Transcript #549

QAV 549 CLUB

Cameron  00:06

Wel­come back to QAV. This is episode 549, we’re record­ing this — well, we hope we’re record­ing it, we hope it’s work­ing — on Tues­day, the 13th of Decem­ber. This is our third attempt of record­ing this, this after­noon. Skype crashed on us twice so we’re try­ing on Zoom, which means the audio qual­i­ty won’t be as good but that’s all we’ve got to work with today. How are you down there in TK land, TK, after your week off?

Tony  00:35

Very good. Very well, thank you. It is TK land down here, isn’t it? It’s good. 

Cameron  00:40

Your own lit­tle fief­dom down there the Cape Schanck. 

Tony  00:43

It is yeah. Well, it’s windy and wet here at the moment though, so I can’t play golf. I can’t, but I choose not to play golf.

Cameron  00:50

Robin Williams would say, “which is nice if you’re with a lady, but not when you’re in the jun­gle.” Maybe windy and wet, no, I think it’s hot and wet. I think it was the line, not windy and wet. You don’t want your lady to be windy and wet. That’s no good. So, mov­ing right along. You’ve been play­ing a lot of golf.

Tony  01:12

Except that it’s hot and wet in the jun­gle. Yeah, I have, I played golf every day last week. 

Cameron  01:19

Played in a lit­tle tour­na­ment? 

Tony  01:21

We did this, yes, we played Roy­al Mel­bourne West, which is a fan­tas­tic course and one of my favourites. Often rat­ed num­ber one in Aus­tralia. We played Met­ro­pol­i­tan, anoth­er real­ly good course, and then we had a char­i­ty day for leukody­s­tro­phy at Wood­lands on the third day, which was good. 

Cameron  01:39

Ter­rif­ic. 

Tony  01:40

Played well, one a lit­tle bit of prize mon­ey, which I put back in raf­fle tick­ets at the char­i­ty auc­tion. So, that was all good. First time I won some prize mon­ey in a long time.

Cameron  01:49

And what did you win in the char­i­ty auc­tion?

Tony  01:53

Noth­ing, it was a dona­tion basi­cal­ly.

Cameron  01:56

You did­n’t get anoth­er Eagles — not Eagles — Angels, Angel’s con­cert? 

Tony  02:00

No. 

Cameron  02:03

That’s a shame. It’s been a big week in the stock mar­ket, Tony. Well, when I say big, bad big, in a bad way. Your good friend, Mr Lowe, at the RBA decid­ed he’s not done fix­ing the econ­o­my. He lift­ed inter­est rates yet again last week and sort of kicked the mar­ket in the nuts. I just post­ed, “oh, the mar­kets been going up for a cou­ple of months. I think we’re on an uptick trend,” and then he did that, and it came down. It’s still up since the begin­ning of Octo­ber quite a lot though. What did you think about the RBA inter­est rate rise? Were you sur­prised, not sur­prised?

Tony  02:43

Not sur­prised at all, I think it’ll keep going for a while. Infla­tion was, I think, 8% in his most recent announce­ment. So, it’ll keep going for a while. I think it will come off, but who knows. I think overnight tonight, tonight being Tues­day, the 13th, the US Fed­er­al Reserve might raise inter­est rates by 50% over there. So, yeah, we might see some, who knows? It’s hard to say whether we’ll see up or down move­ments in the stock mar­ket. It went up today overnight, the US mar­ket went up because they think they’ve got it all fig­ured out and they’re expect­ing a 0.5% rise tomor­row, but they could be sur­prised.

Cameron  03:24

I thought it went up because they’re expect­ing the announce­ment of Q is greater than one today, US time. That’s sup­posed to come out today. 

Tony  03:35

Q being what?

Cameron  03:37

The amount of ener­gy gen­er­at­ed by the lat­est cold fusion reac­tor. 

Tony  03:41

Yeah, right. I saw that. 

