basis there at all?

Cameron  06:02

No, not in this arti­cle. There’s no link, actu­al­ly, in this arti­cle, to the actu­al per­for­mance tables, which does­n’t help. It would be nice if they actu­al­ly gave me a link. But yeah, it says that on a sev­en-year basis, some of the more recent win­ners fall off the top five because they haven’t been around long enough. Some good per­for­mance on a one-year basis. Oh, sor­ry. We do have a three-year basis. I did­n’t read enough. That Cap­i­tal num­ber one spot was 22.9% over three years, fol­lowed by our friends at Collins Street Val­ue, 22.6%, and Samuel Ter­ry Absolute Return, 15.82%. They’re good num­bers for the last three years.

Tony  06:49

They are, yeah. And we know that Collins Street is a val­ue fund, so that’s good. So, we will have sort­ed in where? The dum­my port­fo­lio, I think, was 15 odd per­cent over the three years.

Cameron  07:00

Some­thing like that. Yeah. So, we’d be prob­a­bly in the top three or four if we were being com­pared on the three-year basis. We just cel­e­brat­ed our three-year anniver­sary on the sec­ond of Sep­tem­ber, it would have been, so there you go. But they’re good num­bers. And con­grat­u­la­tions to those funds.

Tony  07:18

We for­got to cel­e­brate our third anniver­sary of the dum­my port­fo­lio. But yeah, puts things in per­spec­tive, does­n’t it? I mean, it’s been hor­ri­ble sell­ing things in the last few days, but the dum­my port­fo­lio is ranked three or four in Aus­tralia. That’s pret­ty good.

Cameron  07:33

Yeah. So, con­grat­u­la­tions to you, Tony.

Tony  07:36

Well, thank you. Yeah, and con­grat­u­la­tions to the oth­er guys, too. But I guess my com­ments on these kinds of tables are to look at the longer-term ones, the longer-term results. So, three years and out­ward at least. When­ev­er I look at tables like this, if they’ve got some­thing even longer, since incep­tion, that’s the best to look at. And cer­tain­ly, if it goes back to take into account a down­turn in the mar­ket. So, how long’s COVID been? Three years might just cov­er COVID. But you know, the longer the bet­ter to try and com­pare funds. I guess, you know, if you’re new to the mar­ket, and you see some­one like Col­in Street Val­ue Fund, for exam­ple, do well, and you like their process, you might invest some with them. But yeah, I cer­tain­ly rely on longer term per­for­mance num­bers over short­er term ones.

Cameron  08:23

Well, let me see, what else have I got? Here’s anoth­er, this arti­cle was in the ABC from a cou­ple of days ago: “Did the Reserve Bank’s mon­ey print­ing cause infla­tion? The bank says it’s com­pli­cat­ed.”

Tony  08:37

Is that what fox says?

Cameron  08:39

Yeah. “Ah, it’s com­pli­cat­ed.”

Tony  08:42

“Did you kick this over?” “Nah, it’s com­pli­cat­ed.”

Cameron  08:44

It’s com­pli­cat­ed.

Tony  08:46

Bit of grav­i­ty, bit of iner­tia. It’s com­pli­cat­ed.

Cameron  08:50

Yeah, yeah, yeah. You real­ly need to under­stand Ein­stein’s spe­cial the­o­ry of rel­a­tiv­i­ty for me to explain this to you, father. Well, I do. It’s a good thing that I do. So, did you read this arti­cle, Tony?

Tony  09:03

I did. I did. I learned a fair bit. I mean, it is com­pli­cat­ed. There’s far much more going on in the Reserve Bank than I ever thought, how­ev­er, I still scratch my head and say, “how did they do it, real­ly?” There’s cer­tain­ly val­ue cre­ation out of noth­ing going on some­where.

Cameron  09:20

So, they’re basi­cal­ly try­ing to say, “look, the infla­tion, well, you know, it’s not real­ly because we were print­ing mon­ey. It’s got to do with veloc­i­ty of mon­ey, it’s got to do with the kinds of mon­ey that are out there. They’ve got all these dif­fer­ent cat­e­gories of mon­ey. Mon­ey base M1, M3, broad mon­ey.” So, I don’t know. Did you did you buy it at the end of the day? Do you think it’s more com­pli­cat­ed or less com­pli­cat­ed?

Tony  09:55

It’s more com­pli­cat­ed, I mean, how the RBA works I think is more com­pli­cat­ed. Go back to the head­line; “Did the Reserve Bank’s mon­ey print­ing cause infla­tion?” It did a lit­tle bit, but like I said last week, it’s more to do with sup­ply chain and COVID, I think, and ener­gy, than print­ing mon­ey. So, the corol­lary, should they use ris­ing inter­est rates to tame infla­tion, is just not going to work. It’ll work part­ly; or if it works, it’s because it’s crash­ing the econ­o­my. It’s not solv­ing the under­ly­ing prob­lems, which the RBA can’t solve. So, that was my key take­away to this whole thing. But it’s almost like the tides, isn’t it? It’s like, “we may go into reces­sion. Quick, cut inter­est rates, buy bonds, flood the mar­ket with mon­ey, pump prime the econ­o­my. Oops, too much. Now the tides gone the oth­er way. Let’s take mon­ey off the table, let’s raise inter­est rates by by sell­ing or buy­ing bonds.” Yeah, it’s the tides going back and for­ward, but is it real­ly hav­ing an effect? I guess it is, obvi­ous­ly, but is it the best way to have the effect want­ed? And look, you know, I mean, all these kinds of thoughts are play­ing out right now. And if you look at the UK, I mean, what are they smok­ing over there? Their cen­tral bank is hur­ried­ly rais­ing inter­est rates, and the new gov­ern­ment comes in and says, “well, we can solve this, we’ll just elim­i­nate the top mar­gin­al tax rate. We’ll give or give mon­ey to rich peo­ple to spend.” It’s absurd. As one com­men­ta­tor said, it’s a canoe with two pad­dles and they’re both going in oppo­site direc­tions at the moment, fis­cal and mon­e­tary pol­i­cy. So, that’s not going to work. That’s been hap­pen­ing to some extent in the US with, you know, Biden’s put a lot of mon­ey back into the econ­o­my. And my thoughts are that will prob­a­bly stop after the midterm elec­tions, he’s obvi­ous­ly been elec­tion­eer­ing for votes. But when­ev­er a gov­ern­ment does that, your fis­cal and mon­e­tary poli­cies are at log­ger­heads. Inter­est rates are hav­ing to be raised quick­er and fur­ther in the US because there’s too much mon­ey in the econ­o­my, as well as all the oth­er prob­lems with COVID and ener­gy prices. It’s like you’ve got two chefs in the kitchen: one’s fis­cal and one’s mon­e­tary. I remem­bered hav­ing a sim­i­lar sort of con­ver­sa­tion in reverse when COVID was around, that the cen­tral bank was low­er­ing inter­est rates, but the gov­ern­ment was rais­ing tax­es at the same time. So, they weren’t work­ing togeth­er in uni­son. So, I don’t know the answer. If it was me, I’d put some more rules around the RBA, and lim­it their remit, and try and have some bet­ter link to the gov­ern­ment to match fis­cal and mon­e­tary pol­i­cy. But, like I said last week, it’s not going to end well. I’m com­plete­ly amazed at how unco­or­di­nat­ed the approach to infla­tion is.

