QAV 608 CLUB

Cameron 00:06
Welcome back to QAV, TK. This is episode 608. We’re recording on the 21st of February 2023. It’s a lovely Tuesday in Brisbane, a little bit grey in the skies, a little bit cooler than it has been of late. How’s the weather down at Cape Schanck, TK?

Tony 00:23
Lovely. No, the weather is great. It’s cooled off a little bit. It’s sunny now, a little bit windy. But, yeah, just loving it at Cape Schanck. It’s low 20’s and sunny.

Cameron 00:34
And your health is on the mend.

Tony 00:37
Yeah, thank you. I really think long COVID’s a thing, but I’m getting better every day. Went for a walk today, played golf in the cart yesterday. So, yeah. It’s kind of like the volume’s been dialled up each day as everything returns to normal. Thank you. Yes, on the mend.

Cameron 00:55
That’s good. Well, I wish I could say the same thing about the market, Tony. It’s, suffering from long COVID, I think. It’s been a choppy week. Took a big hit this morning, when the market opened. It’s recovered a little bit since then. It closed yesterday at around about 7552, dropped down to 7511 this morning, and then has recovered to 7554; still down from yesterday. I know in Australia in the last week, we’ve had a lot of rather disappointing earnings statements, results, coming out from a range of companies. The market doesn’t seem to be very happy with a lot of the earnings that are coming out. Some surprises in there that I know you might want to talk about a bit later.

Tony 01:44
Yeah. I haven’t got the stats in front of me, but they do keep stats on how many companies beat their earnings. Even though it’s more than half this reporting period I think it’s lower than what it normally is. I forget the number now; say 70% of companies normally beat their consensus estimate, and it’s now less than that. So, that’s one of the things which I think is weighing heavily on the market. Some companies aren’t giving outlooks, which is also weighing heavily on the market. Like, if you’ve always given an outlook and you don’t give one, the market thinks, well, you’re expecting bad news, or you just don’t know. It’s too up in the air. The other thing I’ll say is, there’s just been another horse sale in Sydney, and I’ve been offered lots of cheap horses to buy. I was just speaking with one of the studs on the phone before we started recording, and he was saying that he feels the sales have dropped 20% just in the last month. So, that’s not a great indicator for where the economy’s going usually.

Cameron 02:44
Yeah, well, let’s look at the portfolio updates: dummy portfolio since inception — which for new listeners is the second of September 2019 — according to Navexa is up 15.7% CAGR per annum over that period, down from where we’ve been of late which is more like 18% CAGR. And versus the benchmark, the STW, which is up 7.41% per annum over the same period of time. So, we’re still doing double market even though we’ve come back a little bit. Got quite a few dividends that are in the wings as well that will kick in if we don’t sell those stocks over the next, sort of, month or so they go ex. But FBU, your pulled pork last week, Tony, continued the trend of the pulled pork kibosh: it crashed through — it didn’t crash — it slid gently below its three-point trendline sell this morning. We hold it in the light portfolio, and I haven’t sold it yet today because it’s just been hovering around its three-point trendline sell marker and it looks like it’s going to come back over it, but then it doesn’t. Eleven o’clock this morning Sydney time, I thought — it was like one cent or two cents off it, below — and I was like, I’ll just hold on until I get back from Kung Fu. I got back from Kung Fu, and it was another cent down. I’m like, ah, I’ll just wait until I do the podcast.

Tony 04:25
Wait till tomorrow, see how it resolves. In my defence, I didn’t selective FBU, someone requested it. So, I’m just a mouthpiece. Not sure if it’s my kibosh.

Cameron 04:35
It is. It’s when you talk about these things that you put the kibosh on. So, apologies to Fletcher’s Building Group there for Tony crashing the share price. Monetary tightening in the US has apparently been sending Wall Street lower, according to the Fin Review, and ASX technology stocks have been affected by that. I don’t really know why ASX tech stocks are affected by US monetary tightening, I assume it’s got something to do with investment companies in the US that are investing in Australian stocks that are pulling their belts in or something. How are those two things connected, Tony?