Cameron  03:42

Liv­er­more, Lawrence Liv­er­more, Liv­er­pool, Liv­er pod, some­thing. Lawrence Liv­er­more, I think, research facil­i­ty. They’re rumoured to be doing a press release Tues­day US time to say that they have cre­at­ed a fusion exper­i­ment that gen­er­at­ed more ener­gy than it took to cre­ate, which is called “Q is greater than one” in fusion cir­cles. So, that if true, and if con­firmed and ver­i­fied, and all that kind of stuff… You know, I was say­ing to some­one ear­li­er today, Chat­G­PT tak­ing the world by storm in the last week and now cold fusion as a real­i­ty, I’m start­ing to think Ray Kurzweil… I remem­ber years and years ago, I had Ray Kurzweil on a pod­cast — I think it was like 2015 — and back then he was still say­ing he thought the sin­gu­lar­i­ty would hit by 2030. I think he’s pushed it out to maybe 2035 in recent years, but the thing with the sin­gu­lar­i­ty is, you know, in sin­gu­lar­i­ty cir­cles, there’s always been this talk that you won’t see it com­ing until it hits, it’s at the front door, right? Because it all comes at the end. Like, wow, we have func­tion­al AI and cold fusion hit in the same week. That sounds like sin­gu­lar­i­ty speed­ing up to me, but who knows?

Tony  04:59

I remem­ber learn­ing about toka­mak reac­tors at uni­ver­si­ty. So, cold fusion has been a thing for a long time with­out any results. 

Cameron  05:07

Well, they’ve had results. The Chi­nese cre­at­ed a fusion reac­tion a cou­ple of years ago, but again, Q was less than one. It took more ener­gy to cre­ate than they gen­er­at­ed, but we’ll see. Could be big. Well, I don’t know what that’s got to do with the RBA.

Tony  05:24

Or the Fed Reserve. Well, if they ask Chat­G­PT, he might know. 

Cameron  05:27

Yeah, the RBA is ask­ing Chat­G­PT what they should do with inter­est rates. 

Tony  05:32

Resign. 

Cameron  05:32

I saw, do you know Mark Bouris. 

Tony  05:34

Yes. 

Cameron  05:35

What was the com­pa­ny that he found­ed? 

Tony  05:37

Yel­low Brick Road. 

Cameron  05:39

What was it before that? 

Tony  05:40

I can’t remem­ber, one of the mort­gage bro­kers

Cameron  05:42

Some mort­gage things. Yeah. Saw him on Tik­Tok this morn­ing rant­i­ng about the RBA and the gov­ern­ment. He said, you know, “COVID, you know, they cre­at­ed all of this mon­ey, dropped inter­est rates down to zero, told us to go out there and spend it. So, we spent it and now they’re pun­ish­ing us. Every­one’s get­ting pun­ished by the RBA and the gov­ern­ment for doing what they told us to do two years ago.” So, maybe he wants to throw them into a fusion reac­tor, and that’s how I fin­ish the loop on that. Do you think we’re being pun­ished, Tony?

Tony  06:14

I think it is a bit like a pen­du­lum swing­ing at the moment. Because per­son­al­ly, I think the real dan­ger is that inter­est rates keep ris­ing but infla­tion comes down because it’s not being caused or influ­enced by inter­est rates, its being caused by sup­ply cuts and trade con­straints and the Ukraine war, amongst oth­er things. So, you know, it’s a blunt instru­ment.

Cameron  06:37

Well, mov­ing on. Coal was a buy again, and iron ore. 

Tony  06:41

And gold.

Cameron  06:42

And gold. 

Tony  06:44

I know.

Cameron  06:45

I did­n’t find any coal stocks on the buy list to buy this week, but I did buy some GRR last week, which was nice. I tried to buy FMG yes­ter­day, but it was hav­ing a down day. Hav­ing a down day again today last time I checked, too, first thing this morn­ing. But yeah, that’s excit­ing. What do you think is going on with coal, iron ore and gold?

Tony  07:04

I think on the gold side, I mean, I’ve been sus­pect­ing gold would increase because of infla­tion, it nor­mal­ly does. It’s been a bit of a sur­prise see­ing that the Chi­nese econ­o­my will pick up. It’s been con­strained because of all the cities being in lock down and, and coal and iron ore get dri­ven by the Chi­nese econ­o­my. At least in Aus­tralia.

