Welcome back to QAV episode 622. We’re recording this on Tuesday, the 30th of May 2023 at 2:40pm in the afternoon. We just spent the last forty minutes mostly talking about the Succession finale.
Oh my god, that was so good. It was on last night. That’s why we’re talking about.
Yeah, we’ll get into that more, I guess, in after-hours. How are you, TK?
Good. Good weather in Sydney. Played golf yesterday, went for a walk today. It’s lovely.
Backs doing okay.
A little bit sore, but it’s fine. I’m managing it.
You’re heading off to where?
To Wagga. Down to Wagga-to winter Wagga tomorrow.
The exotic place. You know, it’s the Las Vegas of Australia, Wagga. The capital of entertainment
Yeah. Chrissy and I got our COVID and flu booster shots on Thursday. They knocked me around for a couple of days.
Yeah. Not too bad. But you know, just kind of feeling not great for a couple of days there. Couldn’t go to kung fu, that kind of thing. Did go and see Robert Forster on Friday night, which was great. Had a great night. Really enjoyed the show.
Lovely. Did you go backstage?
No. Why? For the lines of coke and strippers and stuff? What do you think’s going on backstage at a Robert Forster show?
It’d be vegan snacks, wouldn’t it?
Yeah, something like that.
I thought Chrissy knew him.
She does, but she was playing it cool. And Taylor was looking after Fox, so we got home as quickly as possible. But Roberts wife, Karen, who Chrissy knows the best, got up on stage and did a few numbers, which was really nice, because you know, the whole album is about her fighting stage four cancer and the fact that she’s still alive and could get up on stage and sing a few tracks was really, really lovely. Shout out to Stuart and Jemima from Jindabyne, who are new club members. I had a chat with them this morning. Did the ol’welcome to QAV Zoom call, which was terrific. They’re a lovely couple getting their head around how to do a checklist and that kind of stuff. So, shout out to all our new members. If you want to reach out and have a “holding your hand” session and talk you through stuff, it’s actually… I said this to Stuart and Jemima, and I meant it, it’s honestly my favourite part of the job, is getting to talk to new QAV members and talk them through stuff. Explain stuff. It’s always good to get some face time with new — and not so new — members. I like getting phone calls from members and having a chat. It’s always fun.
This is not your favourite part of the whole QAV thing, having a chat for forty minutes on Succession?
Yeah, apart from talking to you every week, my next favourite bit. I’m talking about the work side of it.
This isn’t work, no.
This is the fun part. Tony, if the US always comes up with a last-minute deal regarding the debt ceiling, as they have done this week, why did the market crash for two days? According to the AFR, out of concerns and trepidation about the looming debt ceiling negotiations? And then it just went back to where it was one Monday. It bounced back when they pencilled in some sort of a deal.
Yeah, I think the market isn’t open yet in the US. They’re on their memorial day weekend holiday, so it opens tonight. So, we’ll see what happens. But no, I agree. I don’t know how many times I’ve seen this playbook, and it always ends the same way with a deal with minutes to spare and the problem gets kicked down the road. It’s a strange situation. But I agree with you. The only analysis I saw which made any sense was more to do with the bond market, and people just weren’t prepared to take any risks that there could be a problem with the US government debt not being honoured. And so, they just weren’t entering the market and the market was freezing up, which may have had some ramifications in the stock market if banks couldn’t borrow or whatever. And the sad thing about it is it’s a bit like the boy who cried wolf. This is, what, the thirtieth time they’ve done it or something. Next time they do it, and they don’t get a deal done, it’s going to be a real problem because everyone’s going, “nah, it’s the debt ceiling again. It’s a sideshow, forget about it.”
I think there was one instance I can recall in the last decade when they didn’t do it by the deadline, and they had to start putting people-sending them home. I think during Obama’s reign government employees had to go home for a week. But it only lasted, like, a few days or a week or something and they finally came up with something.
I don’t know. I’ve got a distant memory. It may have been the Clinton years; they actually did drag it out for two or three months and people were taking leave and stuff. But the government, the government never defaulted, they just didn’t pay their employees for a while. So, you know who loses in these things? Not Wall Street.
