Transcript #539

QAV 539 CLUB

Cameron  00:06

Wel­come back to QAV episode 539, record­ed Tues­day the fourth of Octo­ber, 10:51pm Bris­bane time, which would make it 2:51 pm time in the oth­er states that now have day­light sav­ings like Syd­ney. Hel­lo, Tony.

Tony  00:24

Hel­lo. Yes, we have day­light sav­ings. Spring for­ward, so we lost an hour of sleep on Sat­ur­day night.

Cameron  00:32

How are you cop­ing with that? Are you right?

Tony  00:34

Yeah, not too hard. We had a pub­lic hol­i­day on Mon­day to recov­er.

Cameron  00:39

So did we, the Queen’s Birth­day. Isn’t she dead? Why are we still cel­e­brat­ing her birth­day?

Tony  00:44

I don’t even know what it’s for. Is it Queen’s Birth­day here or is it Labor Day? I’m not sure.

Cameron  00:49

No, I think it was a Queens­land thing.

Tony  00:51

Oh, okay. How can you be cel­e­brat­ing the Queen’s Birth­day? Like, if we have it again next year, I’ll get very upset. Not that it mat­ters, I still worked yes­ter­day.

Cameron  01:03

Me too. You know who’s not hav­ing a hol­i­day: Liz Truss. Liz Truss, non-stop, just genius. What was it David Let­ter­man used to say? “Genius has no off switch.” That’s Liz Truss’s mot­to, the new Prime Min­is­ter of the UK.

Tony  01:23

I think there’re prob­a­bly peo­ple in the Con­ser­v­a­tive Par­ty try­ing to find her off-switch at the moment. She’s not hav­ing a good start.

Cameron  01:31

So, she was going to do some big tax cuts. Thought that was a great idea. The mar­ket said no, we don’t like that, and now she’s reversed her posi­tion on the tax cuts. Been in the job for what, two weeks?

Tony  01:43

Yeah.

Cameron  01:43

And she’s already had to reverse her first major pol­i­cy deci­sion. So, as you said off-air, who would have thought they could get some­one in the job that would make Boris John­son look good?

Tony  01:56

I know. I reck­on next week she’ll be in a har­ness being ziplined through Lon­don wav­ing two British flags, like Boris did. She’s opened the bot­tom draw­er and found the envelopes already.

Cameron  02:08

The three-enve­lope strat­e­gy.

Tony  02:10

She’s come out all guns blaz­ing, point­ing at both feet. Not a good start.

Cameron  02:19

No, indeed. But at least when I last looked the mar­ket was hav­ing a bet­ter day today as a result of her reversed deci­sion.

Tony  02:30

Yeah, I mean, it’s inter­est­ing, isn’t it? I was going to talk about a bit lat­er, but I’ll raise it now. I mean, the inter­est rates are ris­ing. We’ve had a lot of mon­ey — free mon­ey — slosh­ing around the sys­tem for many years since the GFC, in fact, and the inter­est rates haven’t risen much, and we’re start­ing to see the chooks come home to roost; or as Buf­fett says, “when the tide goes out, see who’s swim­ming naked.” It did­n’t take much to just about melt the UK bond mar­ket, “the guilts” as they call it. They had the guilts alright last week. Guilts over all the lever­age and the hedg­ing they were doing which they should­n’t have been doing or should have been doing in a much tamer man­ner. Long sto­ry short, there’s a lot of peo­ple tak­ing extra risks and using lever­age because inter­est rates have been low and bond yields have been return­ing not much until recent­ly, and that’s come home to bite them now inter­est rates are ris­ing. And then some­thing comes out of the blue, like it always does, this prover­bial Black Swan, and sud­den­ly we see there’s prob­lems in the bond mar­ket in the UK. The gov­ern­ment has to raise a lot of mon­ey to do what Liz Truss want­ed to do, which spooked the bond mar­ket as well. And then we find out that there were all these pen­sion funds that still defined ben­e­fit, which is, I guess, dif­fer­ent to most Aus­tralian pen­sion funds — there’s prob­a­bly a few defined ben­e­fit funds left in peo­ple who’ve been employed for a long time, maybe in big com­pa­nies, maybe even in the pub­lic ser­vice, I’m not sure. But in Aus­tralia, they’re a rare breed. I know in Cana­da they were still being used a lot, and it sounds like the UK, and they were oper­at­ing on very fine mar­gins. But it seems like a bit of exces­sive lever­age and risk and that’s what caused the bond mar­ket to melt in the UK; as soon as there was a bond sell off, that threw all the hedg­ing out. And it just reminds me, we’ve seen two big — I mean, we’ve seen lots of down­turns in the share mar­ket dur­ing my invest­ment life­time — but two big ones: the ’87 crash, which was before I was invest­ing, but I was cer­tain­ly in the labour mar­ket then, in in the work­force. The ’87 crash was, you know, gen­er­al­ly because of hedg­ing, and long-term cap­i­tal man­age­ment comes to mind as the poster child that went broke and sent mar­kets into a tail­spin. They were tak­ing too much risk and that was meant to be bal­anced by math­e­mat­ics, and it was­n’t of course, and as soon as a black swan event came along it through all their maths out the win­dow and they did go broke. Peo­ple who had lent the mon­ey were tee­ter­ing on the edge as well and had to get bailed out. So, to hear that the British pen­sion funds are doing that again with hedg­ing and those kinds of instru­ments is a wor­ry, and then to hear that some play­ers in the UK mar­ket were also using col­lat­er­al­ized debt oblig­a­tions — CDOs — which was one of the caus­es of the prob­lems with the GFC… It’s just amaz­ing how a) noth­ing ever changes, “this time, it isn’t dif­fer­ent,” and b) how these things creep back into mar­kets after a few, you know, rel­a­tive­ly calm years or up years, and peo­ple start tak­ing risks again. And I guess they forced into it; if you’re a defined ben­e­fits pen­sion fund, you have to have some kind of back-to-back safe invest­ment, and unfor­tu­nate­ly that was­n’t pay­ing enough to cov­er the pay­outs to peo­ple, so they start­ed try­ing to eke out bet­ter returns, and the only way to do that is to increase your risk. And as the tide goes out, now, sud­den­ly, we see that they’re swim­ming naked. So, that’s rever­ber­at­ed around the world. And then when they reverse their tax cuts, that’s kind of sta­bilised Wall Street. So, I think to be hon­est, I think what the bond traders on Wall Street are think­ing to them­selves is “hmm, if in the UK, the gov­ern­ment has crashed the mar­ket, and the Bank of Eng­land has been forced into quan­ti­ta­tive eas­ing again,” which is bond buy­ing, which is forc­ing up the price of bonds, “what can we do in Wall Street now to force the Fed to do a U‑turn and start buy­ing again.” So, I would­n’t be sur­prised if the ultra-smart peo­ple who trade bonds in Wall Street come up with some­thing as well to cur­tail the inter­est rate ris­es, but I don’t know what that will be. But some­one smart will think of some­thing. But yeah, it’s just, it’s just amaz­ing. And of course, it’s the bond mar­ket which can dri­ve the share mar­ket, because it dri­ves inter­est rates which dri­ves the share mar­ket. So, yeah, it’s inter­est­ing to watch where the levers are being pulled and what moves the mar­kets, but yeah, just a com­plete mess in the UK at the moment. And Cam, just as an aside, speak­ing of inter­est rates, I’ve just seen the Reserve Bank has lift­ed the cash rate by 0.25 a per­cent­age point today. We’re record­ing this at near­ly three o’clock Syd­ney time, which is inter­est­ing, too, because every­one pre­dict­ed 0.5, so that might stir a bit of a ral­ly tomor­row in the share mar­ket.

Cameron  07:23

So, we’re going to have to change the inter­est rate in our spread­sheet again.

Tony  07:28

We will, yep. We’ll change it for our IV cal­cu­la­tions by adding 0.25 to it, and we’ll need to change it in the bank mort­gage rates as they start to rise. Some­times they lag by a week or so, but they’ll start to rise soon as well. That’s our test for div­i­dend yield.

Cameron  07:44

So, inter­est rates con­tin­ue to go up. The mar­ket is still up today. About an hour left. It’s up 3.26% today, the All Ordi­nar­ies.