Cameron  07:26

Okay, well, mov­ing on to a port­fo­lio update. Dum­my port­fo­lio still doing good since incep­tion: 15 ver­sus 7 against the STW, still has­n’t changed much from last week. Last thir­ty days is inter­est­ing if I look at the QAV port­fo­lio; it says that we’ve had a good thir­ty days ver­sus the STW. It’s say­ing we’re up 4% in the last thir­ty days ver­sus the STW, which is up 0.8%. So, if I look at it from a finan­cial year per­spec­tive, we’re still seri­ous­ly under­per­form­ing: STW is 16% ver­sus our 3–4%, but in the last thir­ty days it’s start­ed to turn around. Looks like our stocks have out­per­formed in the last thir­ty days. So, with some thanks to CLX which is up 28% in the last 30 days; LAU was up 16%; NCK up 13.5%; NHC up 11.5%. Some of the big win­ners. So, yeah, let’s see how we go.

Tony  08:42

You know, its swings and round­abouts in the mar­ket, isn’t it, in the short term?

Cameron  08:46

Yeah. A cou­ple of weeks ago, you know, when we went through your results over the last twen­ty years, I’ve had a few peo­ple that I’ve spo­ken to — a few lis­ten­ers — since then say, “yeah, that was real­ly inter­est­ing and very brave,” they seem to think of you, to do a full frontal on your num­bers. 

Tony  09:06

Okay. 

Cameron  09:06

Expose your­self. I was like, well, he’s done it before. It’s not the first time we’ve gone through your num­bers, but I think it’s hope­ful­ly helped every­body chill out and realise that there are good years and bad years. 

Tony  09:19

Cor­rect. 

Cameron  09:20

What else do you have on your notes to talk about before we get into the Q&A and the pulled pork, TK?

Tony  09:25

I had just a cou­ple of things. There’s some bank AGMs going on this week, and coin­ci­den­tal­ly their div­i­dends will hit our bank accounts. So, for me that’s NAB and Mac­quar­ie Group, and they’re both on the buy list. So, just be aware of that if either of those are close to a rule one for you. I think they’re rea­son­ably above their three-point trend­line sell points, but yeah, you can’t add the div­i­dend back once they hit your accounts. And just want­ed to talk quick­ly, there was a col­lapse of an engi­neer­ing com­pa­ny called Clough Engi­neer­ing. They were doing some work for Beach Ener­gy, which is now going to delay the bring­ing online and one of Beach Ener­gy’s local gas fields. And so, that’s hit Beach Ener­gy this week as well; they’re down 8 or 9% this week, which makes them very close to a rule one for me. So, peo­ple might want to check that if they don’t have their alerts set. That’s about it, I think. We spoke about the com­modi­ties before being buys again, gold, iron ore and coal, which brings some stocks back onto the buy list for us. 

Cameron  10:34

Good stuff. And who are you doing your pulled pork on this week, TK?

Tony  10:39

Well, I told you this morn­ing it was gonna be BlueScope Steel, but guess what? I spent about an hour research­ing BlueScope Steel, got all the way to the end, was doc­u­ment­ing the risks — one of which is the steel price — looked at the steel price, and it’s a sell. I don’t know if I should do BlueScope Steel if its not a buy even though it’s on the buy list.

Cameron  10:57

Maybe we skip it this week, then, because we got a lot of ques­tions to get through. 

Tony  11:00

Well, I did do anoth­er one on Angl­o­Gold, which I can do quick­ly if you’re like.

Cameron  11:04

Oh, okay. 

Tony  11:05

Angl­o­Gold Ashan­ti. 

Cameron  11:06

AGG. I added that to one of the light port­fo­lios today, so, you know, have they paid the pro­tec­tion mon­ey? 

Tony  11:18

They haven’t. 

Cameron  11:18

Okay, well, let’s be brave. Gird our loins. 