No. It’s the punters. Speaking of punters, congrats to my old mate Dennis Bastas. I read in the news over the weekend that he’s now worth $1.23 billion, his estimated net worth. So, officially, I think the richest guy I know. As I always say, I remember Dennis when I had to take him out to lunch because he couldn’t afford to buy lunch. He now runs one of the generic pharmaceutical companies in Australia. When I say runs it, owns it. And he’s done very well for himself. And I haven’t spoken to him for a couple of years. Chrissy and I had lunch with him a few years ago when we were down in Melbourne. Lovely guys, salt of the earth. Nicest-like you, but Greek. He’s the Greek Tony Kynaston. Really, really, really nice guy. And I remember that he told me this story. When I first met him, he was… I think he was running the digital arm of Village Roadshow in the late 90s, and then he was at a start-up called Isis, which was an unfortunate name for a start-up, in retrospect. And yeah, then Isis ran out of money. He was like the CEO of one of the divisions of Isis, they ran out of money, and he was out of work for like, a year. I’d take him out to lunch on my Microsoft card, like, once a week or every couple of weeks, down in South Yarra. I remember, he went to Greece for some family wedding or something, and he came back, and he said, “yeah, I met this guy who owns, like, the biggest generic pharmaceutical business in Greece at the wedding. And the guy said to me, you know, ‘who runs all the generic pharmaceuticals in Australia?’ And he said, ‘I don’t think there is one.’ He goes, ‘well, maybe we should enter that market.’ He goes, ‘yeah, I’ll write a business plan for you. I’ll go back and I’ll research it.'” So, he wrote a business plan for the guy, then they did a joint venture and Dennis ended up running it. He called me up, he goes, “do you know any CFOs? I need a CFO,” and I said “yeah, I know a guy.” So, that guy, who was my accountant at the time, became his CFO. Anyway, then they floated it. And you know, then they sold that to a bunch of Indians about four years later for 400 million bucks. And then he bought something else. And he just keeps buying stuff and gets bigger and bigger, and now he’s worth over a billion dollars. And just came from meeting a guy at a wedding in Athens and going “yeah, I could do that. Sure.” Anyway, great story. I know he’s a big fan of the show, Dennis. Never misses an episode.
Yeah, we should get him on.
Yeah, we should get him on. No, I’ve tried before. He doesn’t like publicity, Dennis.
Well, he would have just enjoyed that last five minutes of the show then.
Yeah, he was actually one of my advisors at my first start-up, before The Podcast Network, when I did the star-tup called Golf Lounge, where we were trying to set up an online golf booking business in, like, ’99 I think it was. He was one of my advisors in that event. Where were you then? You should have done it with me.
Yeah, I probably would have been a customer.
Yeah. That’s when Mary, Princess Mary of Denmark worked for me.
She was part of my golf lounge business. Yeah, it’s another story. Anyway, congratulations to Dennis. Lovely guy if you ever run into him. Doug Tynan uses a checklist, Tony.
Yeah, I saw that article in the Fin Review. It’s interesting.
Yeah, “Doug Tynan has a simple investment secret,” it said in the Financial Review. “In a market crowded with macroeconomic crystal ball gazing and noisy high conviction stock picking, the GCQ fundy is building a business based on one thing…” One thing. “You want to know the secret to life: one thing.” “Doug Tynan loves a checklist. In a funds management market crowded with macroeconomic crystal ball gazing and noisy high conviction stock picking, the former VGI partners executive is building a business based on one thing: does an investment make it through an extensive vetting process? So far, it appears to be working. His GCQ fund posted a 26.1% return for the six months to the end of April, outperforming its global equities benchmark by 17.6%. He says, ‘some of the key professions in the world, whether airline pilots or ER doctors run off checklists because the world’s a very complicated place.'” He’s been listening to this podcast, Tony.
