This is the transcript of QAV #609 CLUB EDITION

Cameron  00:06

Welcome back to QAV, Tony. This is episode 609. We’re recording this on the 28th of February 2023. What is it? 1:13 pm Brisbane time, 2:13 pm Cape Schanck time. How’s life down at the Cape property, Tony?

Tony  00:29

Oh, lovely. Jen’s down here this week, so we’re having a break which is lovely. Just be relaxing and doing jigsaws and went out for lunch yesterday. All good. She’s having a massage tomorrow. I’m playing golf.

Cameron  00:44


Tony  00:45

Oh yeah. I love the jigsaws down here.

Cameron  00:47

Are they some of the ones that Taylor sold you during COVID?

Tony  00:51

We’d done those years and years ago, so I don’t know where they are. No, I got three for Christmas because people know I like doing them down here. Jenny gave me one of a map of the Mornington Peninsula, like a hand drawn painting of all the attractions and things, so that was good. Just finished that one. Alex has given me one of the Eiffel Tower, I guess in reference to a trip we did with you to Europe, so I’ll do that one next. Then I’ve got another one from my sister of some windmills and tulips. I’ll save that one ’till last.

Cameron  01:25

I would rather have my toenails slowly pulled out with a pair of pliers.

Tony  01:29

Well, that can be arranged.

Cameron  01:35

That’s something Christie will arrange, I think, in time. She loves doing LEGO. I bought her, like, one of the adult LEGO sets for her birthday. It’s a bunch of flowers to go on a vase. She loves doing it. I can’t think of anything worse, like fiddly things.

Tony  01:51

I love LEGO.

Cameron  01:53

Oh, I hate fiddly things. As a kid I used to get those, you know, the model aeroplanes and stuff. I hated them.

Tony  02:01

Oh, I loved it.

Cameron  02:02

I don’t have good fingers or patience for that kind of stuff.

Tony  02:07

No, I love it. I’ve always loved that sort of stuff. I used to make a lot of Lego when I was a kid and loved designing new things, too. You know, helicopters and hovercrafts and all sorts of things, it was great fun. And I religiously buy them for my nieces and nephews as presents.

Cameron  02:25

Fox is obsessed with LEGO. You should come and spend a day in his room. It’s like a LEGO Zoo in his room. I’ll send you some photos. He loves it. He’s been watching, do you know this — you probably don’t, but there’s a YouTuber called Mark Rober. He’s an ex-NASA and Apple engineer and now he’s got twenty-five million followers on YouTube. He does engineering videos. A couple of his most famous ones, he designed a glitter bomb to go in packages on front doorsteps to stop people stealing packages in the US. He’s done a couple of versions of that. Then he did another very famous one where he built a series of hurdles for squirrels in his backyard where they had to achieve certain challenges to get the walnuts which was very big. Anyway, he’s done a million, and they’re all engineering based. And they’re great. He’s really, really good, and Fox is obsessed with his stuff. But he said to me the other day, “I think I want to be an engineer when I grow up.” Which is cool, right? I was like, good on Mark Rober. He’s inspiring kids to become engineers.

Tony  03:38

Oh, that’s fantastic.

Cameron  03:39

Or at least to think about it as an option, you know, because he makes being an engineer look cool. So, that’s great. I love it. And I think LEGO is part of that, too, you know. He loves going and designing stuff and building stuff in Lego. I think LEGO is fabulous. Drives me nuts, but I think it’s great.

Tony  03:56

I must admit, I prefer the way Lego used to be when I was a kid, where you’d just buy a box of bricks, and you could make your own things out of it. Whereas now, you know, because of all the franchises you’re pretty much stuck building the Star Wars, you know, figurine that they give you. The X-Wing Fighter. All the parts are sort of pre-made for that now, which I don’t really like as much as being able to design your own X-Wing Fighter and build it from scratch.

Cameron  04:22

Yeah, well, I think you can still do that. You could still go and buy just the basic bricks. But yeah, the stores are more designed for the custom builds. But it must be a great business. Like, what would it cost to churn out a LEGO brick? Like, fractions, micro cents. They sell them for… Like, the Eiffel Tower one is like $1,000.