Tony  07:56

That’s a huge increase, isn’t it? More than 3%.

Cameron  08:00

It is huge.

Tony  08:01

In one day. That’s one of the biggest ris­es I’ve seen for a long time.

Cameron  08:06

Well, the Dow Jones was up 2.6%, so, you know, we’re even a lit­tle bit bet­ter than that. NASDAQ was up 2.91% last night. So, yes, a real­ly good day. But it has­n’t been a good week over­all for the mar­ket. It’s been doom and gloom yet again in the last week, and that has affect­ed our port­fo­lio of course. But before we get into that, into port­fo­lio updates, let’s talk about coal, Tony. Because when we’re look­ing at our com­mod­i­ty checks at the begin­ning of each week, we decid­ed this week that ther­mal coal was still a buy. It’s roar­ing upward still. But cok­ing coal, or met­al­lur­gi­cal coal, is actu­al­ly a Josephine. And then I screwed up and went bought SMR for our port­fo­lios today, which is actu­al­ly cok­ing coal. After sell­ing it last week I bought it again and I should­n’t have, but I’m an idiot. But I want­ed to ask you about com­pa­nies like Yan­coal, YAL. When we’re in a sit­u­a­tion where ther­mals a buy, coking’s a Josephine — or let’s say it was a sell, either way — and we’re look­ing at a coal stock like a YAL, and I added some YAL to one of our port­fo­lios on Fri­day, I think. How do we, like, do we have to get down into the nit­ty grit­ties and fig­ure out for each coal com­pa­ny what per­cent­age of their coal is ther­mal, what per­cent­age is cok­ing and…

Tony  09:29

Yep.

Cameron  09:30

Oh, real­ly?

Tony  09:31

Yeah, it’s what we had to do last year when we were look­ing at iron ore com­pa­nies, because they weren’t just sin­gle met­al com­pa­nies. BHP and RIO don’t just mine iron ore they, they sell cop­per occa­sion­al­ly, and gold, and oth­er things as well. So, we had to check that iron ore was the pre­dom­i­nant met­al. And there were oth­er small­er min­ers, par­tic­u­lar­ly in the cop­per sec­tor, which are often cop­per and gold, and we had cas­es where the cop­per price was going up and the gold price was going down, or vice ver­sa. So, we have to check. It’s not always con­sis­tent, but Stock Doc­tor will some­times, on the front page, tell you the break­down of sales by type. It does­n’t in Yancoal’s case, so I had to go back to the lat­est results announce­ment and scroll down until it told me how much the sales were by type. In Yancoal’s case it was 3.9 bil­lion of ther­mal coal sales last year, and 0.95 bil­lions of cok­ing. So, it’s pre­dom­i­nant­ly a ther­mal coal com­pa­ny.

Cameron  10:31

So, in that case, we would say, okay, we will rely on the sta­tus of the ther­mal coal com­mod­i­ty price and dis­count or ignore the cok­ing coal. Where­as with SMR, it’s most­ly met­al­lur­gi­cal coal as I under­stand.

Tony  10:47

Cor­rect, yeah.

Cameron  10:48

Okay.

Tony  10:49

And I guess just to add too, you know, I make mis­takes, you’ve just made one, but it hap­pens with investors every­where. You’ve just got to decide whether you want to sell it now and reverse it, but I pre­fer to hold on to it and then just use our nor­mal three-point trend lines and rule one alerts, or stop loss­es, to sell out.

Cameron  11:08

Well, it’s up, SMR is up 6% since I bought it this morn­ing. Real­ly, I’m a genius is what I’m try­ing to say here. Yeah, I’m QAV­er­ick of the Week try­ing to prove that our rules are bull­shit.

Tony  11:22

Bend­ing the rules. Well, I mean, the inter­est­ing thing about mis­takes is we would­n’t be here if it was­n’t for mis­takes. I mean, it was always a key point that I picked up…

Cameron  11:31

Are you say­ing you were a mis­take, Tony? Is that what you’re say­ing? My Moth­er always tells me I’m a mis­take.

Tony  11:34

Very, very dif­fer­ent­ly. Although I had a lov­ing house­hold, I was def­i­nite­ly a mis­take. If you do any read­ing into evo­lu­tion, and I love Richard Dawkins’ books, evo­lu­tion only works because there’s a 5% copy­ing error in DNA when it merges. If you did­n’t have that, the gene pool would be so repet­i­tive and small we’d all look like the British roy­al fam­i­ly, for a start. But you need those errors in the gene pool to allow diver­si­ty to even­tu­al­ly creep in, and for some rea­son, I guess because of evo­lu­tion, at exact­ly the right rate to allow us to sur­vive. So, that’s why I don’t think it’s a prob­lem if we make a mis­take. It’s only one stock in a fif­teen to twen­ty stock port­fo­lio, and we know how to deal with stocks that, you know, go south, so I’m not too wor­ried about it.

Cameron  11:37

Unfor­tu­nate­ly, I told all of our sub­scribers that I bought SMR. So, they put the price up, now I can get out. No, I’m not going to do that.

Tony  12:35

Gor­don Gekko, I’ve got Gor­don Gekko on the oth­er end of the line here, fold. Hair slicked back, pin­stripe suit. Mon­ey nev­er sleeps.

Cameron  12:43

“Because greed, my friends, is good. Greed is right. Greed clar­i­fies. Greed ris­es up.”

Tony  12:53

What was the famous line from Wall Street? “Go to the phone, dial this num­ber and say, ‘blue heron says Ana­cott Steel.’ ” Some­thing like that was the code.

Cameron  13:03

Some­thing like that, yeah. Good film. I love that film.

Tony  13:05

Yeah.

Cameron  13:06

Speak­ing of Gor­don Gekko; Mark sent me an email yes­ter­day to let me know that David Gottes­man, one of War­ren Buf­fet­t’s part­ners, Char­lie Munger’s part­ner’s, passed away the oth­er day. “Nine­ty-six years old, he found­ed the invest­ment house First Man­hat­tan, and after befriend­ing him in the 1960s, pur­sued enor­mous­ly lucra­tive deals with Mr Buf­fett,” accord­ing to The New York Times. Do you know about this guy, Tony?

Cameron  13:37

The New York Times says, “David S. Gottes­man, a pro­tege of War­ren Buf­fett who built a pow­er­ful Wall Street invest­ment house, First Man­hat­tan, and presided over it for half a cen­tu­ry, died on Wednes­day at his home in Rye, New York. He was Nine­ty-six. Though Mr Gottes­man cred­it­ed Mr Buf­fett with mak­ing him a Wall Street bil­lion­aire, he could have scarce­ly been more dif­fer­ent from that world-famous investor. Mr. Gottes­man did not appear on tele­vi­sion, kept his polit­i­cal opin­ions to him­self, and presided over his pri­vate­ly held First Man­hat­tan com­pa­ny with no adver­tis­ing, no com­men­tary and no tout­ing of favourite stocks. The com­pa­ny man­ages more than $20 bil­lion for its clients, most­ly indi­vid­u­als. ‘The only time a whale gets har­pooned is when he sur­faces,’ Mr Gottes­man said in an inter­view for this obit­u­ary at his fir­m’s Park Avenue office in 2013.” So, nine years ago, they inter­viewed him for his obit one day. “After he spent a decade or so drum­ming up merg­er and acqui­si­tion busi­ness for Hall­gar­ten & Com­pa­ny, an old-line Wall Street house, a friend at anoth­er firm sug­gest­ed in 1963 that Mr Gottes­man meet Mr Buf­fett since they had a sim­i­lar approach to invest­ing. ‘I was buy­ing val­ue stocks, he was buy­ing val­ue stocks,’ Mr Gottes­man said, refer­ring to the pur­chase of shares and com­pa­nies with sub­stan­tial assets sell­ing at big dis­counts. The two hit it off over a Wall Street club lunch and a sub­se­quent golf game, launch­ing a close busi­ness and per­son­al asso­ci­a­tion that last­ed for decades. ‘War­ren was smarter and knew more than any­one I’d ever met in the invest­ment busi­ness,’ Mr Gottes­man wrote in rem­i­nis­cences cir­cu­lat­ed with­in his fam­i­ly. ‘I vowed to stay close to him from then on.’ The two men began tele­phone con­ver­sa­tions every Sun­day evening, in which they dis­cussed invest­ment ideas. Mr Buf­fett, not yet in the pub­lic eye, pro­vid­ed so many prof­itable sug­ges­tions that Mr Gottes­man, by his account, found it hard to sleep after­wards.” Any­way, he end­ed up start­ing First Man­hat­tan in 1964, invest­ed a bunch of mon­ey in Berk­shire Hath­away, was a board mem­ber. I think he merged his firm with Berk­shire Hath­away at some point. Any­way, stayed close to Buf­fett for the rest of his life and did very well out of it.