Tony 05:21
Well, when they say monetary policy in the US, they’re talking about interest rates. And so, interest rates are still rising. I did speak last week about the fact that the market kind of gets ahead of itself and thinks that the interest rate rises are either coming to an end, or potentially will be followed by interest rate cuts later on this year or next year. And so that gets people excited again to invest in tech stocks and high growth stocks, because they think interest rates coming down will improve their discounted cash flows for those companies and their valuations for those companies and it’s gonna be free and easy money again, so you may as well take the risk. But the market keeps getting a bit of a dose of reality with all this stuff. And whatever happens in the US with the NASDAQ is going to impact on Australian tech stocks as well.

Tony 06:12
But why?

Cameron 06:13
A lot of these stocks are what they call “relatively priced”. So, it’s a bit like the housing market. We know what it costs to build a house, but the houses that we buy sell for a lot more than that. Which is the land value, I guess, but how do you value the cost of the land, because if you put a house on and it gets a 3% yield, you wouldn’t pay as much for it if you’re just buying it for business reasons because you can get more than 3% yield in the bank by putting your money in the bank these days. So, why just, you know, layout a whole heap for a house and then rent it out for 3%. And what real estate agents will argue if you ask them to value your house, is they will go and pull up all the comparative sales in the market recently. You know, “this house down the street sold for this price, and this one’s also got three bedrooms, it’s the same size as yours on the same block of land in the same suburb.” So, there’s a lot of relative pricing going on. And that’s the same thing, particularly with tech stocks, because how do you value them? No assets, and all the profits are in the future. How long in the future, who knows? So, you value them on relative metrics. You know, “we’ve got this many customers versus this company, tech stock, in the States which has this many customers, and therefore, on a revenue per customer basis, it’s worth x times.” So, that tends to be how they get valued.

Cameron 07:35
Right. So, it’s just a little bit of fudgery-wudgery.

Tony 07:42
Yeah, and all this stuff is just classic noise. Just don’t listen to the short-term noise and what the market did yesterday and all that stuff. It’s just so not important. Really. I mean, yeah, there are big things afoot. I’m not saying that there aren’t trends afoot that are gonna, you know, make it easier or harder for us to invest, like interest rates rising. But to look at what the market thinks interest rates are gonna do today versus yesterday, it’s just gonna turn you in knots.

Cameron 08:08
Well, that’s the thing that always makes me scratch my head, is the market seems to be buoyant one day and then depressed the next day. Like, really? What changed? Like, did somebody die overnight? What’s so different today as of yesterday? It’s not like you didn’t know that the economy was tough, or this was happening or that was happening. What’s the big news that happened overnight that made you go from buoyant to depressed, and I can never work it out.

Tony 08:36
And that’s Mr Market as Ben Graham said over a hundred years ago: the manic-depressive neighbour who comes to your house every day and offers you a different price for the same asset. Nothing’s changed. And what tends to drive the market if you want an answer to those short-term gyrations, is it tends to be whatever data set just gets released. So, there are stats coming out all the time, particularly in the US about arcane things like non-farm payrolls. You know, how many steel workers are employed, all that kind of thing. And then economists will hyperventilate and extrapolate, blow a lot of hot air about what that means for the future of the civilised world, and the market will adjust. And it’s really, it’s really not that important.

Cameron 09:18
Well, on our buy list this week we know that iron ore is a buy again, but on the same day, there was a filthy article in rear window about Andrew Forrest, the, well, he’s not the CEO, the Executive Chairman of Forest Metals Group, written by Joe Aston.

Tony 09:38
Fortescue Metals Group.

Cameron 09:39
Isn’t that what I said?

Tony 09:40
No, you said Forrest Metals Group. He’d love it to be called Forest Metals Group, I’m sure, but it’s called Fortescue.