Tony  04:45

It’s a great story. I’m just trying to remember where I saw it. There must have been a documentary about it, but the guy who did it — I’ve forgotten his name now, back in the 20s or whatever — built wooden toys first of all. Then plastics came in and he eventually came up with the current design, which is the circle, which is the LEGO clutch where two bricks hold together with no binding because of the circles on top and the hollow underneath. Yeah, and it just went on from there.

Cameron  05:19

Yeah, really great success story.

Tony  05:22

Show fox that James May’s Toy Stories. There’s a whole episode in there where he builds a house from scratch out of LEGO — a real house that you can go into. He builds a toilet and puts a brown Lego brick in the bottom of it.

Cameron  05:38

That would appeal to Fox and his eight-year-old-boy humour. Yeah. Anyway, let’s get on to less happy stories. Tough day in the market yesterday. It’s recovered a little bit today, I noticed. Like, it’s rebounded quite a bit today — sort of 50% of the dive yesterday. But it just died from 7512 yesterday morning to 7432, and then bounced around a little bit in the afternoon according to PerthNow. Talking from the AAP: “local share market has suffered its worst day of losses in almost eight weeks following signs inflation in the US is proving remarkably sticky. The S&P ASX 200 index finished Monday down 82.2 points, or 1.12%, to 7224.8, while the broader All Ordinaries dropped 93.1 points, or 1.24%, to 7419.6. It was the ASX’s second worst performance of the year after a decline on January 3.” So, look, lift your game, US. You’re hurting our markets.

Tony  06:56

Or lower your game, US. The problem over there is that inflation is higher than what people thought it was. So, people are still spending and therefore the analysts are now forecasting a 0.5% increase in interest rates at the next Reserve meeting over there. Yeah, but like, again, we’ll talk about it when we talk about the Buffett letter. But you know, again, inflation came out, I think they were expecting 4.5% and it was 4.8, something like that; could have the numbers wrong. But it was, you know, thirty basis points higher than what they thought, and they go bananas. The US market dropped 1.8% on Friday. Which is, you know, one of the difficulties of being an Australian investor; you see that on Saturday morning when you wake up and you think, shit, I can’t do anything about it because I know on Monday the markets going to open here and it’s gonna go down, so you just have to wade through it. But our market didn’t go down as far as the US. What did I read on the weekend? The US market was down 2.7 or 2.8% for the week, which is a huge fall. So, there’s still, you know, still a fair bit to happen to come to grips with inflation at the moment. Still got to play out.

Cameron  08:16

I think the thing that’s been boggling my mind over the last week or two, and we talked about this last week, is a lot of these companies are coming out with great looking reports in Australia, half yearly reports. They’ve obviously had a bit of a tailwind over the last — some of them — over the last year because of the Ukraine war and supply side issues and all these sorts of things, you know, and then on the other side, you’ve got inflation and interest rates going up. But you know, they’re coming out with record profits, and then their market price, their share price, would just tank. And you know, I’ve seen people in our forums just scratching their heads about it. In some cases, they’ve reported a good half yearly result, but their projections for the rest of the year aren’t too strong. In other cases, their projections are fine. I think XTE was an example yesterday, but the share price still just took a beating.

Tony  09:08

Yeah, well, someone’s asked the question about that, so I’ll save my comments until then. But I did note XTE has gone through its three-point trendline sell price today. I think you were saying beforehand, you had to sell it from the dummy portfolio.

Cameron  09:23

Yeah, I held on this morning because it was only one cent below the 3PTL, and I felt like, ya know, the market’s going to be up today they say so I’ll go to Kung Fu and I’ll worry about it when I get home. I got home and it dropped down to 58.5 cents and I’m like, “ah, damn it.” Speaking of things breaking through their 3PTL, I was just talking to you before the show about GNC, GrainCorp, and you pointed out that there is a futures chart on Stock Doctor for wheat. When we had a look at it, it’s W# for people that want to have a look at it, wheat is a Josephine and is about to become a sell by the looks of it. It’s very, very close to the sell line, which means we’ll have to dump our GNC. Is there anything else that’s grain related that we should look at that’s on our buy list often?