“‘However, in a lot of funds management, the more experienced a fund manager gets the less they use a checklist. An airline pilot with thirty years’ experience can fly the thing blindfolded, but they still use the checklists and they don’t begrudgingly do it. And whenever there’s an incident globally, they ground the planes, work out what went wrong and improve the list. We’ve done that with investing. Whenever we’ve made an error or lost money or not made the money that we thought we would have, we’ve stopped and said, ‘how could we have avoided this with the checklist?”” Found that interesting.
Yeah, man after my own heart.
Yeah. A big fan of the checklist. Sounds like he read the same book you read, actually.
Yeah, it’s The Checklist Manifesto. Good book.
You’ve never run into this guy before, Doug Tynan?
Never heard of him. I’ve got a feeling… No, hang on. I shouldn’t say that. In the article it said I think he was formerly from VGI partners who were a big short for. I’ve heard of them, but I haven’t heard of Doug.
I wonder if we can get him on the show. We can compare checklists.
Yeah, good. It seemed like their checklist was different to mine. It wasn’t all necessarily numbers based. It was things like, has the company had a natural competitor for the last twenty years or not?
Sounds very Buffety. Do they have a moat?
Yeah, kind of trying to quantify those concepts, I guess.
Speaking of people you know, how’s your relationship with PwC?
I stopped using them a couple of years ago. Which is a shame, I could’ve got some really good inside dope on tax avoidance if I’d stayed with them. Not that I would ever do tax avoidance. But that’s terrible, isn’t it?
Yeah, I was gonna ask you what you thought of the whole PwC meltdown. Like, it’s pretty appalling.
My take on it is, particularly under the conservative government when they peddled the small government mantra, the Public Service was capped and even cut for staff numbers, but consultants grew and they’re now like 25% of the headcount in the public service. Which I think is the real appalling problem. You can’t have these people who are advising you on the one hand and working for you on the one hand, then going out and advising clients on how to catch you on the other hand.
Chinese walls, Tony, we’ve got Chinese walls. Chinese walls, it’s all good. Don’t worry about it. Never been a problem. Never been a problem in the history of corporations, Chinese walls. They always work, Tony. Flawlessly, Tony. There’s never been a book written about how Chinese walls fell over and leaked. There’s no leaks in Chinese walls, Tony, never happens. That’s your problem.
A few trap doors, few secret panels: press this one and the door opens. So, look, I know public service is intransigent and difficult to manage people out, of and that’s one of the reasons for not growing it. But they’ve got to rebalance that so there’s a headcount increase as consultants go down. And well, I think PwC’s just got to be put in the doghouse for a while. Federal government shouldn’t have anything to do with them for five years.
Think that’s going to happen?
Nup. Because these people donate to the political parties, big time. Big donors. “Want to go to the Olympics? Yeah, sure. We’ll do that for you. Want to go to the footy? Want to go to the State of Origin? Yep, no worries, come to the PwC box.”
Ah, dear, it’s appalling. Speaking of appalling: the Brettelator has had problems for the last week. Not Brett’s fault at all. Seems to be, for me anyway, it’s had a lot of problems in Safari. It’s just doesn’t load, or very, very slowly anyway. I opened it in Chrome, and it works a lot better. So, I think there’s some sort of problem with Safari and Google Finance. I don’t know what Apple’s done to Google, but something’s gone awry. So, if people are having problems, no one’s reported it apart from you. And me. I haven’t seen anyone else complain about it. Maybe people just aren’t using the Brettelator as much as we do. But if you’re having problems, my tip is open it in Chrome and see how you go.
That’s the same thing I had. Yeah, I was surprised it wasn’t all over the Facebook group, that it wasn’t loading, but I had problems. That made me think it was just my settings on my laptop, but I got it working in Chrome. It could still be my settings in Safari, but I haven’t been able to get it to work for a week now.
I didn’t change my settings. It was working fine one day and then not working the next. Speaking of things not working, did you know that Apollo tourism is now THL? Have we talked about that?
Yeah, we did. They were going through a merger with a New Zealand Company.
Tourism Holdings Limited.
Yeah. That happened last year, I think. End of last year.