Tony  13:37

I don’t, no.

Tony  14:39

Well, thanks for that. That’s inter­est­ing. Anoth­er val­ue investor, anoth­er val­ue invest­ing bil­lion­aire.

Cameron  16:03

And liv­ing until his mid-90s. So, thanks for point­ing that out to us, Mark.

Tony  16:09

It’d be inter­est­ing to know what the com­mon denom­i­na­tor is between the lifestyles of all these nona­ge­nar­i­an val­ue investors.

Cameron  16:16

Well, they’re bil­lion­aires, for a start.

Tony  16:18

Yep, so good health care.

Cameron  16:19

And lots of See’s Can­dy, I think is the oth­er one. See’s Can­dy is the secret.

Tony  16:27

I can do that.

Cameron  16:30

You got­ta be a bil­lion­aire. It only works, the mag­i­cal pow­ers of See’s Can­dy only work if you’re a bil­lion­aire. So, you know, anoth­er few years to go.

Tony  16:39

And I was also born in 1963, so, mag­i­cal year for val­ue investors.

Cameron  16:45

You were des­tined to be a val­ue investor. Port­fo­lio. Just quick­ly, I had a look at it this morn­ing. Since incep­tion, I think we’re up about 14% CAGR per annum ver­sus the SPDR 200, which is about a third of that. So yeah, that’s the port­fo­lio update; about three times the index over the last three years on aver­age.

Tony  17:19

I just want­ed to add some­thing to that, because we talked last week about why, at least for the short term, we were under­per­form­ing the index. I did notice that the Small Ord’s, on a one-year basis any­way, is down 22.2%. So, I’m not say­ing we should­n’t bench­mark against the All Ords like we do, but a large part of our dum­my port­fo­lio is actu­al­ly small cap com­pa­nies. So, you know, we’re actu­al­ly out­per­form­ing the Small Ords, but on the short term any­way, you know, under­per­form­ing the All Ords.

Cameron  17:50

Yeah, good point.

Tony  17:51

That could be the rea­son.

Cameron  17:52

What have you got on your list of things to talk about today, TK?

Tony  17:55

Oh, we’ve cov­ered some of them. I just want­ed to do a cou­ple of impli­ca­tions on where I think we are in terms of the mar­ket. What we’ve been see­ing recent­ly is the price part of the price earn­ings ratio con­tract­ing. So, stocks have been still report­ing decent earn­ings, but the price of the stock has been com­ing down, which means that the PE has been con­tract­ing. And we can see that in the mar­ket over­all, it’s back towards aver­age mar­ket rat­ings for PEs, but we haven’t seen the E drop­ping yet. So, that’s the thing we’ve got to watch for the next lit­tle while. If we do go into a reces­sion or a neg­a­tive envi­ron­ment eco­nom­i­cal­ly, we will see earn­ings start to decline, and that will be anoth­er leg down in the share mar­ket which is not pret­ty, and we don’t know we’ll get it, but it’s some­thing that we need to be aware of. And if con­tin­u­ance guid­ance works, and it does main­ly, we should start to see com­pa­nies call out dur­ing con­fes­sion sea­son that they’re hav­ing earn­ings down­grades, which will be an issue for us. Does­n’t change what we do…

Cameron  18:53

Sor­ry, what’s con­tin­u­ance guid­ance?

Tony  18:57

Con­tin­u­al guid­ance, it’s a pol­i­cy of the ASX.

Cameron  19:01

Okay, you don’t have to laugh. Just… is that what you’re talk­ing about?

Tony  19:08

Yeah, so con­tin­u­al guid­ance is a pol­i­cy of the ASX. So, every time the com­pa­ny has mate­r­i­al infor­ma­tion about its per­for­mance, it has to dis­close it. Which nor­mal­ly means they do it around con­fes­sion sea­son because they’re pulling all the num­bers togeth­er and work­ing out their P&Ls before announc­ing the whole thing and await­ing audit before announce­ment. But if they know even a quar­ter way through the year — in fact, AGM sea­son, which we’re going into now, can often also be a time when we get con­fes­sions because the com­pa­ny knows already that they’re hav­ing a tough time.

Cameron  19:41

Did­n’t seem to work very well in the lead up to the last report­ing sea­son, because I was sur­prised on a hand­ful of occa­sions in the last report­ing sea­son.

Tony  19:49

Yeah, it does­n’t seem like… I mean, the ASX does mon­i­tor this, but you don’t hear much in pros­e­cu­tions for peo­ple who don’t do this prop­er­ly. But yeah, a few lineball cas­es there, I agree.

Cameron  19:59

All right. Okay.

Tony  20:01

So, that’s one thing to be aware of. The oth­er mus­ing I’ve had about the cur­rent mar­ket is peo­ple do lose sight of the fact that we are focused on infla­tion, but infla­tion is a rate of change indi­ca­tor. So, it’s a price, or the cost, of buy­ing a mar­ket of goods, which has been stan­dard­ised by the RBA, com­pared to the price of doing it last quar­ter and this time last year. So, if the bas­ket of goods last year cost a hun­dred bucks to buy food, gro­ceries, pay your elec­tric­i­ty bill, your rent, what­ev­er, and it cost $110 for the same peri­od this year, then infla­tion is run­ning at 10%. If it cost $110 again next year, infla­tion is zero, but you’ve still got to bear the cost increase from two years ago, right? So, it’s entire­ly pos­si­ble that the RBA can get to a stage where they say, “well, we brought infla­tion down to our 2% range.” But the econ­o­my is still in bad shape. So, again, it gets back to is that the way the RBA should be work­ing? They’ve only got one lever and they’ve got one set of guide­lines, but should they have some pow­er to finesse? Because, yeah, I mean, all this infla­tion can be baked in for a long time and rais­ing inter­est rates won’t help it. Infla­tion might be gone in three to six months, but we still could be pay­ing above and prob­a­bly will be pay­ing above $2 a litre for petrol and pay­ing a lot more for our elec­tric­i­ty and gas, and a lot more for our mort­gages thanks to the RBA. But if infla­tion is at 2%, the RBA will just rub its hands and go “job done.” And it’s not. So, that’s some­thing else to be aware of, I think, and hope­ful­ly all these things are being tak­en into account with the review of the RBA that’s going on. What else? I’ve got to say, I’m increas­ing­ly pes­simistic about our chances of avoid­ing reces­sion. I’ve always had a heuris­tic that the basic mod­el for a house­hold econ­o­my is based on petrol prices, inter­est rates and the dol­lar, and we’ve now had all the legs of that stool kicked out. Inter­est rates are ris­ing, petrol prices are high, and now the dol­lar is drop­ping. So, the dol­lar drop­ping is a good thing in some respects, because we’re an exporter of resources. I’m already hear­ing sto­ries about peo­ple leav­ing the cities and going to work for the mines, and I’ve seen that before, and unem­ploy­ment remains quite low, which is good. But for a lot of peo­ple who, you know, are run­ning a house­hold, buy­ing clothes, white goods, black goods, and they’re all import­ed because we don’t have much of a man­u­fac­tur­ing base here, it’s bad because we’re pay­ing more for it. Now we pay more for an over­seas hol­i­day, all those kinds of things. So, basi­cal­ly, every cost on a house­hold is going up at the moment, and that’s got to be reces­sion­ary at some stage.

Cameron  22:48

When you say inter­est rates are high, though, accord­ing to his­tor­i­cal mea­sures they’re not real­ly high. They’re still quite low, but they’re high­er than they were a few years ago.

Tony  22:58

Cor­rect.