Tony  10:18

I can’t think of it. GrainCorp’s probably the only one. And that’s the grain handler that sends things overseas; it does tend to, to perform along with the grain price. And it’s bottomed out and it’s going up again, like, just bottomed out in the last three or four months, and it’s going up again. It’s climbing up in a zigzag pattern, so even though it crosses it may well come back if it does cross it’s sell line, going up.

Cameron  10:49

Well, so we’ll start tracking that as of this week in our CommStatus tab in the buy list.

Tony  10:57

Yeah, I did notice a couple of other reports came out for first stocks on the buy list and stocks I own. So, Woodside reported just recently: tripled its profit, largely due to the merger with the BHP oil and gas operations, and its dividend is why up as well. So, that was a good result. Stanmore Coal, I saw came out, the coking coal provider, and their profit was twenty times last year’s numbers but their share price went down. I think analysts are kind of looking for future guidance in particular — they always are — but in particular now, because they know that it’s been a good half. They want to know what’s going to happen and if they don’t get every I dotted and every T crossed when they’re presenting, the companies can have their stock price marked down. Like, for example, Qantas was the other one I was going to mention. They haven’t made a profit for three years, I think, and this is the first year they have; they made a billion dollars, and their share price came off 10%, largely because people thought it was as good as it was going to get and with the increased competition, they won’t be able to maintain their margins. Yeah, I mean, the funny thing is, like, nothing changed from the day before the results were announced in terms of the competition or the issues that caused the sell off, so there was obviously some kind of, probably something in the results announcement which someone picked up on and extrapolated from. But Qantas went down, its back up again today. I bought some. I’m not sure that that kind of 10% sell off in a day is the right reaction to a good result, really, so we’ll see.

Cameron  12:43

There’s an old saying, too: buy on the rumour, sell on the facts. Do you think a lot of the funds buy if they think they’re gonna have a good result, then they report the good result and then they just take their profits and move on?

Tony  12:58

It’s possible. I haven’t heard of anyone doing that, but it’s possible.

Cameron  13:04

All right, well, let’s talk about the QAV report, just quickly. The dummy portfolio improved a bit again this last week, surprisingly. We’re up about 16.14% CAGR per annum over the — what is it now? September 2019, three and a half years, a little bit less — versus the benchmark which retreated a little bit last week. It’s now up 7.09% CAGR per annum. So, we’re doing a little bit better than double the benchmark since inception. For the financial year we’re still way behind though. We’re up 6.48% versus the STW up 17.96%. In the last seven days, took a beating from AMP. I actually had to sell AMP out of the dummy portfolio yesterday. It’s the first thing I’ve had to sell since I think, about, November. So, it’s been a good run for the dummy portfolio. But yeah, AMP took a real beating over the last couple of weeks, and I ended up buying three stocks to replace it because I had two parcels of AMP to double the pain.

Tony  14:18

I’m in the same boat.

Cameron  14:19

Yeah. HLI, DUR and BRI are what I replaced it with, and I have no idea how they’re doing today. But yeah, we’ll see. We had a Yahoo Finance article go up, and I have to congratulate Phil Muscatello. Phil from Shares for Beginners emailed me this morning and said, “hey, I just had a huge spike in my traffic.” And I went to look, and it’s this Yahoo Finance article that’s written about Tony. Apparently Taylor wrote it, and I said “yeah, kind of.” And then I emailed it to Taylor and said Phil got a spike, and Taylor went and had a look, and apparently in the article where it says “Tony, co-host of the QAV podcast,” instead of linking to our website, he linked to Phil’s website.

Cameron  15:12

He said, “oh, you’re gonna hate me.” He said, “I must have just Googled Tony’s name and pulled a link up.” I’m like, “dude, what the hell?” So, you’re welcome, Phil for the free traffic. Taylor called me last night before we worked this out and told me it was the number one trending article on Yahoo Finance yesterday, was that article. So, if people haven’t seen that, go up to Yahoo Finance. It was called something like “Three life lessons from one of Australia’s best investors.” And what were the three life lessons, Tony?