Cameron  12:40

But they’re sup­posed to be inde­pen­dent from the gov­ern­ment, right? Isn’t it sort of the point, of hav­ing the RBA at arm’s length from the gov­ern­ment?

Tony  12:47

Yeah, it is, and I once drilled down into that because I scratched my head on why that was impor­tant. Because like, you elect the gov­ern­ment, right? You could make a case to say they should be in charge of inter­est rates. The prob­lem with putting the gov­ern­ment in charge of the Reserve Bank is that they can print mon­ey, and they can start hyper­in­fla­tion because they want to appear good to the vot­ers and bal­ance their bud­get or do away with their debt, and those kinds of things. So, I get that, but there needs to be some kind of coor­di­nat­ed approach between fis­cal and mon­e­tary pol­i­cy. It’s not being solved with one actor pulling one lever and one actor pulling anoth­er lever in dif­fer­ent direc­tions.

Cameron  13:28

So, the bot­tom line is, as you said last week, you think that all of the mon­ey print­ing that went on prob­a­bly has had some impact on the cur­rent infla­tion, but there’s a lot of inter­na­tion­al fac­tors play­ing here, too, that our gov­ern­ment and the RBA real­ly can’t do much about.

Tony  13:45

Yes, but we can do a lot about it. I mean, for a start, the rais­ing of inter­est rates would have hap­pened a lot quick­er and a lot soon­er, which would have been a lot health­i­er and help­ful, if prop­er­ty prices were includ­ed in the infla­tion fig­ures. They’re not and I think that’s a mis­take. I think they were tak­en out, you know, for polit­i­cal rea­sons, and I think they should be put back in. So, when the RBA flood­ed the mar­ket with cheap mon­ey and peo­ple were stuck at home, they paid more for homes, and we had a large prop­er­ty increase. I could even call it a bub­ble. That would have been the time to start rais­ing rates because that’s not good for the econ­o­my for all sorts of rea­sons, about peo­ple get­ting access to accom­mo­da­tion notwith­stand­ing, but also the fact that you’re cre­at­ing a bub­ble in the one asset that’s the the largest in Aus­tralia in terms of indi­vid­ual own­er­ship. So, there are wrin­kles in the sys­tem, and it’s work­ing as a very blunt tool, and it needs updat­ing.

Cameron  14:42

Well, I’m glad you under­stand what’s going on, because it’s all over my head.

Tony  14:47

I’m not sure I do. I’ve just seen it all before.

Cameron  14:50

All of this has hap­pened before, and all of this will hap­pen again, as they said in Bat­tlestar Galac­ti­ca. My last news sto­ry…

Tony  14:56

The remake.

Cameron  14:57

Yeah, the remake. Yeah. Ah, this is also from the Fin, John Kehoe the eco­nom­ics edi­tor: “labour added again in sur­prise move on div­i­dends. The Albanese gov­ern­ment has shocked investors by propos­ing to ret­ro­spec­tive­ly stop com­pa­nies pay­ing share­hold­ers ful­ly franked div­i­dends that are fund­ed by cap­i­tal rais­ings.” I remem­ber the last time the Labor gov­ern­ment were talk­ing about mess­ing around with ful­ly franked div­i­dends, you weren’t very hap­py about it. They’re talk­ing about it being ret­ro­spec­tive going back to 2016. That seems a lit­tle bit dodgy.

Tony  15:34

Yeah, I agree. Gough Whit­lam famous­ly said, “I don’t agree with ret­ro­spec­tive tax­a­tion, except for abor­tion in your case.” Which is a great line. And yeah, I can’t see the case for ret­ro­spec­tiv­i­ty in this par­tic­u­lar appli­ca­tion, or, gen­er­al­ly, any appli­ca­tion, real­ly. What’s hap­pened has hap­pened, and unless you’re com­mit­ting mur­der and they ret­ro­spec­tive­ly apply it, you can’t go back and change the way peo­ple have invest­ed. They did it based on the cur­rent rules. Labor arguably lost the last elec­tion, sor­ry, one before last one, they won the last one and they’re in pow­er, but the one before that they lost, among oth­er things, because of their attack on things like frank­ing cred­its. I’m sur­prised they’re rais­ing this again. It’s a very nar­row one, this time; what they’re seek­ing to stop is com­pa­nies, or LIC’s or what­ev­er, that have frank­ing cred­its on their accounts that they can’t dis­trib­ute because they’re either not pay­ing div­i­dends or not pay­ing enough in div­i­dends, and the frank­ing cred­its get attached to those div­i­dends. Occa­sion­al­ly, from time to time, investors will lob­by those com­pa­nies to do a cap­i­tal rais­ing and then dis­trib­ute the div­i­dend. You know, that’s fair enough, I don’t have a prob­lem with that. I don’t see what the prob­lem is in rais­ing cap­i­tals and then dis­trib­ut­ing it if it takes the frank­ing cred­its off the book. The peo­ple who were putting cap­i­tal into the com­pa­ny knew that was the rea­son for it and agreed that was the rea­son for it, and put the mon­ey in. So, I don’t see a prob­lem. Already, tax accoun­tants are com­ing out say­ing, “hey, this may stop, you know, big com­pa­nies from doing div­i­dend rein­vest­ment plans if they’re under­writ­ten.” Because that’s the kind of form of cap­i­tal rais­ing to pay for a div­i­dend rein­vest­ment plan. So, there might be some unin­tend­ed con­se­quences. I just don’t know why they’re fight­ing this fight. It’s not a big deal. Jim Chalmers even came out and said it’s going to be worth $10 mil­lion of tax rev­enue to us, so that’s bug­ger all. He’s cer­tain­ly got big­ger issues on his desk than this one. Very strange.

Cameron  17:35

So, appar­ent­ly when Scott Mor­ri­son was trea­sur­er back in 2016, he said the Lib­er­al Par­ty was going to do this, but then nev­er got around to it. He was too busy sign­ing him­self up to secret indus­try. and fund­ing the Gov­er­nor Gen­er­al’s lead­er­ship fund.