Cameron 09:46
Fortescue Metals Group, my apologies… Written by Joe Aston in the Financial Review entitled “Andrew Forrest, Insane in the Membrane” where he was just basically talking about an earnings call that they had. “Executive Chairman Andrew Forrest exhibits all the signs of a man hanging onto reality by a very thin thread. He began by assuring participants, ‘I’ll be gladly handing over to [CEO Mark Hutchinson of FFI, the Fortescue Future Industries] and [FMG CO] Fiona Hick, so you won’t hear much from me,’ before completely dominating proceedings. His homespun over familiarity, the fake report, the simulated affection, the random and inappropriate love bombing of people was laid on thicker than ever.” And then he goes on with some quotes. “Much like the nanotube and Elizabeth Holmes magical blood machines, the membrane will change the world.” He was talking about some magical membrane that they’ve got, apparently Forrest said, talking about some breakthrough that they’ve made in Fortescue Future Industries which will be able to produce “sizeable volumes of green metallics out of our own iron ore without producing CO2. ‘Let me just say,’” Forrest teased, “to give a clue to all our competitors out there, it uses a membrane and they’re going to have to come and talk to us if they want to borrow the membrane.’” And Aston writes, “there you have it, ladies and gentlemen, much like the nanotube and Elizabeth Holmes magical blood machines, the membrane will change the world. Though were that the case, the last thing you’d do is talk about it. I have the membrane, just quietly, and I’m also flagging to my competitors that I have the membrane. The membrane is Forest’s secret sauce, like Hamish Douglass’ downside protection™. More likely, Forrest is insane in the membrane.” What did you think of all of that, Tony?

Tony 11:40
Well, first of all, it’s alleged that all those things happened, so we’ve got to be careful about what we say. But Joe Aston is hugely entertaining, and oftentimes the only person that talks truth to power in the business press. So, I think broadly he’s basically saying that Andrew Forrest is a terrific salesperson, handling the media and handing out the love to all the people that are listening. I think Joe Aston’s kind of right when he says that Twiggy Forrest has given some indication that they’ve discovered some sort of particle or process that can make iron ore greener, but he’s not giving out many details at the moment. So, you should be sceptical, and I think that’s fair enough. Hopefully Tiggy Forrest has discovered some way of trading iron ore in an environmentally better process than what’s been done in the past. But like all these claims, we’ll wait and see. Let’s see it.

Cameron 12:35
Astons got a bunch of alleged quotes from Andrew Forrest during the call. This quotes to journalists, he’s written, “‘All of you can contact me any time you like. Look, I think you’re an excellent journalist and they’re great questions. Typically, excellent question, mate, you’re damn right. If you want a ride, mate, it’ll be a great voyage. All these questions, they’re showing a lot of vision, they’re showing a lot of foresight. Great question, Lachlan. Look, excellent question, Melanie. Nick, a great question mate, and you’re overdue to shout me a beer.’” I read all that and I thought, sounds like a great bloke.

Tony 13:03
Great salesperson, and he’s spent his whole career doing that. And to give him his due, I mean, he could be on the wrong train with the FFI, and he’s been trying to promote green hydrogen. I don’t even know if that’s going to work. And he’s been going around the world signing up lots of second/third world countries to provide different things to them. I suspect he’s a bit like some of the Middle Eastern countries at the moment; he can see that iron ore is not going to forever be in a boom that it has been in. China’s not forever going to expand and grow, which is basically where the iron ore has been going from Australia. And so, he’s diversifying away. Just like, you know, Saudi Arabia’s trying to do away from oil. Same sort of process whether it’s green, and who knows, he’s certainly going that way. Whatever it is, it’s in its infancy. He’s seeing a long runway for these things, and he’s got a history of seeing far into the future. I mean, he took on the might of BHP and RIO and became the third powerhouse in iron ore in Australia. To put that in perspective, that’s like starting a supermarket and taking huge market share away from Coles and Woollies, or starting a bank from scratch and, you know, taking on CommBank and NAB and Westpac and becoming a major force in the banking sector. That achievement is so rare in Australia where we tend to have duopolies and oligopolies that he has a lot of track record and a lot of credibility. So, apart from the fact that Joe Aston’s pointing out that he’s a good salesman and we should be sceptical about some of his claims, he may well be onto something. But who knows?