Tony  15:12

Oh no.

Tony  15:55

Start early, start investing early, be the snowball, buy a house and pay it off, and don’t do things that are cool. They were the three life lessons.

Cameron  16:08

Yeah, very good. Well, thank you for your contribution to Phil’s listenership. You owe us, Phil. You owe us one.

Tony  16:20

So does Taylor.

Cameron  16:21

Jeez, what are you gonna do? Ray Dalio is exiting Bridgewater. I read this big article on him the other day, “Hedge fund multibillionaire paid billions to quit his own company.” “One of Wall Street’s most powerful Titans will be paid billions to walk away from the $180 billion hedge fund he founded in his New York flat almost fifty years ago. According to a report by the New York Times, US multi-billionaire Ray Dalio had negotiated secret regular payments through a special class of stock informally named Ray shares, worth billions of dollars. Dalio, who has an estimated net worth of $27.4 billion, gave up control of Bridgewater in October, the mighty hedge fund which manages $180 billion in capital. Although the seventy-three-year-old retired last year, he kept his seat on the firm’s board.” What a piker. Like, you know, Warren and Charlie are still going into the 90s. He stepped away. I hadn’t heard about that, had you heard about that?

Tony  17:30

I read a similar article. I’m just making a note now about being paid to leave the company, though, once I get to 73. Yeah. A few billion dollars, that’d be nice. Secret shares.

Cameron  17:42

Secret shares.

Tony  17:45

It tells you where his head is at, though, isn’t it? Like, he’d been paid billions to step down in secret, and Warren’s giving away 90% of his wealth to charity.

Cameron  18:00

I see Ray on Instagram or TikTok or something from time to time. He does a lot of video content. I hadn’t heard him talk about him leaving. Yeah, no, it’s interesting. I guess he’s got other things he wants to do. But it’s, yeah, I don’t know. I just can’t imagine building something like that and walking away from it.

Tony  18:24

Well, he’s being paid well to.

Cameron  18:25

Well, speaking of decisions, we were quoting Charlie Munger last week about, he said something like the number one problem he sees in businesses is denying reality; how things change, and people just can’t get their head around it, deny the reality of the situation, keep doing what they’ve always been doing. And then I saw, I think the next day, in the Financial Review, an opinion article by senior correspondent Aaron Patrick entitled, “The reality defying optimism of ASX CEOs.” “The gap between how some CEOs describe their company’s performance and reality seems to become unusually large. Blue Scopes 64% profit fall was encouraging, Chief Executive Mark Vassella wrote in the steelmaker’s earnings statement on Monday, because it demonstrated the company’s resilience when prices dropped. In an interview on Sky News, he argued that after very high steel prices, ‘what we are seeing here is a reversion to a more normalised steel price.’ Still, the outlook is bright. There are ‘massive plans’ for building green energy infrastructure in North America, he said, and ‘quite a backlog’ of demand for cars. The seller was promoting his stock. The pitch failed. He ignored or glossed over reality. BlueScope shares fell 10% on Monday after investors worked out that the results included a 100 million profit downgrade.” And then he goes on to say the “CEO sales job,” and we’ve talked about this on the show many times in the past. “All CEOs are salesmen. They sell themselves to staff, directors, customers and shareholders. They’re paid optimists. A public company CEO who says ‘we really blew it this half, but there’s a fifty-fifty chance we can turn the business around in two years’ is unlikely to survive long, no matter how honest the statement. But the gap between how some CEOs describe their company’s performance and reality seems to have become unusually large.” Now, you’ve, you know, you’ve known a lot of CEOs in your time, you’ve watched a lot, you’ve played up in the upper echelons of the corporate world, Tony. Your wife has been up in the upper echelons for most of her career. What do you think about CEOs and denying reality? Is it getting worse or has it always been a problem? Or is it what they’re paid to do, deny reality?