Cameron  22:58

So, when you’re look­ing at the three legs of your no doubt very expen­sive, hand­craft­ed stool that you bought in some bou­tique fur­ni­ture salon some­where on High Street, is it high inter­est rates, or just ris­ing inter­est rates that’s that leg?

Tony  23:17

It’s the ris­ing inter­est rates.

Cameron  23:18

Okay.

Tony  23:19

Yeah. So, you’re right. They’re not high com­pared to what they were, but as peo­ple will know, house­hold debt is much high­er than what it was. And in fact, I don’t actu­al­ly mind inter­est rates going up as long as it’s done in a stepped mea­sure in a con­sid­ered way, because I think we do have too much debt around the world at the moment. You know, when inter­est rates are zero, every­one’s just geared up, and that’s a bub­ble in the debt mar­kets which has to come home to roost. And we’re see­ing it play out in the UK, when a black swan comes along, and things expose all the risk that peo­ple were tak­ing when they should­n’t have been. And we’re see­ing it in the prop­er­ty mar­ket here as inter­est rates rise. We’ll see it prob­a­bly worse over the next twelve months when all the peo­ple who took out fixed inter­est rates when they were 2% for two or three years have to rotate to inter­est rates which are now more than twice that, so their mort­gage dou­bles. Even though 5% isn’t high his­tor­i­cal­ly, it’s still a big cost increase. It does­n’t affect me, like my three-legged stool is ten feet high, right, you can lob a bit off it and it does­n’t change what I do. I’m lucky, but I’m the excep­tion. But if you’re out in Par­ra­mat­ta or Pen­rith in Syd­ney, or wher­ev­er, and you’re try­ing to make ends meet on an aver­age salary, you now pay more to dri­ve your car — and you have to dri­ve it because prob­a­bly trans­port isn’t great out there. You’re now pay­ing poten­tial­ly up to twice for your mort­gage and 30% high­er for your elec­tric­i­ty and gas bills. You don’t have much left­over, and it’s usu­al­ly the dis­cre­tionary spend­ing which dri­ves the econ­o­my. It’s eat­ing out, it’s going to events it’s tak­ing hol­i­days, which keeps the econ­o­my mov­ing. When those things all dry up, it’s reces­sion­ary.

Cameron  25:06

And before peo­ple com­plain and, you know, they try and can­cel us, I just want to point out that when Tony talks about the black swan in the UK, he’s not refer­ring to the Chan­cel­lor of the Exche­quer, Kwasi Kwarteng, when he says that.

Tony  25:19

Very much not.

Cameron  25:21

No, that’s not what you’re refer­ring to.

Tony  25:23

I just want to point out you went there, I did­n’t.

Cameron  25:26

I know, I’m just get­ting ahead of it.

Tony  25:31

I was­n’t think­ing about the colour of any­one, actu­al­ly. In Eng­land all the swans are white, and then the black swan is an unusu­al event. It’s just a say­ing.

Cameron  25:39

I know that, and you know that.

Tony  25:41

Good.

Cameron  25:42

But you got­ta, you got­ta be care­ful these days. You know, you don’t want to end up like Louis CK. Any who.

Tony  25:55

Mov­ing on from there. What else do I want to talk about? No, I think I’ve done every­thing now. Just pulled pork.

Cameron  26:01

All right, pull that pork, Tony.

Tony  26:11

Yes­ter­day was a pub­lic hol­i­day, we prob­a­bly haven’t switched back into busi­ness mode yet, have we?

Cameron  26:14

Hey, you and I worked very hard over the course of our lives to make sure — you more than me — to make sure we nev­er have to be in busi­ness mode ever again.

Tony  26:23

Yeah.

Cameron  26:23

That’s why I’ve got the long hair. That’s one of the rea­sons.

Tony  26:28

Okay, so BFG is my pulled pork this week, Bell Finan­cial Group. And the rea­son I did that was, we haven’t talked about it for a while, or haven’t talked about it at all, I don’t think. It’s very high up on our buy list, it’s num­ber sev­en on our buy list at the moment. It’s prob­a­bly no longer a Josephine, it was just on the cusp when I did the analy­sis yes­ter­day. But any­way, have a look at it, peo­ple, do your own research. I’ve done num­bers when the share price on the week­end was for some rea­son 95 cents when it down­loads in Stock Doc­tor, but today when I had a look it’s back up to $1. So, that’s a big swing. But any­way, it does­n’t make much dif­fer­ence to the num­bers, but you might want to check it out based on your own num­bers. First of all, ADT for this stock is $84,000, so it’s not gonna suit every­one, but it’s a rea­son­able size for some peo­ple. And a cou­ple things to point out, well, first of all, it’s a stock­bro­ker. It’s not a great time to be a stock­bro­ker at the moment when the mar­kets down, but it’s not a bad time to buy one when the price is down. So, there’s swings and round­abouts with this. Bell Direct Group is a full-ser­vice bro­ker. It’s also an online bro­ker, it also offers mar­gin lend­ing prod­ucts to peo­ple, pro­vides stock mar­ket research, and retail and whole­sale broking. It’s been around for a long time, it’s offer­ing a full suite of stock broking ser­vices, well estab­lished busi­ness. The share price is down 50% from its highs last year, so it has come off a lot — and I’ll go through the risks at the end, there’s a cou­ple of rea­sons for that. But any­way, I’ll go through the num­bers first. A cou­ple of things strike me straight away off the bat: the yield is near­ly 9% on this, it’s 8.9%. So, that’s very high. And the own­er­ship, or the CEO which is called the MD exec­u­tive chair­man in this case, holds 40% of the of the mar­ket cap. So, huge share­hold­ing for the prin­ci­pal, and he’s been employed by the bro­ker­age since 1983. So, I think this com­pa­ny goes back a long way and was found­ed by one per­son called Bell. This per­son isn’t Bell, but he’s been around for a long time, and he holds 40% of the com­pa­ny. So, he’s prob­a­bly run­ning it to suit the long-term ben­e­fits of the com­pa­ny and the share­hold­ers. But he must be get­ting along in his career, and so suc­ces­sion plan­ning would be an issue. I have had a quick look at the board and nobody else holds any­where near the stock hold­ing he does, so it’s not clear who’s com­ing up the ranks to replace him, but it will be an issue over the next year or two I imag­ine, or in the com­ing years. He may be anoth­er War­ren Buf­fett and last until he’s nine­ty-six or longer. Back to the num­bers. Stock Doc­tor has the finan­cial health as sat­is­fac­to­ry, but I’ve noticed there’s no trend for Finan­cial Health in Stock Doc­tor for this com­pa­ny. Not sure why, I don’t know if it being a stock­bro­ker caus­es a prob­lem or whether there is just a data glitch with Stock Doc­tor, but no finan­cial trend to score them. Like­wise, we don’t have any con­sen­sus tar­gets for this com­pa­ny. I’m won­der­ing whether that’s because it’s a stock­bro­ker and the oth­er stock­bro­kers don’t want to give it any air­time. But any­way, that suits us because we can get in before oth­er peo­ple. The Pr/OpCaf for this com­pa­ny is 1.83 times, so it’s very, very cheap in terms of the cash it’s throw­ing off. It’s just below its net equi­ty per share plus 30%, which comes out to 92 cents, so we can’t score on that. And because of the high yield and low PE, which is 8.8 for this com­pa­ny — and the yields cur­rent­ly 8.9 — this is one of the com­pa­nies which scores on that unusu­al met­ric where the yield is high­er than the PE, which I’ve found to be a quick test of a deep val­ue invest­ment. If peo­ple want to check that out, and they go down the check­list in detail and have a look at that col­umn, you’ll see that a lot of the com­pa­nies on our buy list actu­al­ly score on that met­ric where the yield is high­er than the PE. As I said, the chair holds 40% of the com­pa­ny, he’s the exec­u­tive chair, so he’s also the MD. It’s cur­rent­ly trad­ing at the low­est PE of the last three years, so that’s scores for us. As I said before, the price is down dra­mat­i­cal­ly over the last twelve months, but it has just start­ed to turn up again. So, we have a new three-point trend line buy sig­nal and a recent upturn for that. We don’t score it for con­sis­tent­ly increas­ing equi­ty, as you can imag­ine the equi­ty has been drop­ping back as the mar­ket’s declined. Over­all, that sums up to a qual­i­ty score of 11 out of 11, of 100%, and a QAV score of 0.55, and that was when I did the analy­sis at 95 cents. It’s actu­al­ly 0.51 based on $1.10 price today. So, it scores real­ly high­ly for us, but there are risks. And that’s often the case when a com­pa­ny is look­ing good as a val­ue buy. And the risks are that in Feb­ru­ary of this year Aus­track appoint­ed exter­nal audi­tors, which is Price­wa­ter­house­C­oop­ers in this case, to inves­ti­gate BFG’s com­pli­ance with anti-mon­ey laun­der­ing laws. There’s been radio silence since then, we haven’t found out what the results of that is. But as we’ve seen with the casi­no indus­try, if it comes back with a bad report that could be dev­as­tat­ing for the com­pa­ny. But like I said, we’re oper­at­ing in a void, so we haven’t heard any­thing about that yet. But it’s cer­tain­ly a risk. And the oth­er thing is that what I’ll call the weight of mon­ey argu­ment, which is when the share mar­ket is down stock broking gets lighter. So, 17% decline in the rev­enue for this com­pa­ny in its lat­est results com­pared to last year, and 44% decline in prof­it. And by weight of mon­ey, I mean, when the share mar­kets down, there are less IPOs. There can be less M&A, peo­ple can sell things and sit on cash. So, all those things are hap­pen­ing. There’s just less mon­ey slosh­ing around in the share mar­ket. And it’s an inter­est­ing part of the share mar­ket, that if nobody sells any­thing, so every­one’s decid­ed to buy and hold through this down­turn, the share mar­ket can still go back­wards because there’s no one’s buy­ing any­thing. One of the head­winds for the Aus­tralian share mar­ket has been the fact that every­one’s putting 10% of their salary into Super funds who have to invest some­where, but they’ll be invest­ing less and less in the share mar­ket at the moment because it’s drop­ping — and poten­tial­ly bonds as well for the same rea­son. But even­tu­al­ly they’ll come back. So, it’s not a bad time to buy a stock broking com­pa­ny; it’s cheap, and the mar­ket will turn even­tu­al­ly, and that mon­ey will come back in and find a home in the share mar­ket. But do your own research. Not with­out risks, this one.