Cameron 14:48
I love Joe Aston’s conclusion: “what he ultimately wants is for everyone to love him. Not everyone will love Andrew Forrest for being a very successful businessman who dug shit out of the ground and sold it to the Chinese to make steel. That will merely get him a who’s who entry as another mercantilist. That’s not what Twiggy wants. He wants statues. He wants global acclaim. He wants world peace. He wants the lot because he’s effing mad. So, he’s ending slavery, saving the ocean, building happy abattoirs, being the King of Davos. There is no lane left for him to stay in. There is none because he’s swerving all over the effing road. Is it any wonder Guy Debelle crashed his bike just to get the hell out of there? Joining the others tearing their hamstrings down the exit ramp…

Tony 15:30
Well, that’s certainly true. And we’ve spoken about that in the past. There’s been some, I mean, the CFO resigned just before the results were announced, and Guy Debelle who was a senior banker at the RBA joined FFI and then quit soon afterwards. So, there’s something going on there, Joe Aston’s right to point out.

Cameron 15:48
So, I guess my question is: iron ore’s a buy again, FMG’s on the buy list, right down the bottom this week, but it’s on the buy list. Adding those two things together plus Joe Aston’s article, would you buy FMG?

Tony 16:02
I’m not going to add Joe Aston’s article into my considerations because he’s writing for entertainment. But I am cautious because of Guy Debelle’s and the CFO’s resignations. I think they’re red flags. So, if it was my last dollar, maybe, but I’m hoping to find something on the buy list a bit higher up to buy first.

Cameron 16:20
All right, let me move along to Charlie Munger. Charlie Munger.

Tony 16:28
All hail Charlie Munger.

Cameron 16:31
Wow, this guy, super impressive. As most people listening to this probably know, Charlie Munger not only has a big stake and is one of the co-whatevers of Berkshire Hathaway, but he also owns a big chunk of a newspaper called Daily Journal which has been transitioning from being a newspaper to a technology company. And he, with the interim CEO of Daily Journal, did a live Q&A for their annual general meeting this week. And Charlie as always is being interviewed by Becky Quick from CNN. She’s passing through the questions, facilitating it. Charlie is ninety-nine years old, and he looks it, but he is so sharp when he’s answering these questions. I’ve only watched about thirty-forty minutes of it so far, but I just want to play a little bit of it. There was a question preceding the one I’m about to play where he was asked what he thought about AI and chat GPT, and he gave a fairly cautious response. I don’t know what you’re gonna ask a ninety-nine-year-old guy about AI for, but he said, look, I think there’s a lot of possibilities for AI, I think it’s gonna it’s got a big future ahead of it. He said that he doesn’t think that it’s really something to worry about right now. He talks about how the technology business destroyed the newspaper business, the Daily Journal’s business, and they’ve had to pivot and it’s a long, hard slog. But then the interim CEO of Daily Journal piped up and said he actually thinks that chat GPT and tools like that are going to have a huge impact on journalism, and they’ve already been using it in their newspaper, experimenting with how to use it to write articles and things like that, which is interesting. But then the next question Becky came up with was apparently written by chat GPT, somebody submitted a question that they used chat GPT to write, and it’s about cognitive biases. So, let me see if I can make the technology work here, and I’ll play the question and Charlie’s answer.

Becky Quick 18:41
“In your experience, what’s the most challenging bias to overcome, and how do you personally guard against it? So, I’d ask for an answer to that question and then what do you think of the question that GPT chat wrote for you?”