Tony  20:56

It’s always been a problem, and it is what they’re paid to do. I wouldn’t call it denying reality because I think they understand perfectly well what the reality is. They’re spin doctors. I’ve always felt very uncomfortable around people who do that. I think it’s psychopathic, myself. To stand in a meeting and watch the CEO lie, basically, trying to put a spin on a… Trying to shine up a piece of shit to make it shine, which is their job. So, I get it, but they could take a leaf out of Warren Buffett’s book. I mean, you look and almost every year he starts off with his annual letter, “I fucked up, people, I made a mistake. I made this mistake, I made that mistake.” And that just gets it straight off out of the way. Clears the deck, you actually feel a bit sympathetic for him, and then he tells you about the results.

Cameron  21:57

The difference being that Warren can’t get fired.

Tony  22:00

Well, that’s true. Yeah, no, that’s true. So, he doesn’t have to sing for his supper. I mean, that’s how these people get into it, you know, it’s evolutionary, really. The person who gets the top job in a public company, unless they’re founder, or the son of the founder, or daughter of the founder, they’re generally someone who’s just been successful at hiding problems and managing upwards. That’s really all it is. I’ve seen it a hundred times. It’s annoying, because they’re not the best person to run the company, not even close to the best person to run the company, but they just happen to be the one that evolutionarily succeeds. And don’t forget, there’s survivor bias here. There’s another hundred people who tried to put good spin on things who got found out and didn’t get promoted. So, you know, below the person who’s spinning are the people who’re copying the spinner, so that doesn’t bode well for these organisations, either. But yeah, I’m not a fan of it. I don’t see how anyone could be a fan of it. And I don’t see how they think they can be doing a good job for their company by spinning like that. It’s just, it’s pattern lying, really?

Cameron  23:10

And why are the boards allowing them to do this? I mean, it’s the boards that hire them. It’s the boards that fire them. Surely the people on the boards are smart enough to know when they’re spinning everything and things aren’t going well. Are their conversations with the board different to their conversations to the staff and the public?

Tony  23:28

No, oftentimes the board’s ex-CEOs. They’re the past masters.

Cameron  23:33

So, they’re all in on it.

Tony  23:34

Absolutely. I mean, I’ve sat in board meetings where they spend two hours over a sentence. You know, “but if we say this, they’ll think that. If we say this, it’ll look better.” You’ve got to do a certain amount of that, and you’ve got to have things legaled, and the PR people will get involved to try and spin it. But yeah, there’s a lot of time and effort devoted in public companies to signing off on announcements, then bomb because they’re patently lies. And it comes back to continuous disclosure, too. I mean, technically, you used the BlueScope example, and I don’t know it in detail, but if it took them to the market announcement of their results to discover $100 million profit shortfall and the CEO didn’t call it out, even during the announcement, how is that continuous disclosure to the market? Yeah, so I mean, that’s the game, isn’t it? I probably shouldn’t pick on BlueScope because I don’t know the details of the situation, but you’d have to say they found the problem and they said, “okay, we can go to the market and tell them and suffer a share price reduction now, or we can try and dance a bit faster. See if the problem goes away. And then when the results come out and we have to tell them, we’ll just try and hide it and spin it.” It’s just shocking, shocking corporate governance. It really is.

Cameron  25:06

Reminds me of something Warren said in his annual letter, which we’ll get to, next. But speaking of psychopaths, I don’t know if you saw my post about this, but some political scientists in the US has just come out with a book about psychopaths and power, and how they’re the cause of a lot of the world’s problems. It’s getting a tonne of media coverage, obviously got a much better publisher than we had for our book three years ago that said exactly the same thing.

Tony  25:37

Get Taylor to write a Yahoo Finance article and then link it to our book rather than his.

Cameron  25:41

No, he’ll link it to this guy’s book probably.