Tony  11:22

Okay, quick­ly: Angl­o­Gold Ashan­ti, gold com­pa­ny obvi­ous­ly. Very sto­ried back­ground. It’s a South African based gold min­er, based in Joburg, but it also has EDI list­ings in the US, here, and Ghana, which is where the “Ashan­ti” part of their name comes from. Because they’ve spent most of their life buy­ing and sell­ing mines, so bit of a trad­er. They were big in Aus­tralia at one stage, but they sold the Bod­ding­ton gold mine to New­mont ten or so years ago, which is one of the rea­sons why they’re still list­ing here. They would have had local share­hold­ers in Bod­ding­ton, it was a pret­ty big gold­mine. They still do have two gold mines in Aus­tralia, one called Trop­i­cana and one called Sun­rise Dam, and they have anoth­er eleven around the world. Most of them are still in Africa, but fun­ni­ly enough, no longer in South Africa. But some in Ghana, Tan­za­nia, oth­er parts of Africa. They have three mines in South Amer­i­ca, and they’ve just acquired a mine in Neva­da. So, they do like to trade their mines, this com­pa­ny. I should point out from the out­set that it’s a small ADT stock, and I think that’s because of the dual list­ings, or the quad list­ings. So, the mar­ket cap in Aus­tralia for the list­ing is much low­er than that in Joburg and the ADT is only some­thing like $25,000 a month, so it won’t suit a lot of investors, but it’s very high up on our buy list. So, run­ning through the num­bers. There are no con­sen­sus tar­gets or no bro­kers fol­low­ing this because of the small vol­ume. It’s a thin­ly trad­ed stock on the ASX any­way, cer­tain­ly not in Joburg where it’s large, but here it’s thin­ly trad­ed. No con­sen­sus tar­get, which gives us a bit of an edge because we’re doing the analy­sis that the bro­kers would be doing. I’m doing my num­bers based on the share price of $5.55 which it was on the week­end. It has gone up 20 cents since then today, so that will change the num­bers slight­ly, but at $5.74 the share price is greater than IV 1, there’s no IV 2, but it’s much less than net equi­ty per share, which is 14.84. So, it scores for that, and also, of course, for being less than book plus 30. Stock Doc­tor finan­cial health is strong and steady. The PE is 8.81 which is rea­son­ably low, but not the low­est in three years so it does­n’t score for that. This is where it gets a bit inter­est­ing, and if any­one’s think­ing of invest­ing in the stock they might want to just email Stock Doc­tor and ask them a ques­tion, but I get a Pr/OpCaf of 0.19; Stock Doc­tor has one of 2.7, so there’s a bit of a dif­fer­ence there. I tried to research why Stock Doc­tor has $2.03 as the oper­at­ing cash flow per share, but we’re get­ting $6.14 in the down­load. And that’s strange because we’re using Stock Doc­tor num­bers, so I’m not sure what’s going on there and I can’t explain the dif­fer­ence. It might need a an email to Stock Doc­tor to explain that if some­one wants to invest in this first. Either way though, it’s still appear­ing on our buy list, it just drops from about the sec­ond high­est QAV score back to, I think, 0.26 if we use Stock Doc­tor’s Pr/OpCaf num­ber. I’m not sure why that’s occur­ring, that’s a ques­tion for Stock Doc­tor. Yield on the stock is 1.78, so it’s not going to score there. It does score for a new three-point upturn, does­n’t score for con­sis­tent­ly increas­ing equi­ty, and all in all, it’s 9 out of a pos­si­ble score of 13, or 69% for qual­i­ty, which isn’t too bad but not right up there. Using our Pr/OpCaf we get a QAV score of 0.77, or 0.26 using Stock Doc­tor. So, some­thing to look into, there, with Stock Doc­tor. And I just want­ed to point out, too, that I have fol­lowed AGG for a long time because it does come on to the buy list fre­quent­ly, and the risk with AGG which peo­ple should be aware of is the low liq­uid­i­ty. So, it’s ADT is $25,000; that’s an aver­age. It may just be, when it comes time to sell, that there’s no trade at all. So, just be care­ful with this stock and be patient, espe­cial­ly on the way out. So, that’s AGG. 

Cameron  15:30

Thanks. Yeah, 0.77, I saw that this morn­ing, and the low Pr/OpCaf of 0.9 or some­thing. They real­ly looked like extreme­ly good num­bers.

Tony  15:41

Yeah, it does. Stock Doc­tor is strange, because we use the Stock Doc­tor down­load num­bers, and part of the down­load is to down­load what Stock Doc­tor has as Pr/OpCaf. Even though it’s got all the same num­bers, except for that one oper­at­ing cash per share, when it down­loads to us, we use the $6.14 num­ber, but in the field called “price to oper­at­ing cash flow”, they’re get­ting 2.7 times, which is strange.