Yeah, I noticed that Apollo was still showing up in our manual data in the checklist and THL isn’t. So, we haven’t made the change. But I just wanted to let people know. Now, I know this is a very sneaky attempt that Apollo’s making to get through my Apollo filter. I see what you’re doing there, Apollo; you’re trying to get back in the QAV good books.
Yeah, they went through a rebranding exercise just to avoid my steely gaze.
I wonder what PwC will rebrand to. National Government Holdings?
Chinese Walls Limited. Using GPT to find companies with a qualified audit. I had a question from Alex F on Facebook asking if anyone had tried to use Chat GPT to find companies with a qualified audit. So, I did try. Chat GPT now for the people who aren’t aware has access to the internet. If you’re a premium subscriber, it has access either via Bing or via a number of different plugins. So, I actually asked it-I gave it Apollo tourism’s website and I said, “can you tell me if this company has a qualified audit?” First I asked it if it knew what a qualified audit was, and it told me what it was. So, it did understand that. Then I asked it to check if Apollo Tourism had one. It couldn’t find one, but that may be because Apollo Tourism is now THL. The website sort of redirects now though. I know that in our manual data we’ve still got Apollo listed as having a qualified audit, but I don’t know if that’s true now that they’re THL. But then I asked GPT to give me a list of all of the publicly listed companies on the ASX that have a qualified audit. It couldn’t do that. It basically said, go do your own work you lazy bastard. No, it said “I’m sorry, I can’t do that.”
It’s beneath it.
Puny humans, that’s beneath me. Do your own work.
It said, “as of my knowledge cut-off in September 2021, I don’t have real time access to such specific and up to date market data, including lists of companies with a specific audit status. However, this information can be potentially obtained, etc., etc., etc.” And I said, “hold on a second, you do have access to the internet. Can’t you do it for me?” “I’m afraid I couldn’t find a comprehensive list of all ASX listed companies with a qualified audit. However, audit reports for publicly traded companies are typically included in their annual filings, such as form 10k in the United States. In the context of Australian companies listed on the ASX, these reports can typically be found on the ASX company announcements platform or the company’s own website. The audit report is usually included in the annual report of the company. In these annual reports, you need to look for the reports of an independent registered public accounting firm or the auditor’s report section. If the auditor’s report is qualified, it will be mentioned in this section.” Then it tells me how to do it. “Unfortunately, as an AI, I’m unable to automate this process for every ASX listed company. You’d have to check each company’s annual report individually or use a specialised database or service that tracks this information.” You know, I don’t know about that. But I think that as it progresses, we might be able to figure out a way around that. Alex suggested we just download all of the annual reports and feed that into it and say, “check all of these.” Which isn’t easy to do yet unless you have your own AI running locally, which I’ve tried to do in the last couple of weeks. And I haven’t succeeded, because I’m not quite nerdy enough to figure out how to do that. But some people are doing it with some success. Hopefully we will get to a point, is my point, in the not-too-distant future where we will be able to say, “here’s a list of companies, go check their websites, find their latest annual report and tell me if any of them have a qualified audit.” That’s not, you know, I think, a big stretch for the role of an AI in our investing research. What these chat or generative AI systems are good at, these large language models, is reading stuff and understanding the stuff that they read. So, you should be able to point it at a bunch of websites, say, “find the latest annual report, read it and give me a report. Build me a spreadsheet on which ones have a qualified report and which ones don’t.” So, hopefully that will make life easier.
We could also extend that for them to screen scrape all the figures we need as well and cut out any sort of data provider.
Ostensibly, yeah, you’d be able to get it to go through an annual report and turn all of the figures into some sort of digestible format. I foresee the day in the not-too-distant future where we’ll be able to use these AI tools for research in that kind of manner. People will probably build, you know, and they already are building AI based investing services where they’re sort of doing this for you, I guess. They’re basically grabbing all of the data out of Refinitiv or Reuters or somebody and putting some sort of a Chat GPT style interface to it so you can query it and ask it questions. There’ll be a lot of those. You may just be able to cut out the middleman though and point it at a company’s website and say, “analyse their financials and plug it into this sort of a checklist.” I’m not sure.