Tony  17:59

Yes, but he asked the Trea­sur­er, turned around and asked the trea­sur­er, and Scott Mor­ri­son said “no.”

Cameron  18:04

Looked in the mir­ror.

Tony  18:05

I sus­pect what hap­pened back then, Cam, was that they announced it and then got feed­back to say “this is dumb,” and then did­n’t go ahead with it.

Cameron  18:14

Yeah, but appar­ent­ly, they thought it was a good idea. So, both par­ties, the Coali­tion and the Labor Par­ty, both seem to think this is a good idea. The explana­to­ry mate­r­i­al accom­pa­ny­ing the new draft leg­is­la­tion says it’s “to pre­vent enti­ties from manip­u­lat­ing the impu­ta­tion sys­tem to obtain inap­pro­pri­ate access to frank­ing cred­its.” So, they don’t think this is a legit way of dis­trib­ut­ing frank­ing cred­its, appar­ent­ly.

Tony  18:43

So, the Tax Office takes the view that it could be rort­ed, and tech­ni­cal­ly, they’re cor­rect. And it could be rort­ed in a large way. So, what the tax office is bank­ing on is the fact that there are a cer­tain per­cent­age of com­pa­nies out there who don’t dis­trib­ute their frank­ing cred­its, and there­fore the tax office does­n’t have to… that’s like a win for the tax office. They don’t have to give peo­ple cred­its on their tax returns, or even pay back actu­al cash to peo­ple who are on low tax rates, like retirees, for exam­ple. So, that’s why the Tax Office is putting this for­ward. And the case is basi­cal­ly that if peo­ple are try­ing to do this in a big way, and enough com­pa­nies or enough LICs bor­row mon­ey to release all the frank­ing cred­its, we’re going to have a big bill. So, tech­ni­cal­ly that’s cor­rect, and that might hap­pen in the future. That’s why they’re push­ing this case, but it has­n’t hap­pened to date. And it has­n’t hap­pened to date, because I don’t think the eco­nom­ics stack up that well to go to your investors and say, “hey, give us some more cap­i­tal and we’ll pay a div­i­dend and give it back to you with frank­ing cred­its.” The frank­ing cred­its, it’s play­ing around on the mar­gin to some extent, because first of all, div­i­dend yields are usu­al­ly around, say, 4%, and then the frank­ing cred­it’s a frac­tion of that. So, it’s, you know, it’s going to be a 1–2% improve­ment In the returns from the com­pa­ny for all that muck­ing around of rais­ing mon­ey and then dis­trib­ut­ing it again. It’s not high on the agen­da for most funds to seek this with com­pa­nies. So, it has­n’t been a prob­lem in the past. I just think that they’re on hid­ing to noth­ing with this one.

Cameron  20:17

And one of the impacts to us as investors, I know Jeff Wil­son is not too hap­py about it. What are the real impacts to us if this goes ahead?

Tony  20:26

I haven’t real­ly delved into it with Jef­f’s case. I know Jeff suc­cess­ful­ly over cam­paign many years ago to say that an LIC… in the past, the pri­or law was an LIC could not pay a div­i­dend if it did­n’t make any prof­it. And last week I spoke about the times when LIC’s don’t make a prof­it because they haven’t sold any­thing, but they’re sit­ting on large paper prof­its. So, the LIC is still a good invest­ment even though it’s not mak­ing a prof­it in an account­ing sense. What Jeff lob­bied for and achieved was a change in the law, to say that if there was retained prof­its or oth­er assets on the bal­ance sheet that could be used to pay a div­i­dend, even though the LIC did not make a prof­it that half or that year, they could still pay out a div­i­dend. He’s very focused on his suite of LIC’s pay­ing out a high yield; that’s what attracts a lot of peo­ple to, par­tic­u­lar­ly, WAM cap­i­tal, the biggest of his LICs. So, I think last time I had a look it was prob­a­bly on at least 5% yield, and then ful­ly franked grossed up it more than that, you know, sort of 7.5%/8% yield. So, he’s wor­ried that there might be an impli­ca­tion where­by if he tech­ni­cal­ly does­n’t make a prof­it in his LIC, that some­how, it’s seen as a cap­i­tal rais­ing if he pays it out of retained earn­ings. That’s my guess, but, you know, I haven’t delved into it too deeply.

Cameron  21:49

Alright, well, thanks for that. I thought I’d do a port­fo­lio update. The dum­my port­fo­lio since incep­tion, which as we said is just over the three-year mark, is cur­rent­ly track­ing at 12.96% per annum. Not quite the 15.

Tony  22:04

No, it’s gone down.

Cameron  22:06

Well, a week ago it was 18.

Tony  22:08

Yeah.

Cameron  22:10

Now it’s down to near­ly 13 after the last week. Ver­sus the SPDR 200 Fund, which is at 4.46% over the same time peri­od, so we’re out­per­form­ing by rough­ly you know, not quite three, I guess. I don’t know what that is. Two point some­thing.

Tony  22:28

So, the index has fall­en quite a bit, too, has­n’t it?

Cameron  22:30

Yeah, it was about 6.66 last week — no, sor­ry, a month ago. A month ago, it was 6.66, we were 18.51. We’ve dropped down. You go back to July ’21, we were run­ning at 38.74% per annum ver­sus 9.3% for the SPR 200. This halve we’ve come down by 60%, so it’s been a rough year and a bit for our port­fo­lio. In the last cou­ple of days done a bit of trad­ing, last week actu­al­ly, I’ve sold off Yan­coal, PWR — bought and sold PWR, bought it one day, sold it the next. BFG, sold that, MQG I sold last week, TER I sold last week, and that’s it. The only buy I’ve had in the last week was PWR and then sold it the next day, as I said. It’s been real­ly hard to find any­thing that’s not a Josephine or not hav­ing a down day in the last week. It’s been real­ly tough.

Tony  23:37

Yes, it has been. Espe­cial­ly in the last twen­ty-four hours. The mar­kets up a lit­tle bit today, but Wall Street was down again, so I’m not sure how long that ral­ly is going to last. But yeah, I sold sev­en of my stocks in the last twen­ty-four hours as well.

Cameron  23:47

Wow.

Tony  23:47

It’s been tough. Those num­bers over the longer term, I mean, they’re illus­tra­tive of the fact that we tend to fol­low the ASX index in terms of direc­tion, but we still out­per­form. I guess that’s one of the things that I’ve found over the years, is that we oper­ate in the same mar­ket; so, the mar­ket goes up, the mar­ket goes down and our port­fo­lio does too, but it still tends to out­per­form or does out­per­form over the long term. It just does direc­tion­al­ly still fol­low the way that the index is going.