Cameron  16:06

All right. AGG, check it out if you have low ADT require­ments, I guess. But don’t all buy it and then try to get out of it at the same time I’m try­ing to get out. 

Cameron  16:19

Because that would not be good. All right. Any­thing else before we get into all the Qs and the As this week, TK? 

Tony  16:19

Yeah, cor­rect.

Cameron  16:23

No, that’s all.

Cameron  16:29

Thank you, Tony. Okay, first one is from Ally: “Hi Cam and Tony. Do you mind dis­cussing trail­ing stop loss­es ver­sus our stan­dard stop loss­es? Does any­one in this group use a trail­ing stop loss?” Part two is: “also, with infla­tion at 7.3% in Aus, is it still busi­ness as usu­al for us? Infla­tion real­ly eats into our prof­its or mag­ni­fies loss­es, any advice around this?” And then she’s got a part three, too. Any­way, let’s start with part one: trail­ing stop loss. 

Tony  16:56

Yeah, trail­ing stop loss­es, they are what they say. So, you can with at least most bro­kers, put in either a dol­lar amount that the share price can drop before it’s sold or per­cent­age amount. So, if you’re away from a com­put­er for a while, you’re hik­ing some­where or what­ev­er, or you’re in hos­pi­tal, you can set trail­ing stop loss­es to be able to sell you out if the share price drops by, say $1 if a $1 is rel­e­vant, or by 20% or 10%, or what­ev­er the num­ber is. I’ve nev­er used them; I’ve always pre­ferred to use the alerts and exe­cute the trades myself. A cou­ple of things about it is that when the stop loss is exe­cut­ed, the trade becomes an at mar­ket trade. So, even though the share price may have dropped by $1 and that was your desire to get out, you may get out at a much low­er price because the mar­ket may not be at that price, it may drop through it. Once the stop loss is reached, it will just exe­cute at what­ev­er price is then avail­able. So, you might say, “exe­cute the trade if it falls by $1,” but you might find you’ve actu­al­ly had a trade exe­cut­ed when it fell, which was $1.50 below the share price. 

Cameron  18:09

But we use at mar­ket any­way if we get an alert and go to sell it, so isn’t it the same thing?

Tony  18:14

It is pret­ty much, yeah. Although you can decide if you think the share price is going to return to wait for a bit.

Cameron  18:21

No, you can’t. That’s against the rules. If it trig­gers, you sell. You don’t stick around and wait. Come on, TK. That’s fore­cast­ing.

Tony  18:31

Yeah, right. Well, yeah, you can finesse it a lit­tle bit dur­ing the day if you do it your­self. Stop loss­es exe­cute at mar­ket. The oth­er things to be wary about with stop loss­es are that you’ve got to set the stop loss price or per­cent­age so it takes into account nor­mal price fluc­tu­a­tions, because you can be stopped out quite quick­ly if you set too fine a trail­ing stop loss. Like, if you say it’s 2% and the stock is occa­sion­al­ly fluc­tu­at­ing by 5%, you’ll be stopped out and you’ll be curs­ing it when it goes back up again. So, just be aware of that, and also be aware around div­i­dend times if you, again, have a trail­ing stop loss which is close to in the mon­ey, and you’ve said it a very nar­row range. You could be stopped out dur­ing a div­i­dend time. 

Cameron  19:19

Which prob­a­bly is not so bad if you are like Samuel, who was going to be hik­ing Kil­i­man­jaro and offline for a month. Okay, yeah, worth tak­ing the risk. But day to day, you might want to check things like div­i­dends before you let it go to sell on your behalf.

Tony  19:39

Yeah, cor­rect. And the oth­er thing, too, is that trail­ing stop loss­es don’t real­ly suit three-point trend lines, which is a fixed point. So, what I mean by that is, you know, the sell price for a stock might be $5 and the share price might be $6. If the share price drops by 2% or 5% or 10%, we’re still not sell­ing. But if you said $5 was a 20% drop from $6 — what­ev­er the math is — it might take three months for that to come into effect, and by that time the three-point trend­line sell may change. So, it does­n’t real­ly suit the way that we invest.