Cameron  33:17

I actu­al­ly sold it from a cou­ple of port­fo­lios last week because it crashed through its 3PTL, I think, or it might have been a rule one sell. I can’t remem­ber.

Tony  33:27

Yeah, it did turn up I think a cou­ple of weeks ago and now it’s turned back again.

Cameron  33:31

Turned up, turned down, but I think it’s above what I sold it at. It’s trad­ing at about 99 cents today by the looks of it. I think I sold about 88 last week.

Tony  33:39

Right, okay. Well done. Thanks for boost­ing it for the oth­er share­hold­ers.

Cameron  33:45

I tell, you these rules. The rules.

Tony  33:49

I know. It’s a chop­py mar­ket, isn’t it?

Cameron  33:51

Yeah, thank you for that Tony. BFG. Big Eff­ing Gun, as it is in the gam­ing com­mu­ni­ty I always have to point out.

Tony  33:59

Is it? Big Friend­ly Giant in the Roald Dahl uni­verse.

Cameron  34:03

Yeah, yeah. I used to like Roald Dahl when I was a kid, good books. Time to get into some Q&A’s.

Tony  34:11

Yes.

Cameron  34:15

First one is from Reg, not real­ly a ques­tion but more of an insight/thought. He says, “every so often I think it’s not a bad idea to reflect on the invest­ment clock, which seems to me to always give a good idea of the cur­rent and expect­ed state of play. I was prompt­ed this morn­ing by a Morn­ingstar arti­cle. Sure, if we fol­low the QAV process there are like­ly to be some good and maybe not so good buys, but it could be some time per­haps before the mar­kets are rosy again. How long will it take us to get to 8pm?” 8pm on the invest­ment clock that he sent through from Morn­ingstar is sort of the last stage of recov­ery before you get to ris­ing com­mod­i­ty prices. If you think about a clock, right at 12 is at the top of the boom, and accord­ing to this clock we’re cur­rent­ly at about 2:30. Not when you go to the den­tist, but it’s when there are falling share prices and some falling com­mod­i­ty prices, and then it goes into reces­sion not long after that. What do you think of the invest­ment clock depic­tion of where we’re at, Tony?

Tony  35:19

Yeah, look, the invest­ment clock is always rough­ly accu­rate. But of course, the econ­o­my does­n’t fol­low a clock, and as we saw with COVID, we can have one month of a dip and then we’re back on the gravy train again. So, it can be a stop­watch, it can be a time dila­tor and we can spend lots of time on one part of the invest­ment clock and then whizz through the next bits. I agree with you that we’re prob­a­bly at around 2:30 on the invest­ment clock, which is falling share prices. But we’re also at 5:00 and 6:00, which is tighter mon­ey and falling real estate val­ues as well. So, it’s nev­er easy to read the clock, but direc­tion­al­ly it’s right. And of course, the next stage of the invest­ment clock, accord­ing to this one, is that the reces­sion hap­pens, and we get 3:00, 4:00, 5:00 and 6:00 on the clock to wait for that to run through, and then we get six hours of recov­ery. Accord­ing to the clock any­way. From 6:00–9:00 for recov­ery, then boom from 9:00–12:00. I tend to pre­fer Col­in Nichol­son’s view of the mar­ket which has three stages, and the stages can take as long as they take but you’re look­ing for signs. And so, the invest­ment clock is, you know, not too bad here. The signs in the mar­ket are falling share prices. We’ve seen some com­mod­i­ty prices fall. Obvi­ous­ly coals still boom­ing, but yeah, we’ve seen oil, iron ore, gold, all falling, so per­haps we are already past three o’clock on the invest­ment clock, and we’re head­ing clos­er to reces­sion. And we are cer­tain­ly see­ing real estate val­ues decline, so it’s prob­a­bly not too far away is my think­ing any­way, but who knows? I can’t pre­dict. How long will it take to get to eight o’clock, which was the ques­tion. If I knew, I’d sell up and go and play golf and come back at eight o’clock, but I don’t, and nobody does. The famous say­ing is no one rings a bell when the mar­ket bot­toms or when the mar­kets at its top.

Cameron  37:07

But would you, though? I mean, isn’t part of the process to invest and look for things to invest in even dur­ing reces­sion­ary peri­ods?

Tony  37:16

Yeah, so I kind of ignore it, real­ly, the invest­ment clock. To be hon­est, I remem­ber back to the GFC, and it was March 2009 when the share mar­ket had tanked. All the stocks on the ASX, at least the big ones, had been doing heav­i­ly dis­count­ed cap­i­tal rais­es to shore up their bal­ance sheets. And then the results came out in March 2009, and I’m like, “wow, I’ve nev­er seen good results like this and cheap prices like this.” And I just, you know, invest­ed what­ev­er I could. Bor­rowed mon­ey, all the rest of it. And so that was the bot­tom, you could pick the bot­tom. So, in that case I could, but I did­n’t have an inkling of that in the GFC. Sor­ry, in the COVID cough. I did­n’t know where we would be in the invest­ment clock in the COVID cof­fee. But fol­low the process; once the three-point trend­line start­ed break­ing out on the upside, we start­ed buy­ing bar­gain. So yeah, there are cer­tain­ly indi­ca­tors, but it’s hard to pick the top and the bot­tom of the mar­ket.

Cameron  38:11

So, are you say­ing that by 2009 you saw that the num­bers looked good, and yet the All Ords did­n’t get back to pre-GFC lev­els for ten years.

Tony  38:16

Cor­rect.

Cameron  38:16

So, how does that make any sense? If the results look good a year lat­er, but it took anoth­er nine years or eight years from the from that point, maybe, for the All Ords to get back to where it was?