Tony  25:47

But also, the other leaf out of Warren Buffett’s book is he doesn’t give guidance. He just says, you know, “I’m not going to give guidance because I don’t want you playing with the share price based on what you think is gonna happen.” Or, you know, “I can’t forecast in twelve months what’s going to happen, so I’m not gonna give guidance.” But you know, clearly in some of the cases we’re talking about they love to go out at the start of the year and say, “oh, it’s gonna be fantastic this year. We’re doing this, that and the other thing, and building you green steel works,” and all this kind of stuff. And then hopefully the share price goes up and they can cash in or they can leave before the chickens come home to roost.

Cameron  26:25

You know, I guess the bottom line of what you’ve taught us for the last three or four years we’ve been doing the show is don’t listen to the stories. If I want to hear a story, I’ll buy a book. Don’t listen to the stories that the media are telling you, that the CEOs are telling you. Just look at the facts, and the facts are demonstrated by the numbers, which is why we look at the numbers,

Tony  26:47

And not even all the numbers, as again we’ll see in Warren’s letter. Look at the ones they can’t manipulate easily.

Cameron  26:53

The real numbers, yeah.

Tony  26:54

Look at cash flow.

Cameron  26:56

So, it was Christmas for value investors this week. The Berkshire Hathaway annual letter from Warren came out. And oh, my God, it was such a great read. There’re so many great lines in this. I know you’ve got a bunch of things you want to talk about. I’ll kick it off with some of my favourite quotes from it. “The disposition of money unmasks humans.”

Tony  27:25

Mr Dalio.

Cameron  27:30

Yeah, I really liked that. I mean, it’s, you know, there’s a saying that I used in our psychopath book, and so did this other guy: “power corrupts, and absolute power corrupts absolutely.” But you see that money unmasks, you know, people’s real levels of honesty and integrity and how they deal with… Money and children and power are three things — and animals — where people’s true character tends to come out. But I thought that was nicely put: “the disposition of money unmasks humans.”

Tony  28:04

And what I think what Warren was talking about there, was that a lot of the shareholders in Berkshire Hathaway have signed up for the giving pledge, and they’re giving away their outsized fortunes rather than creating dynasties and passing it on. And Buffett goes on to say he likes managing a company where his shareholders share that same kind of mentality.

Cameron  28:30

Another quote from Warren: “our goal in both forms of ownership,” talking about owning 100% of businesses or owning just a stake in them in publicly traded companies, “is to make meaningful investments in businesses with both long lasting, favourable economic characteristics, and trustworthy managers. Please note particularly that we own publicly traded stocks based on our expectations about their long term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial. Charlie and I are not stock pickers. We are business pickers.”

Tony  29:08

And I mean that is somewhat different to the approach I have. I’m more like an earlier Warren Buffett who’s looking for deep value. But the situation he’s got is he’s got hundreds of billions of dollars to invest, and he wants to invest once and move on. He doesn’t want to continue to manage that investment and look for time to sell and all that kind of stuff. So, he has involved to invest the way he does, to look for long term businesses. And he’s quite happy to say he’d rather buy a long term investment like that at a fair value than a business that may not be long term at a cheap value, or cheaper value.

Cameron  29:47

But I think we tend to be looking at business performance as well. We’re trying to buy shares in good performing businesses with a good history of performance where we can get them when they’re undervalued, difference being that we will sell them if the share price drops below our buy price to save money or if the sentiment turns against them, for some reason, in the marketplace. We will save our capital and put it somewhere else. But we could just as well hold on to those businesses for the long haul and just, you know, go home and read a book.

Tony  30:32

Well, we could. I don’t think our returns would be as good, but we could. You know, if we were in Warren’s situation with lots of capital to invest, we’d have to do it that way, I think. There’s no way he could, you know, take 25% of Coke and then say “I’m gonna decide to sell it tomorrow,” and buy something else. It would be very difficult to do that. So, that’s why he does what he does. But I think you’re right, the point that we can take and learn from is that it’s not the stock market that’s important, it’s the underlying business. And that’s why we base our decisions on numbers. It’s how’s the business performing? We like a good business at a good price.

Cameron  31:15

We’re not trying to buy a share because it’s trendy and we think it’s going to be popular.

Tony  31:20

That’s right. We’re not buying Afterpay shares or BNPL shares because they’re going up.


Cameron  1:45:46

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.