Cameron  20:14

I mean, if you could pick a price, if you could get the 3PTL price and stick it in and say, “okay, it it hits $1.10, sell then.” That would be okay, but by 10%, or what­ev­er…

Tony  20:25

That’s a fixed stop loss. You can do that now, too. Yeah.

Cameron  20:28

As opposed to if it just drops by a cer­tain per­cent­age.

Tony  20:32

Yeah, cor­rect. It’s handy if you’re away and you can’t exe­cute your trades; it keeps an eye on it for you. But oth­er­wise, if a stock drops that dra­mat­i­cal­ly… Like, say, for exam­ple, Beach Ener­gy did dur­ing the week, and you had a 5% stop loss on it, it may well have plum­met­ed through that 5% and you’re out at 8%. Which, in my case, it was­n’t my rule one which is 10%. So, using that kind of per­cent­age-based stop loss would­n’t have real­ly worked in my case, and I’m still hold­ing; at present I would have been sold out, but not at 5, prob­a­bly at 8. 

Cameron  21:05

Okay, what about Ally’s ques­tion about infla­tion? Busi­ness as usu­al?

Tony  21:09

Yeah, it is in terms of QAV. I mean, the busi­ness envi­ron­ment in times of high infla­tion is dif­fer­ent to the busi­ness envi­ron­ment in times of low infla­tion. We don’t have all the dot­com stocks going to the moon when we’ve got inter­est rates which are high­er, so that’s one dif­fer­ence. I’m always remind­ed of War­ren Buf­fet­t’s words when he says that a qual­i­ty busi­ness is one that can raise prices at any stage dur­ing the cycle, and we’re try­ing to find qual­i­ty busi­ness­es. So, hope­ful­ly, the ones that we’re invest­ed in won’t be that affect­ed by infla­tion. And then Buf­fett talks about the moat and being able to raise prices dur­ing infla­tion because of the qual­i­ty of the busi­ness and because it’s sell­ing a prod­uct that peo­ple want to use. So, you know, your Heinz toma­to sauce, Google, that kind of thing. So, they’re going to always be able to sell things dur­ing peri­ods of high infla­tion. But we do see busi­ness­es come in and out of the mix dur­ing peri­ods of high infla­tion. So, high infla­tion usu­al­ly hurts dis­cre­tionary retail expen­di­ture. So, we might see that Myer might strug­gle a lit­tle bit dur­ing a peri­od of high infla­tion, and typ­i­cal­ly the super­mar­kets will be bought up by peo­ple want­i­ng a safe har­bour because, again, it’s a basic need, and peo­ple will still need to buy their food. Super­mar­ket sales often go up dur­ing peri­ods of high infla­tion because restau­rant meals go down, peo­ple eat out less and they buy and cook at home more. But what I found is that the super­mar­ket com­pa­nies share prices go up, so their PEs expand dur­ing peri­ods of high infla­tion. So, even though they offer a safe har­bour, they’re not nec­es­sar­i­ly a good invest­ment to own. There will be phase shifts in the mar­ket, which is prob­a­bly the best way to put it, but the process will still take that into account, and we’ll find stocks that can’t put their prices up will come off the buy list and those that can, will come on.

Cameron  22:58

Ally asked about infla­tion, is infla­tion eat­ing into our prof­its? How does infla­tion eat into our prof­its? Just because mon­ey’s not worth as much?