Charlie Munger 18:53
Well, if I had to name one factor that dominates ill and bad decisions, it would be what I call denial. If the truth is unpleasant enough, people, their mind plays tricks on them, and they think, ‘is this really happening?” And of course, that causes enormous destruction of business when people go out throwing money into the way they usually do things, oh, you know, it isn’t gonna work at all well in the way the world is now having changed. And if you want an example of how denial has affected things, take the world of investment management. How many managers are going to beat the indexes, all costs considered? I would say, maybe 5% consistently beat the average. Everybody else is living in a state of extreme denial. They’re used to charging big fees and so forth for stuff that isn’t doing their clients any good. It’s a deep moral depravity. If some widow comes to you with five hundred thousand dollars and you charge her one point a year, you could put her in the indexes. But you need the the one point. So, people just charge a considerable fee for worthless advice, and all professions fall into that kind of denial. It’s everywhere. So, I had to say, I always quote Demosthenes — a long time ago, Demosthenes, that’s more than two thousand years ago — and he said, “what people wish is what they believe.” Think of how much of that goes on. And so, of course, is hugely important. And you can just see it. I would say the agency costs and money management, they’re just so many billions it’s uncountable. And nobody can face it. Who wants to keep your kids in school? You’ll quit, you need the fees, you need broker choices, so you do what’s good for you and bad for them. Now, I don’t think Berkshire does that, and I don’t think we Darren and I did it at the Daily Journal. Darren and I never took a dime on salary or directors fees or anything. If I have business, I talk out of my phone or use my car, I don’t charge it to the Daily Journal. That’s unheard of. It shouldn’t be unheard of, and it goes on at Berkshire, it goes on at the Daily Journal. But we have an incentive plan now in this Journal technologies, and it has a million dollars for the Daily Journal stock. That did not come from the company issuing those shares, I gave those shares to the company to use in compensating employees. And I learned that trick, so to speak, from BYD, which is one of the securities we hold in our securities portfolio. And BYD at one time in its history, the founder-chairman, he didn’t use the company’s stock to reward the executives, he used his own stock. That was a big reward, too. Well last year, what happened? BYD last year made more than $2 billion after taxes in the auto business in China. Who in the hell makes $2 billion as a brand-new auto business for all practical purposes. It’s incredible what’s happened. And so, there is some of this old-fashioned capitalist virtue left in the Daily Journal, there’s some left in Berkshire Hathaway, and there’s some left at BYD. But most places, everybody’s trying to take what they need and just rationalising whether it’s deserved or not.

Cameron 22:45
So, that’s a small taste of Charlie at ninety-nine. Isn’t he great?

Tony 22:51
He is good. You know, we should reach out to Charlie and try and get him on the podcast for an interview. That’d be fantastic.

Cameron 22:57
Well, you’re gonna be over there in a month. I’ll try and line it up.

Tony 23:02
He’s brilliant. I mean, apart from the fact that he’s ninety-nine and still going strong, he’s just as clear as a bell. And just thinking so clearly about everything, isn’t he? Just pointing out where all the problems are in the industry and capitalism and in businesses, listed businesses generally, it’s just incredible.

Cameron 23:23
Quoting Demosthenes.

Tony 23:27
I mean, his breadth and depth of knowledge is just incredible. And he’s very rarely wrong. I can’t think of a time when I’ve thought that Charlie was wrong or that he came out and apologised for making a mistake. You know, if he says 5% of fund managers beat the market, that’s probably about the right number. And if he thinks that they’re overcharging in fees, then they probably are.

Cameron 23:52
Demosthenes, on the other hand, was very wrong.

Tony 23:54
Why’s that?

Cameron 23:55
Oh, he roused Athens to fight against Philip of Macedon and Phillip’s son Alexander the Great. They were pretty sure that they could beat these puny Macedonians and Athens got crushed and stayed under the heel of the Macedonians then for a couple of hundred years until the Romans took over and crushed the Macedonian. So, anyway, Demosthenes was a bit of a madman.

Tony 24:18
When we get Charlie on for an interview, you can talk ancient Greek history with him.

Cameron 24:22
I will. I will. I will talk about the Demosthenes. My last point for the news section this week is, as you know, I’ve been building this GuruFocus checklist predominantly for our American subscribers, but I’ve been testing it against Australian stocks and comparing it to the Stock Doctor checklist. Now two things I’ve discovered through this process: number one, I’m not as good at Excel as I thought I was. Number two, actually, Chat GPT has helped me a lot in solving Excel formula problems.

Tony 24:55
Wow.

Cameron 24:56
Yeah, I just throw a formula into Chat GPT and go, “can you fix this?” And it goes, “yes, I can” and it tells me how to fix it, it’s fantastic. Works more often than it doesn’t work. Thirdly, what I’ve picked up is there have been some discrepancies between GuruFocus’s data and Stock Doctor’s data. In the couple of instances that I’ve come through, and I’ve only looked at a couple of stocks this week, and there was problems in both of them. It turns out it was Stock Doctor, I’m pretty sure, that had the data problem just in case anyone’s interested in these particular stocks. One is IMA, which has been at the top of our buy list forever. Stock Doctor is showing a 90% reduction in its market cap starting in 2022, which the ASX and IMA’s own website doesn’t show, and GuruFocus didn’t have. They went from, like, I don’t know, I think it was 150 million shares on issue down to, like, 12 million shares on issue, which is going to have an impact on its score in our buy list, right, you know, when we’re looking at things like equity per share and stuff like that. So, I flagged that with Stock Doctor, Victor Di Pascuale, and he’s looking into that. And the other one I picked up is N1H, which is also up at the top of our buy list. Stock Doctor shows a drop in their shares on issue from 86.5 million down to 25 million, but the ASX has them at 88 million, as does GuruFocus. So, I think Stock Doctor’s got some data integrity issues. I might be wrong, I’ll wait to Victor comes back to me, but that may change some things.