Cameron  24:16

Well, we’re still out­per­form­ing, and I guess that’s all we can real­ly aim for. If I look back, what was last week? So, the 20th, we were 15.65 last week ver­sus 5.84 for the SPR 200. So, it’s been a bru­tal week for us.

Tony  24:34

And the mar­ket, too.

Cameron  24:35

Yeah, but com­pared to the top funds in Aus­tralia, we’re up in the top five easy. So, yeah, it’s all rel­a­tive.

Tony  24:43

Yeah, and I guess to put it in per­spec­tive it has been a bru­tal twen­ty-four hours and last week was­n’t great either. You know, this is part of invest­ing. These are tidal flows: the tide comes in, the tide goes out. The thing that I take solace in is the fact that I’ve now got some cash and when things turn around, I can invest it. But also, too, I haven’t been wiped out; no one gets wiped out using this process, right? We can drop in per­for­mance, and that’s, you know, hard to take emo­tion­al­ly, but we don’t get wiped out because we sell up and move out before­hand. And that’s why even repeat­ed­ly over the last three years, and even why as late as last week I was say­ing, “look, don’t mar­gin lend in times like this. Don’t bor­row too much. Just keep your keep your pow­der dry and wait for a def­i­nite turn in the mar­ket before get­ting back in.”

Cameron  25:34

Real­ly?

Tony  25:35

Yeah. I’m still using the same sys­tem to sell things, so the rule ones and the three-point trend lines, and when we can’t find any­thing else to buy, then that goes to cash, and we wait for the good times to come round again. So, we’re not being wiped out. But if you’re lever­ag­ing a lot, par­tic­u­lar­ly into this kind of volatile mar­ket which is going against us at the moment, you can get wiped out. You know, Buf­fett famous­ly said, if he’d mar­gin loaned Berk­shire Hath­away, he would have been wiped out twice dur­ing his life.

Cameron  26:06

No, I meant, sor­ry, when you say wait for the mar­ket to turn around, you’re still buy­ing stuff if it turns up as a buy on the buy list, right.

Tony  26:13

Cor­rect, yeah. If it’s not a Josephine, if it’s hav­ing an up day, all those things, yeah. So, I did buy some more White­haven Coal today, but that was the only thing I could find a buy.

Cameron  26:22

I might have to do that with the dum­my, you know, look at things that we already own and dou­ble up on some stuff if they’re buys. I think it’s still going to be hard to find any­thing.

Tony  26:32

Yeah, I think that’s fine.

Cameron  26:34

Put some of that mon­ey back to work. What else have you got to talk about today, TK?

Tony  26:39

Yeah. So, I mean, I don’t want to labour the RBA again, but just one thing that struck me out in all the writ­ings on the week­end and last week about the RBA, is it’s not going to pay a div­i­dend this year. So, while inter­est rates are going down — which means, if you remem­ber, inter­est rates are the reverse of what’s hap­pen­ing with the cap­i­tal gain or loss on the bond, bonds have been gain­ing in cap­i­tal. And so, the RBA sit­ting on all those bonds has been mak­ing mon­ey on paper and then pay­ing a div­i­dend of about $2 bil­lion a year to the gov­ern­ment. That’s not going to hap­pen this year, and actu­al­ly if it was a sep­a­rate com­pa­ny, it would be trad­ing insol­vent. So, its lia­bil­i­ties now out­weigh its assets because of all the bond write-downs it’s had to do in the last six months because of ris­ing bonds. And would­n’t you know it, they were buy­ing bonds dur­ing the QE phase. So, they’ve stocked up and now they’re suf­fer­ing from that, too. The last time I remem­ber this hap­pen­ing it did­n’t end well, and the gov­ern­ment actu­al­ly had to inject bil­lions of dol­lars onto the RBA bal­ance sheet to keep it oper­at­ing. So, watch this space. It may not hap­pen again this time, and hope­ful­ly it won’t, but it’s not going to pay a div­i­dend for the fore­see­able future. And that’s not the end of the world. I mean, the gov­ern­ment is mak­ing a lot of mon­ey out of min­ing tax­es in par­tic­u­lar, with the iron ore boom and now the coal boom going on. So, the gov­ern­ment aren’t cry­ing Paul, but it’s again one of these inter­est­ing intri­ca­cies with the RBA that as far as the accoun­tants are con­cerned, it should­n’t be oper­at­ing and it’s now sit­ting on a big loss. Any­way, a cou­ple of stocks in the news dur­ing the week. So, up until yes­ter­day, I’d owned Viva ener­gy, which is the old Shell busi­ness — which I used to work for — and they were in the news because they bought back the Coles Express retail site. The fuel busi­ness was leased over to Coles fif­teen or so years ago, back when shop­per dock­ets were first intro­duced and they were all the rage, and they cre­at­ed a big increase in vol­ume for Shell and BP and Cal­tex in par­tic­u­lar, which aligned them­selves with the shop­per dock­ets. At least Shell and Caltech’s did, I’m not sure about BP, but Shell and Cal­tech did. Coles has decid­ed it’s going to end that deal a bit ear­ly, and Shell are very hap­py to take back the oper­a­tion and the prof­it of the retail sites, and I guess it’s a good time. Fif­teen years ago, the retail mar­ket was­n’t earn­ing any­thing at all out of petrol sales, and all the income was com­ing through the con­ve­nience store. That income through con­ve­nience is still there, but the retail petrol mar­gins are strong again, so Viva ener­gy is hap­py to buy it back. The oth­er two stocks in the news: White­haven Coal has announced a $2 bil­lion buy­back, and that sug­gests to me that they see that the mega prof­its in coal are set to con­tin­ue. They would­n’t be buy­ing back their stock if they thought that the coal price was going to drop off in any mean­ing­ful way. And last­ly, one for you Cam, I saw in the paper on the week­end Apol­lo Tourism and Leisure shares went up because they…

Cameron  29:46

Some­body’s buy­ing some­thing that they’re sell­ing, but it ain’t me.

Tony  29:50

Yeah, so Apol­lo tourism and Leisure have been try­ing to merge with a New Zealand Com­pa­ny called Tourism Hold­ings for a while, for the last six months, and the com­pe­ti­tion reg­u­la­tors haven’t liked it because it lessens com­pe­ti­tion in that hol­i­day camper­van rental mar­ket. Then Apol­lo announced last week that they were going to sell off some assets to their com­peti­tor, Juicy, which oper­ates camper vans, and they also are going to sell their star rental brand as well in the hope that that was going to appease the com­pe­ti­tion reg­u­la­tors con­cerns about hav­ing too much con­cen­tra­tion in the pro­posed merged com­pa­ny. And on the basis of that, the Apol­lo shares rerat­ed to be clos­er to what the val­u­a­tion is if the merg­er goes through. So, three shares in the mar­ket from our buy list.