Tony  23:07

I’m guess­ing she means our prof­it as QAV investors, and it does­n’t. Like I said, I think the sys­tem will take into account which stocks are hurt by infla­tion and which stocks will do fine. If she means eat­ing into the prof­it of the busi­ness­es we invest in, again, it’s the Buf­fett say­ing: if we’re invest­ed in qual­i­ty busi­ness­es, they’ll main­tain their prof­its in a high infla­tion envi­ron­ment. So, for exam­ple, the banks: the big four banks in Aus­tralia, they’ll ben­e­fit from infla­tion, or should­n’t be hurt by infla­tion, unless, you know, it becomes a full-on reces­sion and peo­ple lose their jobs and default on their mort­gages, because the banks can put their mort­gage inter­est rates up and put up their deposit rate. So, that’s an exam­ple of a busi­ness that does well dur­ing a high infla­tion envi­ron­ment. But stocks like we’ve spo­ken about already, like the high PE growth stocks are all doing ter­ri­bly because of the sim­ple math of a dis­count­ed cash flow. Infla­tion means as peo­ple dis­count the cash in the future, it’s worth a lot less now. When infla­tion is at near enough to zero, a dol­lar you own in ten years’ time is worth the same as the dol­lar you own now. So, you can push the prof­its of these com­pa­nies down the tracks and still expect to make mon­ey at some stage. But when run­ning at 8 or 9% infla­tion, if the com­pa­ny does­n’t turn a prof­it for ten years, their prof­its are worth half of what they are now. So, there­fore, the amount you want to pay for that dol­lar in ten years is half of what it was last year when infla­tion was very low.

Cameron  24:34

Alright, part three of Ally’s ques­tion: “I’d be keen to hear how Tony comes up with the hur­dle rates.”

Tony  24:41

Yeah, sure. So, again, I guess she’s mean­ing IV 1 and IV 2. So, IV stands for Intrin­sic Val­ue. And I guess just as an intro­duc­tion, I’ve found over the years that no one met­ric for valu­ing a com­pa­ny or valu­ing all com­pa­nies works well, so I use a num­ber of them and just try and cre­ate a bit of a heat map for val­u­a­tions of com­pa­nies. It’s an impre­cise sci­ence, but gen­er­al­ly if you have a num­ber of dif­fer­ent ways of valu­ing a com­pa­ny, and it’s cheap on some and maybe not so cheap on oth­ers, you still err on the side of being a val­ue com­pa­ny. But there are two ways to do it. Basi­cal­ly, you can use the assets of the com­pa­ny, which is where we talk about equi­ty per share, or occa­sion­al­ly net tan­gi­ble assets per share, and are we pay­ing more than that for the com­pa­ny or less than that for the com­pa­ny. But in terms of hur­dle rates IV 1 and IV 2, basi­cal­ly say­ing that we have a com­pa­ny which is mak­ing a prof­it, and that prof­it can be expressed as a return on our invest­ments and is that return high enough. To decide whether it’s high enough, we use the term hur­dle rate to set the bar for what’s high enough. So IV 1 is, I guess, my own met­ric, and his­tor­i­cal­ly I start­ed to use it as a way of say­ing, “if I’ve got a con­cen­trat­ed port­fo­lio of fif­teen stocks, I only want to add a stock which is going to improve the over­all return on invest­ment of that group to me.” So, I’m look­ing for stocks to add to the port­fo­lio which have a high­er return on the invest­ment than what the port­fo­lio gen­er­ates. So, 19.5% over time, that’s the hur­dle rate I’m look­ing for, and so I’m look­ing for stocks which if I pay the price that they are now, their earn­ings per share equate to more than a 19.5% return. That’s a pret­ty thin list of stocks, because that’s a high hur­dle rate. So, most peo­ple when they talk hur­dle rates are talk­ing sort of sin­gle fig­ure num­bers, or maybe 10% as a hur­dle rate, and we’re talk­ing dou­ble that. It might be eas­i­er for Ally to think of it in the reverse or the inverse. So, the IV cal­cu­la­tion, if it has a hur­dle rate of 19.5%, is like say­ing if I put one over 19.5, I’m gonna get a PE ratio of around 5. So, inverse of 20% is 5. So, we’re look­ing for stocks which have a PE ratio of less than five, is the oth­er way of express­ing a hur­dle rate of 20%. But we see them, they’re on the buy list. There are plen­ty of stocks on the buy list which have a PE ratio of five or less, but they are very deep val­ue stocks. And so, I, you know, from time to time and dif­fer­ent mar­ket cycles, I found that look­ing for that kind of stock was get­ting pret­ty thin on the ground, and it was hard to find them. So, I have oth­er met­rics, and IV 2 is the most com­mon met­ric which is used by the stock mar­ket. It basi­cal­ly says, if I can invest my mon­ey in the most risk-free asset out there, which is gen­er­al­ly accept­ed to be gov­ern­ment trea­sury bonds — so, ten-year bonds — then at what return am I pre­pared to take the risk of leav­ing a trea­sury bond and invest­ing in the stock mar­ket, which is inher­ent­ly much riski­er? So, I know if I buy a trea­sury bond, I’m gonna get, say, 3% or around that from the gov­ern­ment, and the gov­ern­ment is more like­ly to be here than a com­pa­ny on the stock mar­ket is after ten years, and I’ll get my mon­ey back and I will have earned 3% along the way. Not a great return, but it’s often spo­ken of as “the risk-free return.” It’s the least risk in the in the invest­ing uni­verse. So, how do I mea­sure that up against the risks and rewards in the stock mar­ket? Well, I add what’s called the risk pre­mi­um to that 3%. It’s gen­er­al­ly, I guess, accept­ed that the stock mar­ket has a 6% risk pre­mi­um com­pared to gov­ern­ment bonds. And so, the hur­dle rate for IV 2 cal­cu­la­tions are sim­ply 6% plus the cur­rent RBA cash rate, which is usu­al­ly the ten year bond yield. And so, that’s been going up recent­ly, and so the IV 2 hur­dle rate has been going up as well. But that’s sit­ting at around 9% now, which is a much low­er met­ric than IV 1. But that’s gen­er­al­ly what peo­ple are using in the mar­ket and ana­lysts are plug­ging into the dis­count­ed cash flows, which I just spoke about. So, they’ll use around 9% at the moment, and they’ll be say­ing that “if I can take a com­pa­ny and look at its cash flows over the next ten years and then dis­count them back, I’m using a 9% hur­dle rate.” Which basi­cal­ly means that’s like a 9% infla­tion rate. And what’s the dol­lar worth in ten years’ time? Well, I have to dis­count it back by 9% a year, and the rule of 72 tells us that if we invest it in the stock mar­ket and get a 9% CAGR in eight years’ time, we will dou­ble our mon­ey. It’s the reverse of that. So, $1 in eight years’ time is worth 50 cents now if I dis­count it by 9% over the inter­ven­ing peri­od. And so, that’s what a dis­count­ed cash flow is, and that’s what the hur­dle rate is that’s being used in most ana­lysts’ mod­els. We just sim­pli­fy that by tak­ing it as the return that we need before we invest, which is called IV 2.