Tony 26:39
I had a similar problem last year. Remember, I bought News Corp because they came on to the buy list, and it turned out they had the wrong number of shares in Stock Doctor. So, looked they’re not immune, and I imagine there are errors in GuruFocus, too. I’m not that familiar with it. But yeah, if something looks strange, it’s worth checking out. Were there any shared consolidations or buybacks for those two stocks you mentioned?

Cameron 26:59
Not that I could see. I went through the announcements on Stock Doctor. And again, I looked at the ASX and I looked at AMA’s website. I don’t think I looked at N1H’s, I just took the ASX number. But yeah, GuruFocus tends to agree with the ASX on both those, and Stock Doctor’s in disagreement.

Tony 27:16
Wow, okay. Yeah, well that’s not good. Hopefully, Stock Doctor can fix it. We can talk about this later, but I’d be interested to know what you’re doing for Financial Health in GuruFocus, because I had a look at it last year and couldn’t come to a conclusion that got me close to the Stock Doctor financial health ratings.

Cameron 27:34
Well, they have their own ratings for those sorts of things, and I’m testing those out. My thesis at the moment is that it doesn’t really matter if their scoring is different to Stock Doctors if the stack ranking of those scores is similar. So, if they give it a strong or weak or stable and I can score them on that, as long as, you know, at the end of the day it’s giving it a similar sort of score — because that’s what we care about, right? If it’s improving, declining, strong, weak, those sorts of things. GuruFocus have their own metrics that they’re measuring, I can’t remember what they’re called.

Tony 28:20
Yeah, it had Z scores and different versions of that. Or “zee scores” as they call it. But yeah, when I ran my tests it was coming out with different results compared to Stock Doctor, and that’s where I put it aside. I haven’t tested it much further than that.

Cameron 28:37
I’m working my way through that. And, you know, at the end of the day if I can get a similar sort of list as an output to our list, I think, then I’m on the right track. Anyway. But some of these things are really throwing me. Like, the differences in market caps and the differences in shares on issue has been throwing me for a bit of a loop this week.

Tony 28:56
Maybe we should suggest to Stock Doctor that they institute some kind of quality control. They might be able to run a download from the ASX and compare it to their data provider. Because I’d be fairly sure that the error is with whoever provides their data, probably, more than what they’ve done to the data when it arrives at Stock Doctor. But who knows?

Cameron 29:17
Yeah, you would think. All right, what else have you got in the news of the week, TK?

Tony 29:22
Well, it’s been an up and down reporting season, as we talked about before. In terms of my own portfolio, AMP results came in and that was just terrible. Surprised on the downside, and I can’t understand why AMP didn’t come out during confession season and start to reveal some of the problems it revealed when it actually came out with its results announcement. So, I don’t know what’s going on there. I don’t know what the regulator’s doing, they should have jumped all over AMP and said, “hey, you must have known about the reduction in the funds under management and the other issues you were facing at least weeks before the results came out.” So, the regular has done nothing.

Cameron 30:02
Well, look, AMP’s had such a clean record for management and quality control over the last few years, Tony, I think they probably just trusted that they knew what they were doing down there.

Tony 30:15
Yeah, or that they didn’t work out the numbers until the night before they released them, and therefore it was continuous guidance. So, I don’t know. But yeah, it’s not good. I didn’t treat it as a red flag, but only because AMP has now fallen back almost to its sell line.

Cameron 30:32
It was one cent above it when I checked an hour ago.

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Cameron 1:07:18
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