Cameron  30:38

The joke there for peo­ple that haven’t been around very long is, when we first start­ed the dum­my port­fo­lio three years ago — or three and a half years ago is when we start­ed buy­ing shares — Apol­lo was the first stock that we added to it and then we had to sell it like a week lat­er. And then we bought it again a month lat­er and had to sell it a week after that, too, so I was like, “that’s it. We’re nev­er buy­ing Apol­lo again.” But I look at it now, I think back then it was trad­ing around two years ago, Sep­tem­ber 2020, it was trad­ing at 26.5 cents. It’s now at 65 cents, so if we’d held on to it, we would have done very well out of it, but it’s been a rocky road over that peri­od.

Tony  31:23

It has, has­n’t it? The last thing I want­ed to talk about was the ABC news on TV have been upping its busi­ness news sec­tion over the week­end, which I quite liked. So, they’re devot­ing more to what’s going on. The reporter by the name of David Chau did an excel­lent job in sum­maris­ing what was hap­pen­ing with the mar­kets that were in tur­moil Fri­day night, and with the UK elec­tion, so well done to him and to the ABC for giv­ing him some space. But it was a bit of a “don’t look up” moment on the week­end, I think it was Sun­day morn­ing, when the two blonde reporters behind the desk watched David Chau do his very in-depth cov­er­age of what was going on eco­nom­i­cal­ly, and they were like lambs in the head­lights. He fin­ished and they did­n’t know what to say, and then one of them said, “oh, and now an arti­cle about old peo­ple exer­cis­ing where you get to meet new peo­ple.” It was a real clanger.

Cameron  32:17

How many times did he men­tion King Charles in the news report?

Tony  32:21

None.

Cameron  32:22

Real­ly? I thought it was oblig­a­tory that every ABC sto­ry had to men­tion the roy­al fam­i­ly at the moment.

Tony  32:29

Well, not that one. He was good.

Cameron  32:30

That’s good. And you’re doing a pulled pork for us this week, TK?

Tony  32:35

I am. And it took me a while to find a com­pa­ny that we had­n’t cov­ered, and par­tic­u­lar­ly one that was going up and worth hav­ing a look at, but I found one. It’s on our buy list. It’s one I haven’t come across before and it’s only a small one, but it is wor­thy of peo­ple hav­ing a look at: it’s called Xtek. The ASX sym­bols are XTE, and it was up 4% yes­ter­day when the mar­ket was going down. So, that was good.

Cameron  33:04

But do you know why?

Tony  33:06

Well, they announced a con­tract, appar­ent­ly.

Cameron  33:09

Well, that’s one rea­son, but it’s also accord­ing to Doug — QAV Club mem­ber, Doug — it was all the QAV­er­icks dri­ving it and buy­ing it yes­ter­day because it was on top of our buy list. And I went to buy it yes­ter­day mid­day because Doug was talk­ing about it and it was on our buy list, and it was down 7%. I was like, well I’m not buy­ing it, its down 7%. And then it fin­ished up 4% at the end of the day. Doug Vass’s the­o­ry — a QAV club mem­ber who lives in Spain of all places, but he’s an Aussie — thinks it was the QAV­er­icks who were buy­ing it even though it was hav­ing a down day and drove it up. I did buy it today, though, and then it went down 2%. So, thanks every­one who dumped it. Any­way, on to XTE, Tony.

Tony  33:58

Yeah, so I did­n’t know that about Doug. I found this one this morn­ing as well. So yeah, it’s a com­pa­ny based in Can­ber­ra, but it has fac­to­ries in the US and Aus­tralia, in South Aus­tralia. It pro­duces and sells hel­mets, body armour, and vests, so per­son­al pro­tec­tive gear, for the mil­i­tary and for police forces, and also secu­ri­ty tech sys­tems as well as secu­ri­ty tech hard­ware. So, things like drones and sen­sors and those lit­tle robot vehi­cles that look a bit like bomb dis­pos­al vehi­cles, appar­ent­ly are like drones but oper­ate on the ground. In Xtek speak, they’re a per­son­al bal­lis­tic pro­tec­tion equip­ment com­pa­ny and recon­nais­sance and sur­veil­lance UAV and UGV com­pa­ny. I guess UAV’s unmanned aer­i­al vehi­cle and UGV unmanned ground vehi­cle. That’s what they do. I guess I should point out the risks with a com­pa­ny like this; the fact that they’re based in Can­ber­ra with facil­i­ties else­where makes me think that they sur­vive on con­tract wins. So, they want to be close to where the con­tracts are assigned, but they man­u­fac­tur­er were its cheap­er. This can be good and bad. It’s a good allo­ca­tion of divi­sion of labour, I guess, but they remind­ed me of anoth­er com­pa­ny which I’ve had in my port­fo­lio over the years, I think it’s been on the buy list in the last three, called Austil, ASB, which start­ed life as a ship man­u­fac­tur­er, ship builder from Perth. Orig­i­nal­ly, I came across it because they had a lot of tail­wind when they came up with the design for the cata­ma­ran fer­ries that peo­ple will have trav­elled on at some stage, espe­cial­ly if you’ve been out to places like the Whit­sun­days, Hamil­ton Island, that kind of thing, where you get on a very large cata­ma­ran. So, the Shark Cat type fer­ry that takes you over very smooth­ly. They can hold lots of pas­sen­gers and they’re cheap­er than the old style of boat to pro­duce. They even­tu­al­ly got into the pro­duc­tion of com­bat boats for the Navy, espe­cial­ly the US Navy, in what they call the lit­toral craft and busi­ness, which I under­stand is anoth­er word for coastal. So, it’s not in inter­na­tion­al waters, it’s in local waters, and they just con­vert­ed their cata­ma­rans to have guns and armour plat­ing. And that became a big busi­ness for them. But it is lumpy, and I guess the take­out from that is it does rely on con­tract wins to keep the prof­its flow­ing. Any­way, that’s the first risk. Sec­ond risk is that it’s a very small com­pa­ny, it’s $58 mil­lion in rev­enue, but a very high prof­it mar­gin which is good. I know it’s a small ADT com­pa­ny, so it won’t appeal to all peo­ple. I do hes­i­tate myself to buy small com­pa­nies like this with sub 100-mil­lion-dol­lar rev­enue items. This one’s prob­a­bly okay, because the net prof­it is high, but the basic rule of thumb is that com­pa­nies make around 4% net prof­it after tax, usu­al­ly about 10% gross prof­it based on rev­enue. And so, if you’re not mak­ing $100 mil­lion in rev­enue, and you’re only mak­ing say $2-$4 mil­lion in net prof­it, you’re not able to sock away that much for a rainy day. If you do have a bumpy year and you’re not mak­ing prof­it, it can be com­pa­ny end­ing. As opposed to, you know, a com­pa­ny which has got much high­er rev­enue and that 4% can become a mean­ing­ful nest egg on the bal­ance sheet for a rainy day. But any­way, I mean, that’s not to say that small com­pa­nies aren’t investable. And obvi­ous­ly, they often have the ben­e­fit of high growth because they’re com­ing off a small base, and we’d all like to buy an acorn and watch it turn into an oak tree. So, that’s essen­tial­ly the case here. But I just high­light those two risks. The num­bers though, which are just as impor­tant to us, if not more — and I’m using 47.5 cents which was the price yes­ter­day when I did the analy­sis — the first thing to note about the num­bers is there’s no con­sen­sus fore­cast, and no div­i­dend. So, we can’t score based on IV 2 cen­sus fore­cast or div­i­dend yield. How­ev­er, the finan­cial health in Stock Doc­tor is strong and recov­er­ing, which we like. So, that scores well. A cou­ple of met­rics we don’t score I just want­ed to call out: the ROE is 20%, the PE is 7.5, so high cap­i­tal gen­er­a­tion and low PE which is good. Pr/OpCaf is 1.84 which is real­ly low, so that’s great, throw­ing off lots of cash. And again, I point out that’s prob­a­bly because of the con­tracts it wins, so that mix could change, but doing well at the moment. Net equi­ty per share is 35 cents, and so book plus 30% is 45 cents, which is almost the share price at 47.5 cents. So, if it drops a lit­tle bit it may score on that one. Inter­est­ing­ly enough, no own­er founders. I found that strange for a small com­pa­ny, but I’m not sure the back­ground of the own­ers of this one. I did note there was an inter­im CEO in the role, so there could have been some cor­po­rate activ­i­ty recent­ly for this com­pa­ny. And in read­ing some of their releas­es, they were talk­ing about get­ting back to basics on what they do. So, there could have been some cor­po­rate activ­i­ty in this com­pa­ny in the last lit­tle while. Over­all, though, the qual­i­ty score for this com­pa­ny is 10 out of 12, or 83%, and the QAV score totals 0.45, which is high up on our buy list. So, check­out XTE.