Cameron  29:47

Very good. Thank you, Tony. Hope that helps, Ally. Jor­dan: “Hi Cam and Tony. I’m inter­est­ed to know Tony’s thoughts on C6C sell­ing its Aus­tralian assets. Is this like­ly to lead to a delist­ing on the ASX?”

Tony  30:02

I can’t be sure. I would­n’t think so, because there’s still a large num­ber of share­hold­ers who invest in C6C. It’s a bit like AGG, Angl­o­Gold Ashan­ti. You know, they had a lot of share­hold­ers from Aus­tralia who want­ed to own the Bod­ding­ton gold mine, which I think might have been the biggest in Aus­tralia at the time. And then they sold that to New Crest, but they kept all the share­hold­ers as CDIs even though AGG is list­ed in the main in Joburg. I think the same thing will hap­pen with C6C. Gen­er­al­ly, a com­pa­ny will keep it alive because it’s a source of cap­i­tal for them and will only turn off an exchange if the cost of keep­ing it going out­weighs the ben­e­fit. And so, there has to be a pret­ty small num­ber of share­hold­ers left before that hap­pens. So, I don’t think that will be the case with C6C, but I can’t guar­an­tee it. Its an inter­est­ing time for C6C. I just did a bit of a dive into it. So, in sum­ma­ry, they sold off, I think the cop­per mine was called Eva, I think; any­way, they sold a cop­per mine in Aus­tralia to Har­mo­ny Gold. Yeah, so they’ve got $170 mil­lion dol­lars which they’re going to rede­ploy into Cana­da, where their oth­er mines are based. But C6C came out and said they did­n’t make any mon­ey in the last quar­ter, they lost mon­ey, and they also fired their CFO ear­li­er in the year. So, there’s fun and games going on with C6C at the moment from a cor­po­rate per­spec­tive. I think the sale of the Aus­tralian busi­ness has come in handy for them to be able to keep going in in Cana­da and get them­selves back on a good foot­ing again.

Cameron  1:10:28

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