Tony  38:35

Yeah. So, in 2009, the All Ords was down prob­a­bly 50% from 2007 — some­thing like that, I’m just talk­ing from mem­o­ry here. You know, it went up dra­mat­i­cal­ly in 2009 and then it went up in a slow­er arc until about 2012. Then it came off again, then it went up again, and even­tu­al­ly by about 2017/2018 it had recov­ered where it was in 2007. So, it nev­er fol­lows a straight line. But my point was in 2009 in March, you know, most of the com­pa­nies on the ASX had raised cap­i­tal, their bal­ance sheets were uber strong, and they were pro­duc­ing good results, but their share prices were still depressed because every­one was full of doom and gloom because they were still in the mind­set of the GFC. And I just went “wow, this is amaz­ing, the prices we’re pay­ing for such qual­i­ty earn­ings.” So, in that sense I could pick it and the share mar­ket recov­ered a lot in 2009, and I made a lot of mon­ey back then. But gen­er­al­ly fol­low­ing the clock is pret­ty hard to do, the invest­ment clock.

Cameron  39:36

Yeah, well we’ll just keep doing what we’re doing.

Tony  39:41

Yep.

Cameron  39:42

Here’s a ques­tion from Chris… sor­ry, back to that. Get­ting back to some­thing I was telling you about off-air. I had an email from some­body yes­ter­day say­ing, “oh, I real­ly thought QAV was going to be more ‘buy and hold long-term’ and there’s a lot more trad­ing than I thought I was going to have to do.” And I replied to them say­ing, “well, yeah, lis­ten, we think it’s buy and hold, too. I mean, in the good times that’s what we do.” I think on aver­age, dur­ing nor­mal mar­ket con­di­tions, you turn over about 50% of your port­fo­lio every year, or the whole thing every year. Can you remem­ber?

Tony  40:22

I think it was like one rev­o­lu­tion a year from mem­o­ry, on aver­age.

Cameron  40:27

So, maybe one or two stocks a month we’re trad­ing on aver­age dur­ing nor­mal mar­ket con­di­tions.

Tony  40:34

I think I did the analy­sis before even with the dum­my port­fo­lio. I think some stocks we hold for two years plus. So, the trad­ing isn’t like we’re turn­ing over the whole port­fo­lio every year, it’s like we will have maybe a quar­ter of the port­fo­lio gets trad­ed a lot, but some stocks are buy and hold. So, yeah, on aver­age it turns over once a year, per­haps.

Cameron  40:54

But when the mar­kets doing what it’s doing, hav­ing a con­nip­tion like it is at the moment, I mean, you’ve got lim­it­ed choic­es, right? You either just go to cash and just wait it out, in which case, you run the risk of miss­ing the turn­around.

Tony  41:09

Sor­ry to inter­rupt, but the 3% rise today, you missed out on that, for a start.

Cameron  41:13

Yeah. And we know that, his­tor­i­cal­ly, the biggest returns that you’re gonna get over time are usu­al­ly when the mar­ket turns around. It’s com­ing out of a cor­rec­tion and there’s the exu­ber­ance that comes back into the mar­ket. That seems to be at least when the mar­ket gets the most growth. Or you could cash out and throw your mon­ey in an ETF or a LIC or some­thing like that, let them wor­ry about it. But again, if you’re not active­ly trad­ing it, you’re going to poten­tial­ly miss out on the turn­around when it comes. If you’ve devolved respon­si­bil­i­ty to some­one else to man­age, you’re going to get some upturn, but not as much as you would get if you’re active­ly trad­ing it in the­o­ry.

Tony  41:54

Well, if you’d bought a LIC on the way down in the GFC, it would have tak­en you a long time to get back to where you start­ed from. You know, because the index took a long time to get back.

Cameron  42:03

Years.

Tony  42:03

Well, ten years from the top, but maybe you sold out low­er. So yeah, but a long time.

Cameron  42:07

The third alter­na­tive is you just buy stuff and just hold it and don’t sell it, don’t active­ly trade it. Ignore stop loss­es, ignore your rule one, you ignore your 3PTL, and you’re like, “no, this is a good com­pa­ny. It’s prof­itable. It’s under­val­ued, screw it, I’m gonna buy more. It’s going down, I’m gonna dou­ble down and buy more,” and you just do that sort of thing, which you can do.

Tony  42:33

Yep, dol­lar cost aver­age it, for sure.

Cameron  42:35

And just go, “no, this is good. I’m stick­ing with it.” What’s your argu­ment against that approach, Tony? Why don’t we do that?

Tony  42:43

Because our stop loss­es are there as insur­ance, right? So, at this stage, yeah, we have lots of trad­ing because we’re cash­ing in on lots of insur­ance and the mar­kets drop­ping, so it’s work­ing for us. If you look back at the port­fo­lio, say from this time last year, and we just said, “screw it, we’re going to buy and hold,” we would have tak­en a bath on Fortes­cue Met­als Group, for exam­ple, Eclipse, all those stocks that we’ve held, who we were hold­ing back then that we’ve sold, have gone down a lot since then. So, you could say, “well, they’ll come back,” and sure, but aren’t you bet­ter off sell­ing them at like a 20% loss and then buy­ing them back when they’re much cheap­er than hold­ing them, then hav­ing all the stom­ach churn­ing that goes on when we’re see­ing some­thing drop 25/30/40/50% and wait for it to recov­er? Because don’t for­get, if a stock drops 50% it’s got to dou­ble in val­ue to recov­er. So, that can take a long time. I was a buy and hold investor, so I’m not going to crit­i­cise it, but I did find dur­ing the GFC it was cost­ly and I want­ed to try and avoid that risk again.

Cameron  43:50

I won­der if there’s any way of me going back and see­ing what our port­fo­lio was a year ago and run­ning an analy­sis on it?

Tony  43:59

For sure. Just go and grab one of the buy lists from twelve months ago and see what was there.

Cameron  44:03

Not the buy list, our port­fo­lio. I can prob­a­bly do that in Navexa, think we’ve been using it long enough.

Tony  44:09

You can prob­a­bly select an end date for last year, I’m not sure. Well, we dumped the trans­ac­tions and gave them to Rud­dy, so we should be able to dump the trans­ac­tions and look at it for the time. Any­way, you can do that. The oth­er risk, of course, in the GFC as I said just before, is that com­pa­nies raise cap­i­tal because things got so tough. That can hap­pen if you’re a buy and hold investor and you’re hold­ing on to com­pa­nies dur­ing a reces­sion. Not only are you hold­ing on to them, but unless you want to get dilut­ed you have to stump up new cash. And then you have to sell some­thing to do that if you want to, and you’re sell­ing in the depths of the reces­sion, not when you would like to sell them when the mar­kets up.

Cameron  44:49

Right. Well, I’m going to, just for shits and gig­gles, have a look at our port­fo­lio from where it was a year ago at some stage and see if we just held where things would be today. See what it says. All right. Next ques­tion. Chris: “could you please describe from a prac­ti­cal aspect how to deter­mine if there has been a recent pos­i­tive upturn?” That’s a good ques­tion, because these are things that we’ve talked about a lot, but for new peo­ple I think it’s always good to revis­it these sorts of ques­tions. I should put it in my new sexy data­base that I’m build­ing. He writes, “my inter­pre­ta­tion is: ‘has the month­ly share price breached the 3PTL buy line since the release of the most recent finan­cial reports.’ ” I think that’s the right def­i­n­i­tion, right?

Tony  45:38

I think I expand­ed it, and I’m not sure what’s in the Bible so I could be wrong. Well, what I look at is if it’s the end of the year for the most recent finan­cial reports. So, for exam­ple, if it’s August report­ing sea­son, I will go back to the end of June. So, from the first of July onwards.

Cameron  45:55

Ah, okay. Same thing, kind of.

Tony  45:59

Yeah, it’s a month dif­fer­ent to what we’re say­ing here, but that’s how I do it.

Cameron  46:04

Well, it’s since the end of the last report­ing peri­od, not nec­es­sar­i­ly…

Tony  46:09

The day the report drops.

Cameron  46:12

Yes, that one.

Tony  46:15

And just a bit of rea­son­ing on that is because the com­pa­nies gen­er­al­ly know where they’re at, at the end of the finan­cial year, and it starts to leak. It should­n’t, but it does. So, you can see up turns start­ing a bit ear­li­er than when the com­pa­nies report.