Cameron  39:32

Thank you, Tony. Should we get into some Q&A mate?

Tony  39:36

Yeah, sure.

Cameron  39:37

Coin­ci­den­tal­ly, the first ques­tions also from Doug. “Just an update on my short­ing exper­i­ment,” he men­tioned recent­ly, I’m not sure if it was last week or the week before that he was doing some short­ing and we said good luck with that, be care­ful. That’s when you were talk­ing about being care­ful about lever­ag­ing, I think. “Now the big ques­tion is when to get out when the main mar­ket indices become buys again, or could that just be false pos­i­tives? Ie the ‘buy­ing the dip’ sce­nario. More research to do, stay pos­i­tive my QAV­er­icks.” He includ­ed a lit­tle chart of his per­for­mance, looks like it’s doing very well. I know you’re not a short­er, but do you have any thoughts on when to get out of short­ing, Tony?

Tony  40:16

Yeah, so what Doug’s doing, I guess, isn’t short­ing him­self, he’s buy­ing into funds that short the index. So, I’d love to know how this turns out for Doug. But what Doug has done is when the mar­ket became a three-point trend sell, he bought into a cou­ple of funds that were short­ing the index and so he’s been prof­it­ing from that sit­u­a­tion. But the ques­tion he asked is when to reverse that, and I think that, well, if I did this what I would do is when the mar­ket, the index becomes a buy again, I’d sell the fund that shorts the index. But yeah, I mean, cer­tain­ly some­thing I’ve been think­ing about a lot over the last week is whether we should short or sell out of our port­fo­lio when the mar­ket turns down in gen­er­al. I noticed AFI became a three-point trend­line sell last week, so, you know, start­ing to reduce our posi­tion in equi­ties around that time might be help­ful. The last time I did a deep dive into this, though, I was­n’t find­ing a strong cor­re­la­tion. So, in oth­er words, going back in his­to­ry and look­ing at my per­for­mance ver­sus down­turns in the ASX, some­times it worked, and some­times it did­n’t. So, that’s what stopped me from doing it, but that’s for a cou­ple of rea­sons, I guess. One is that our port­fo­lio, even though I said before it does for the ASX as a trend, it cer­tain­ly does, it does­n’t always cor­re­late exact­ly. That can be because, you know, we can hold stocks which don’t cor­re­late to the way the index is going. And, you know, clas­si­cal­ly, for exam­ple, often­times when the econ­o­my’s not doing well, gold goes up as a safe haven, and I’ve owned gold stocks dur­ing those times in the past, which has turned out well. So, yeah, I still oper­ate com­pa­ny by com­pa­ny rather than over­all on the ASX. But the thing I’m prob­a­bly even more inter­est­ed in look­ing at and explor­ing fur­ther is whether we should­n’t be doing some­thing to reduce our expo­sure to equi­ties when the actu­al port­fo­lio per­for­mance becomes a three-point sell, like our dum­my port­fo­lio has done in the last lit­tle while. That might be a bet­ter indi­ca­tor for us than using some­thing like the index, but it still requires a lot more research.

Cameron  42:28

Okay, you need to explain a few of the things you said there to me. So, when you’re talk­ing about if you were to be using short­ing tools, buy­ing these funds. So, BBOZ, BEAR, BBUS, these are index­es that are short­ing the index?

Tony  42:43

Yes.

Cameron  42:43

Is that what they’re doing?

Tony  42:43

Cor­rect. Yeah, so they should oper­ate as an inverse to the index: index goes up, they go down, index goes down, they go up.

Cameron  42:53

And so, you said if you were doing this you would sell these index­es when the over­all index becomes a buy again. So, you would just be using a five-year month­ly chart to deter­mine when it becomes a buy again like we do with a stop?

Tony  43:12

Cor­rect. And that could be too late. As we’ve seen some­times with charts, the buy line or sell line could be a long way off where the cur­rent posi­tion is. So, it could, you know, I’ve nev­er done this so I’m not talk­ing from expe­ri­ence if I were to do it and giv­en that it looks like Doug has tak­en the three-point trend sell line for the for the index, I’d be look­ing at three-point buy line for that posi­tion.

Cameron  43:35

And you said that might be some­thing to con­sid­er when our port­fo­lio reach­es its sell line. You’re doing the same thing? We haven’t been around for five years; how do you deter­mine when our port­fo­lio over­all is in sell ter­ri­to­ry? Three-year month­ly chart?

Tony  43:54

Yeah. I guess in my case I’ve been around longer than that, but for the dum­my port­fo­lio it’d be a three-year month­ly chart. We can see when if we had applied a three-point month­ly chart to our per­for­mance, you could just look at Navexa to get that, we could see when it became a sell. And there’s a lot more work I need to do on that, Cam, because does that mean we sell every­thing in the port­fo­lio? Does it mean we buy inverse index funds like Doug is doing? There’s a whole lot of work that I need to do before I can even rec­om­mend any­thing on this sort of score.

Cameron  44:25

Well, I think Navex­a’s charts are month­ly by the looks of it, and I can go back three years and try and draw some­thing here. Have you already done this exer­cise?

Tony  44:44

I did. And from mem­o­ry, it became a sell around Christ­mas, I think.

Cameron  44:50

look­ing at this, it would have become a sell prob­a­bly June ’21. It was still going up then. If I take the COVID cough as L1 and I take Novem­ber 2020 as L2, it would have become a sell June ’21, I think. But then there was anoth­er low point after that, which means, depend­ing on when we were to sit down and do this, would have been a sell prob­a­bly August ’21.

Tony  45:25

Just look­ing at the Navexa port­fo­lio in August 2021, I’m not sure what the port­fo­lio val­ue was back then.

Cameron  45:32

I mean, I could just type the num­bers in here. What do you want? What date do you want? End of August 2021? Port­fo­lio val­ue would have been $31,616.

Tony  45:42

Right. And the port­fo­lio val­ue now is $28,600. So, we would have ben­e­fit­ed from sell­ing back then.

Cameron  45:49

But we would have been out of the mar­ket that entire time.

Tony  45:53

Yep, I would think so.

Cameron  45:53

Right.

Tony  45:55

I can’t see a buy since then. So, it’s inter­est­ing, it’s worth look­ing at. But like I said, I did do a deep dive a while ago and it did­n’t cor­re­late one to one.

Cameron  46:07

Okay.

Tony  46:08

Some­times it works, some­times it did­n’t.

Cameron  46:10

Very inter­est­ing.

Tony  46:11

It is. I’d be glad to even get Doug on the show and take us through his learn­ings at some stage, too.

Cameron  46:17

Yeah, that’d be great. Let us know, Doug, when you’re ready to do that. Mov­ing right along. Ed: “hi Cam. Won­der­ing whether TK had any thoughts or back test­ing around observ­ing major trig­gers of a gen­er­al down­ward trend in the mar­ket? This is a shot of the ASX 200 yes­ter­day, close of busi­ness. Using the rules, this sug­gests we should have exit­ed the mar­ket when it crossed the three-point trend­line last week. Hind­sight is a beau­ti­ful thing.” Sim­i­lar sort of approach, Ed.

Tony  46:42

It is. Yeah. Well, I think I’ve just cov­ered that. I think if you’re an index investor and you only own the index, then yeah, for sure. It’s time to get out. Like I said before, Aus­tralian Foun­da­tion Invest­ment also crossed its sell line. But we have a dif­fer­ent sort of stock-by-stock approach, so that’s why I haven’t been exit­ing. But as it turns out, I’ve exit­ed half the port­fo­lio any­ways. We may be look­ing at this and then it’s solv­ing itself for us any­way using the cur­rent sys­tem.

Cameron  47:15

Yeah, so we go to cash on a stock-by-stock basis. And as you say, some­times your port­fo­lio has fol­lowed the index and some­times it has­n’t, so if you had sold and gone to cash in those times when it did­n’t fol­low the index, your over­all per­for­mance results may not be as good. Is that the think­ing?

Tony  47:35

Yeah, cor­rect.

Cameron  47:37

Julian: “I want to start a con­ver­sa­tion about the pros and cons of ETFs. I’m only new, but it seems that in the past ten- or fif­teen-years ETFs have just explod­ed on the back of Buf­fet­t’s advice on diver­si­fi­ca­tion and obser­va­tion around man­aged funds ver­sus the mar­ket. The premise for invest­ing in an index ETF seems extreme­ly sound, espe­cial­ly if you get one with low fees. My con­cern is in two parts: 1) if every fund man­ag­er, Super­fund and risk adverse investor now includes an ASX 200 ETF, for exam­ple, as a large part of their port­fo­lio, is there a dan­ger that this may arti­fi­cial­ly inflate the mar­ket cap of the top 200 com­pa­nies just because they were in the top 200 when they became a thing? Is it almost an ETF bub­ble? 2) if the mar­ket works on a risk equals reward method­ol­o­gy and ETFs con­sis­tent­ly bring back bet­ter than man­aged returns, the reward now seems to be out­strip­ping the risk. Thus, is it like­ly that ETFs will see, like all streaks, a vio­lent cor­rec­tion?” Now I know we have talked about this before, but I thought it’s always good to recap some­thing like this. Do you have any thoughts, Tony?