Cameron  46:29

And then Chris has giv­en some exam­ples here of stocks where he believes they should be get­ting a point for a recent pos­i­tive upturn on our check­list, but they’re not. And there can be a lot of rea­sons for that. I mean, I did­n’t go through and look at all of these indi­vid­u­al­ly, but we don’t nec­es­sar­i­ly do all of the man­u­al data every week for every stock on the check­list, because a lot of them fail for dif­fer­ent rea­sons before we get to do the man­u­al data, so we don’t update it. So, that could be one rea­son there might be oth­er rea­sons. So, we just missed it, or we screwed up. But we don’t always look at all the man­u­al data every week. It would take us way too long.

Tony  47:11

Yeah, I accept that. That’s true. But just to help, Chris. So, to pull out a cou­ple that he has giv­en us, three exam­ples that won’t take us long to look at in the Bret­te­la­tor. So, C6C was one of Chris’s ques­tions. He thinks it should be a “one” for recent update.

Cameron  47:28

Well, I can already tell you that’s alu­mini­um, and alu­mini­um is a sell — or is it cop­per? Cop­per.

Tony  47:35

Yeah, it’s cop­per.

Cameron  47:36

And cop­per is a sell, right?

Tony  47:39

So, we would­n’t have updat­ed the man­u­al data.

Cameron  47:41

Yeah, we would­n’t be both­er­ing to check it because it’s a non-event for us right now.

Tony  47:47

Yeah, but just to help Chris out, if he calls up C6C in the Bret­te­la­tor, the buy line for C6C is ages ago, right? It crossed the buy line back in, it looks like about July 2020, and it went up and it’s come back again almost to the sell line. So, yeah, I’m not sure why Chris thinks this is a recent buy, but if he has a look at the Bret­te­la­tor, we’re using the buy line — the yel­low line in the Bret­te­la­tor — and that’s way back in the past. So, I can’t C6C, even if we’ve looked at it being a recent buy line. So, I hope that helps, Chris. I can do some oth­er exam­ples, I’m not sure it’s worth it. But yeah, that’s what we do.

Cameron  48:25

But def­i­nite­ly, like, for every­body out there. If you look at our check­list and you think we’ve got a score wrong, just shoot me an email.

Tony  48:35

Absolute­ly.

Cameron  48:36

And I’ll look into it. Some­times, you know, we screw up. There’s plen­ty of human error to go around. But some­times there are good rea­sons for it. But the key thing I want to just reit­er­ate is if it’s failed on some ear­li­er met­ric, we won’t check the man­u­al data every week because there’s no point check­ing every­thing for stuff that’s not going to be on the buy list any­way. That’s just, I mean, I know Alex does, she does like pain. That’s why I have her do the check­list, because it’s painful. And she likes it. She goes, “I love it! I love it. I love the num­bers. I love spread­sheets.” So, that’s why I give Alex all the painful stuff to do. But there’s a lim­it to even how much pain Alex is gonna take on. She’s not going to do work that does­n’t need to get done.

Tony  49:21

No, it’s a fil­ter­ing process. We don’t look at every stock in the mar­ket, we don’t down­load every stock, we only look at stocks with pos­i­tive cash flow. And then if it’s not going to make the buy list through the first stage of our fil­ter­ing, we don’t both­er look­ing at the man­u­al­ly enter data for it either. So, you make a good point.

Cameron  49:37

And for SDG…

Tony  49:41

Again with SDG, the Bret­te­la­tor is giv­ing a buy line that crossed way, way, way back. So, 30th of Sep­tem­ber 2020. So, a year ago.

Cameron  49:51

That’s two years ago.

Tony  49:53

Thank you, two years ago. See, we all make mis­takes.

Cameron  49:57

I know you’ve blocked out the last cou­ple of years. Okay, I hope that helps, Chris. Doug: “uno pre­gun­ta.” I was like, I don’t know that word in Ital­ian, and then I looked it up and it’s Span­ish, not Ital­ian. Uno deman­da, maybe, in Ital­ian. “From TK’s exper­tise,” and Doug lives in Spain, so that makes sense. “Why does he think cap­i­tal goods com­pa­nies are start­ing to show up in droves on our list? The coal com­pa­nies are obvi­ous, but is there any­thing about the cur­rent busi­ness cycle that would lead to these cap­i­tal goods com­pa­nies (XTE, LYL, MLD, NWH etcetera), climb­ing our buy list?” Good ques­tion, Doug.

Tony  50:36

Yeah, I’m not sure. Well, my under­stand­ing of cap­i­tal goods com­pa­nies is that they’re basi­cal­ly man­u­fac­tur­ers. So XTE fits that mould, but I’m not sure about LYL, MLD, and NWH, which are all con­trac­tors and min­ing ser­vices busi­ness­es to the min­ing indus­try. LYL and NWH are both min­ing con­trac­tors and MLD pro­vides accom­mo­da­tion for mines. So, I can see why they’re on our list, because we’ve been going through a min­ing boom. So, the min­ing con­trac­tors and sup­pli­ers do well, but they’re not man­u­fac­tur­ers. I haven’t had a look at what ASIC cat­e­go­ry there is for those com­pa­nies, I would have called the min­ers mate­r­i­al goods, or mate­ri­als com­pa­nies, but per­haps these com­pa­nies are lumped into cap­i­tal goods. But cer­tain­ly, I would draw a dis­tinc­tion between the min­ing con­trac­tors and oth­er cap­i­tal goods com­pa­nies, which are man­u­fac­tur­ers, which XTE is one. And I think in XTE’s case, it’s prob­a­bly com­pa­ny spe­cif­ic; they’ve won some con­tracts recent­ly to pro­vide Kevlar and hel­mets and things to the US mil­i­tary, I think, which has helped it. How­ev­er, hav­ing said that as a spe­cif­ic answer, I would­n’t be sur­prised that man­u­fac­tur­ing comes back onto the buy list, because I spoke last year about the macro sce­nario plan­ning that com­pa­nies like Shell do, and they said one of the sce­nar­ios going for­ward will be less out­sourc­ing and coun­tries bring­ing back man­u­fac­tur­ing as the world moves from free and open bor­ders back towards coun­try-first type poli­cies, and we saw that under Don­ald Trump in the US in par­tic­u­lar. But there are oth­er rea­sons for it; you know, sup­ply chains, if we have trad­ing issues with Chi­na and with Rus­sia and the Ukraine, we have to find oth­er ways of man­u­fac­tur­ing goods. So, we might see man­u­fac­tur­ing come back into the US and back into Aus­tralia, and that may have an impact on that sec­tor. Again, pre­dic­tion, who knows what will hap­pen? But we may see man­u­fac­tures back on buy list. And of course, if you’re an Aus­tralian man­u­fac­tur­er and you’re export­ing the goods over­seas, hap­py days, because the dol­lar being so low is a good tail­wind for that. So, that may be anoth­er rea­son why we see man­u­fac­tur­ers on the buy list. But I think we’ve just got to be care­ful we don’t lump man­u­fac­tur­ers in with min­ing ser­vices com­pa­nies and min­ers because they are dif­fer­ent — even if they do all fall under the ASIC cat­e­go­ry of cap­i­tal goods. And I’m not sure they do, but I haven’t looked at it. The oth­er point I want to make is that my process is very much a stock-up process. So, I’m not look­ing at any par­tic­u­lar indus­try or any par­tic­u­lar sec­tor or com­modi­ties, we just fol­low the rules and then look back and say, “hey, how about that. We’re now own­ing air­lines, or we’re now own­ing banks, or we’re now own­ing gold com­pa­nies.” It’s just how it works.

Cameron  53:34

Yeah, some­body — I think might have been Mur­ray, who’s still in Hawaii get­ting ready for his Iron­man, I think, this week — but some­body post­ed on Face­book in the last week ask­ing again for your pol­i­cy on over­ex­po­sure. I think he was talk­ing about being over­ex­posed to coal, and I did­n’t add it to the ques­tions because we talk about it a lot, but I did just remind him that your posi­tion has always been “don’t care. If it’s top of the buy list and it’s under­val­ued, I don’t care what sec­tor it is or how much I own in that sec­tor already. Just buy it.”