Tony  48:46

Yeah, I do. A cou­ple of thoughts. So, Buf­fet­t’s com­ments on ETF funds — and I don’t think he’s actu­al­ly called out ETF funds so much as he’s called that index funds — as being a default invest­ment for most of the pop­u­la­tion is in the con­text of him say­ing that most fund man­agers don’t beat the mar­ket, most active fund man­agers don’t beat the mar­ket. And also, in the con­text of him say­ing “if you don’t do it your­self, and you’re not good at it, then buy an index fund” rather than give your mon­ey to, you know, the typ­i­cal Wall Street 2&20 fun­ders he calls them — so, the fees are 2% per admin and 20% of per­for­mance. And that’s pret­ty sound advice, and we spoke about in the past that most active­ly man­aged funds don’t beat the index, so why would you invest in them? And a lot of Buf­fet­t’s com­ments around this came about because of acad­e­mia going back to the 80s, I think, from mem­o­ry. Around the time when I was first get­ting involved in invest­ing a guy called pro­fes­sor Eugene Fama came out with a thing called the “effi­cient mar­ket the­o­ry”, which is basi­cal­ly that you could­n’t get an edge in the mar­ket because all of the infor­ma­tion was baked into the price as soon as it was known, and there­fore the mar­ket was always effi­cient and you could­n’t get an edge, and there­fore you should buy an index fund. And that was kind of the birth of index invest­ing, I think pio­neered by Charles Schwab. Buf­fett point­ed out that he did­n’t agree with Fama because he had been able to exact infor­ma­tion­al edges and invest above mar­ket returns over a num­ber of years, and he also point­ed out to a whole heap of oth­er peo­ple who are val­ue investors who had that sim­i­lar sort of record, just not the pro­file of Buf­fett. If any­one wants to look at this, it’s a famous paper of his called “the Super investors of Gra­ham-and-Doddsville,” which he pre­sent­ed as a rebut­tal to Fama’s effi­cient mar­ket the­o­ry. Both Munger and Buf­fett even went as far as to tell peo­ple not to get finan­cial high­er edu­ca­tion, because they were being taught rub­bish at the at the uni­ver­si­ties. Hav­ing said all that, he did also say that most active­ly man­aged funds did­n’t beat the index, and that if you weren’t pre­pared to do it your­self and do it well, that you should buy an index fund. So, all of that, I guess, has been dis­tilled into the mar­ket and has come to pass. And now, sor­ry, I for­get the name of the per­son who was ask­ing the ques­tion, but they point out that index funds and ETFs in par­tic­u­lar are now dom­i­nant. And they are very large. A cou­ple of com­ments to make about that: I do hold some sen­si­tiv­i­ty towards large ETF, because just like a large man­aged fund — if man­aged funds ever grew to be as big as ETFs — they can move the mar­ket and they can move the mar­ket where you least want it to move the mar­ket, which is down. So, in times like these last lit­tle whiles, as the mar­kets are rocky and shares get sold off, then they also have to sell off shares to to keep the index weight­ings active­ly track­ing the index in their funds. Then that could tempt oth­er peo­ple to sell off and it becomes a bit of a vicious cycle, an ampli­fi­ca­tion of a mar­ket down­turn. And of course, the same thing hap­pens on the way up, and so you can get over­in­flat­ed asset bub­bles. From what I’ve seen, even though ETFs are very large in this mar­ket, and if you buy mar­ket cap, if the top trad­ed enti­ties on the share mar­ket are gen­er­al­ly ETFs and they’re even big­ger than BHP and Rio and some of the oth­er big com­pa­nies on the ASX. So, they do have an impact; if they con­tin­ue to grow, there’ll be a prob­lem. And they’ll also be a prob­lem in what’s called price dis­cov­ery. And this has prob­a­bly been one of the issues raised the most when it comes to ETFs, is that if you had a mar­ket that did­n’t have War­ren Buf­fett in it or oth­er active­ly man­aged fund man­agers in it, then who sets the price for BHP? If the ETFs are mere­ly fol­low­ing the mar­ket and bal­anc­ing their funds to reflect the mar­ket, who sets the mar­ket? The cur­rent think­ing is that ETFs will nev­er get to a stage where they’re com­plete­ly tak­ing over the mar­ket, because then there’s no one set­ting the price for BHP and Wool­worths and the banks and all that kind of stuff. But cer­tain­ly, I do agree, I think that there is an ampli­fi­ca­tion or even an echo cham­ber that goes on which is mak­ing the mar­ket a lit­tle bit more volatile than it has been in the past.

Cameron  53:05

There you go, Julian, I hope that helps. And sor­ry that I was a bit slow get­ting to that; Julian post­ed that on our group chat on the web­site, but I only noticed that he cre­at­ed a new forum today. Got a late one, late ques­tion from Phil, Tony, that came in on Face­book this after­noon. “With some­thing like ECX con­tin­u­al­ly buy­ing back shares, how do you take that into account in set­ting the 10% rule num­ber one.” Do you fac­tor in buy­backs at all into rule num­ber one?

Tony  53:37

No, not at all. And ECX is prob­a­bly a good exam­ple of why I don’t. ECX, which is Eclipse, which is a share I sold yes­ter­day but had owned for quite a while, actu­al­ly, and quite liked, has been drift­ing side­ways and down­wards for the last six months or so. It’s a vehi­cle leas­ing com­pa­ny, so ris­ing inter­est rates may not help it. But any­way, inter­est­ing case that Eclipse was tak­en over maybe two or three years ago from mem­o­ry, and it’s now run by an ex-invest­ment banker. He believes the best way to reward share­hold­ers is not to pay a div­i­dend but to do an ongo­ing buy back, con­tin­u­ous­ly. So, Eclipse has been in buy­back phase now for a while, well, since he took over so at least the last cou­ple of years. But that’s by the by. I mean, the buy­back is sup­port­ing the share price, and maybe it should be falling faster. How­ev­er, the share price is still falling, and it’s gone through our three-point trend sell line as of yes­ter­day, and if I bought it recent­ly, it would have gone through rule one. So, I don’t take the buy­back into account at all.

Cameron  54:39

And that’s sort of the same thing Buf­fett believes in too, right? Buy­ing back shares, we’ve talked about that before. It reduces the num­ber of shares on the mar­ket which means that every indi­vid­ual share that a share­hold­er owns is, in the­o­ry, worth more.

Tony  54:54

Yeah. It’s worth more and it’s also more tax effec­tive, because even­tu­al­ly If your shares are going up, you’re pay­ing cap­i­tal gains tax when you sell, or no tax if you don’t sell. Where­as, if you’re get­ting div­i­dends every six months, you’re pay­ing tax on those div­i­dends. So, it’s more tax effec­tive for a buy­back. The only caveat in Aus­tralia which is dif­fer­ent to the US in this respect is the frank­ing cred­its. So, there are ben­e­fits to some peo­ple, par­tic­u­lar­ly retirees of get­ting frank­ing cred­its, because they get a check from the gov­ern­ment equal to the frank­ing cred­its. So, they’re not get­ting taxed and they’re get­ting a refund, or they’re get­ting taxed at 15% maybe in Super, and they’re get­ting a refund. So, that negates the buy­back argu­ment. And it’s inter­est­ing that this tug of war is going on, it’ll be inter­est­ing to see what hap­pens with Eclipse because there is cer­tain­ly a large appetite in Aus­tralia for div­i­dend pay­ers with frank­ing cred­its, as opposed to com­pa­nies buy­ing back shares. So, inter­est­ing to see how this all plays out.

Cameron  55:49

So, there’s no equiv­a­lent of frank­ing cred­its in the US?

Tony  55:54

Not that I’m aware of. There was some­thing in Cana­da, but I don’t believe there’s a frank­ing cred­it in the US. But I’m not famil­iar with the US that much.

Cameron  56:04

All right. I hope that helps, Phil. Thank you, Tony. That’s it. That’s a full lid

Cameron  1:07:16

The QAV Pod­cast is a pro­duc­tion of Space­craft Pub­lish­ing Pro­pri­etary Lim­it­ed, autho­rised rep­re­sen­ta­tive of AFS sell 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.