Tony  54:10

Cor­rect. Yeah, I mean we’ve had a few emails about re-buy­ing things, and I’ve been doing that, re-buy­ing coal stocks in the last week or so and then buy­ing dou­ble posi­tions. A cou­ple of things you have to be aware of is that if you are re-buy­ing extra posi­tions because you can’t find some new stock to buy, then just be aware your ADT rules s still apply. So, you don’t want to hold too much of a small com­pa­ny because you will get stuck when it comes time to sell. And if you are over­weight in indus­try, and it does turn against you, you do want to get out and you don’t want to be try­ing to push too many shares through the fire door to get out, so that’s an issue. I guess the oth­er thing that I try and do, for exam­ple, at the moment I think Yan­coal is top of my buy list when I take into account ADTs and all that kind of stuff, and I’ve now bought a dou­ble posi­tion in it. I would­n’t buy a triple posi­tion if there was anoth­er stock, I haven’t got a dou­ble in down the buy list; I’d buy that first, if that makes sense. So, you know, I’ll go dou­ble in Yan­coal, and then I think I went dou­ble in AMP recent­ly because I already owned it, it was back into a buy sit­u­a­tion on the buy list, and it was high up on the list. And then maybe a dou­ble into White­haven Coal, for exam­ple. So, just like I do when I’m set­ting up a port­fo­lio, I’m try­ing to buy the next stock I don’t already own. With rebuy­ing I’m try­ing to buy the next stock I haven’t got­ten a sec­ond posi­tion in first before I, you know, will buy a triple posi­tion in Yan­coal, for exam­ple — if I could, I don’t think I could because the ADTs high, but I don’t want to get too much into one com­pa­ny and get stuck. One last thing that the Iron Man has point­ed out is that when the coal stocks turn, if we have a sell line for the com­mod­i­ty which is way below the price, then we could suf­fer a hit to the port­fo­lio. Which is one of the rea­sons why I’m also look­ing at Renko charts, because I think in that case, if we do have a low sell line for coal, they might prove more use­ful than wait­ing for us to breach. But that’s still some­thing I’m par­al­lel test­ing at the moment.

Cameron  56:10

Speak­ing of stocks that we hold and how often we turn them over, I just hap­pened to notice that we’ve held ECX in the dum­my port­fo­lio, the cur­rent par­cel that we own, since the eighth of Sep­tem­ber 2020. We’ve held it for over two years, ECX, and it’s up 16.63% per annum. We bought it at $1.50, it’s now $2.02 today. So, it’s gone up 33% rough­ly over that peri­od of time, about 16.63% per annum, which makes sense con­sid­er­ing it’s two years. That’s ECX. IGL we’ve held since the 28th of July 2021, over a year. We bought it at a $1.46.

Tony  56:56

Sor­ry, sor­ry to inter­rupt you again. ECX is a three-point trend line sell at the moment.

Cameron  57:01

What?

Tony  57:02

Yeah, have a look. I sold mine last week for the same rea­son, but I had held it for a long time.

Cameron  57:08

You and your rules, Tony.

Tony  57:11

Hate to spoil a good sto­ry with the facts, but yeah.

Cameron  57:15

I can’t check it because the Bret­te­la­tor is not work­ing for me. It has­n’t turned up in my alerts.

Tony  57:20

Oh, okay.

Cameron  57:22

I’ll look into that. Some­thing to add to my to do list. Is IGL a sell, Tony?

Tony  57:31

No, IGL’s fan­tas­tic.

Cameron  57:33

IGL we’ve held since the 28th of July, bought at $1.46, cur­rent­ly $2.20. So, it’s up 53.81% per annum. I remem­ber hold­ing on to IGL in one of my per­son­al port­fo­lios like two/three years ago and it was just sit­ting there doing noth­ing for like a year, hov­er­ing. I think I did sell it at some point, but you know, it’s gone gang­busters recent­ly. So, it was a good bet, a good buy, just took a long time to kick in.

Tony  58:00

Just on IGL, they’ve just announced a cap­i­tal raise. So, if you want to buy IGL, or buy more of IGL, the share price in the cap­i­tal raise is $2.25. The cur­rent share prices $2.23. So, at this stage, it’s not worth buy­ing any more through the cap­i­tal raise, you can buy it cheap­er on mar­ket. But I think we have at least a num­ber of weeks to go before the cap­i­tal raise shuts. So, if any­one owns IGL just keep your eye on the price, and when it gets above the cap­i­tal raise price you might want to con­sid­er buy­ing some.

Cameron  58:34

And CVL, Civmec, we’ve held since the first of March 2021. Bought it at 60 cents, it’s cur­rent­ly trad­ing all the way up at 60 cents. So, it’s gone nowhere in eigh­teen months, but there you go. We did get a div­i­dend for it, actu­al­ly we’ve got a tonne of div­i­dends out of it. They’ve paid four div­i­dends in that peri­od of time, but that’s only added 4.42% to our return on it, but there you go. So, we do hold stuff a long time, which harkens to your point ear­ly on.

Tony  59:14

Yeah.

Cameron  59:15

Okay. There we go, Doug. That’s Doug. I’ve got a late one from Mark, Tony. “Hi Cam. Could you please ask Tony to explain once again the the­o­ry of 3PTL sells and div­i­dends. I under­stand the basics of ex-div­i­dend dates, i.e., the share price should drop by the div­i­dend per share amount, we should fac­tor this in. But I don’t under­stand the rel­e­vance of the pay­ment date. Let’s say a share at $1 has a remark­ably flat 3PTL sell price of 91 cents and it pays a 10-cent div­i­dend. If the share price should drop to 90 cents on the ex-div date, and we would add back the 10-cent div­i­dend for a 3PTL sell share price of $1, we don’t sell. My under­stand­ing is that Tony would sell on, or the day after, the pay­ment date if the share price is still at 90 cents and the remark­ably flat 3PTL sell price is still 91 cents. To me, this makes no sense. I’ve trousered the 10-cent div­i­dend, I’m hold­ing a 90-cent share, I’m still all square. Sen­ti­ment has gone south in line with the div­i­dend per share only, so the­o­ret­i­cal­ly it’s flat. Thanks, Mark.” And I agree with Mark, I still don’t under­stand that. I’ve got the mon­ey. I’m not under­wa­ter, tech­ni­cal­ly. So, why am I sell­ing on the day after the pay­ment date?

Tony  1:00:41

Yeah, I can see what Mark’s get­ting out, and in some respects it’s arbi­trary. My log­ic for what it’s worth is that in Mark’s case, if I’ve pock­et­ed the 10 cents, I’ve rede­ployed that some­where else. You know, I put that to work some­where else, so it’s no longer asso­ci­at­ed with that stock. And we have to draw a line some­where in time to say, how long do we keep adding 10 cents back? Is it one month, six months? Is it twelve months? Is it for­ev­er? So, if you look at your port­fo­lio track­er — and I use Share­site and Navex­a’s the same — you can see for the peri­od you’re look­ing at that the cap­i­tal por­tion of the stock per­for­mance might be neg­a­tive, and you add back div­i­dends and it’s back above a 10% drop. But when do you stop doing that? And so, my log­ic is, when I’ve rede­ployed the cap­i­tal some­where else, I can’t keep allo­cat­ing it to two dif­fer­ent stocks, that’s when I say it’s enough. The oth­er point to note about div­i­dends is it’s not math­e­mat­i­cal, the share price can go up after a div­i­dend is paid and they don’t always drop exact­ly the amount of the div­i­dend. So, there’s often­times some­thing else, there’s oth­er mar­ket forces at play at the same time that can have the over­rid­ing effect. So, I don’t want to ignore those mar­ket forces for too long, and so I just use the pay­ment peri­od as the time when I’ll add it back. When I get it and rede­ploy it, I stop doing that.

Cameron  1:02:00

Yeah, that makes per­fect sense. To me, any­way, hope it does to Mark as well.

Tony  1:02:05

But feel free to come up with your own rules, Mark. This is not etched in stone. It’s just what I do.

Cameron  1:02:11

Be a QAV­er­ick if you want, Mark.

Tony  1:02:13

Yeah. Be a QAV­er­ick.

Cameron  1:02:16

All right. Well, that’s all of the ques­tions for this week, TK. After hours. Tell us about your hor­sies, Tony…

Cameron  1:09:22

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