I was kicking myself last week. I should have twigged to how we could benefit from AI when you started talking about it, because I noticed Nvidia, the chip maker to AI systems, was up 25% last week. I should have gone out and bought their shares when you start talking about GPT.
Yeah. Microsoft shares are up because they own 50% of Open AI and video shares are up, Google shares, or Alphabets shares, are up. Not sure about Facebook’s though. I don’t know if you saw this, but Facebook quietly killed its whole Metaverse strategy a month ago.
So, their rebranding didn’t work either.
No. The 100 billion dollars that Zuck threw into the metaverse is taking a back step now that it turns out AI is going to be the next wave and not the Metaverse.
Well, there you go. There’s a salutary lesson about trying to predict things, isn’t it? If Zuckerberg can’t get tech trends right, who the hell can?
Good point. Quick portfolio report. Dummy portfolio is still tracking about two and a half times the benchmark since inception. I think we’re doing about 16.2% per annum versus about 7% for the STW. For new listeners, inception is September 2019. So, coming up on three years, I mean four years. Three- and three-quarter years.
Four years, yeah.
For the financial year, though, the STW was way ahead of us. But as I said to Tony earlier, our performance isn’t bad for the financial year: we’re up 11% for the financial year. That’s not too bad. I mean, the STW is up about 16%, so it’s doing better than we are in, you know, one brief period of time. But being up 10/11% in a year is nothing to cry about. For the quarter, were basically at zero now. We’ve come down a lot with the last, sort of, goings on in the market. And the STW is, I think, up 1% for the quarter. So, it’s doing slightly better than we are but there’s really not much between us. It’s been a miserable couple of months in the markets, as we know.
Yeah. And I was talking before off air with you, I had a look… I’m trying to find something to buy at the moment, I thought I might be able to after the debt ceiling was resolved. But I still haven’t quite got there with a couple of things. But I was looking at this commodity scorecard that gets produced every week by Alex, and everything is either a Josephine or a sell, I think with the exception of magnesium. I can’t even think which company mines magnesium, at least in a large amount. It’s probably part of South 32 or something like that. But yeah, that kind of shuts down a quarter to a third of the market for us to look at buying from. Especially in a large cap space, it leaves things like Qantas and QBE in my sort of investing universe, but they’re both Josephine’s at the moment. So, I can’t buy any more of those. And nothing new is popping up. I guess the other thing about the commodities all being sells or Josephine’s is, there’s not much going on in the world economically to drive those commodities, so they’re all going backwards as well. Yeah, like you said, not good news economically around the world at the moment. But as we also said off air, it’s a great time to buy and to be invested, because things could turn around quickly. And when they do, they just pop, and you want to be in the market then.
I think that’s the hardest thing to convince people of. I know, there’s been a lot of QAV members who have got started in QAV over the last couple of years, and it hasn’t gone well for them. Not because they’re doing anything wrong, or not because QAV doesn’t work, but because the markets pretty much gone sideways for the last couple of years. Down and sideways as, you know, I keep pointing out if you just look at the All-Ords over the last two years. It pretty much hasn’t moved. And depending on when you got started in your investing — it has gone up and down over the last two years and ended up back where it started — but depending on when you started and when you stopped, you could have lost 10 or 20% over that period. I can understand that that’s psychologically and emotionally difficult for people, when they get excited about something, and they get into it. It’s just the unfortunate truth. That’s the way markets go, in different cycles. And what you know from experience, and I know from your experience, and from looking at your returns over the last thirty years, is down cycles in the market are followed by up cycles in the market, and if you’re not in the market when it’s stuck, you know, you never know… Like our maximums say you never know when it’s turned around until later. Six months later you go, “oh wow. We’re up by 20%.” But if you weren’t in it at the beginning of that, you’ve just missed that 20%. There might still be another 20% left in it, but then you’re up 20%, not 40%.
Yeah, and I mean like you were saying, if you’re a new investor and you’re backwards by 25% in the last twelve months or last two years, or whatever the number is, if I went back in time two years ago and said to you, “here’s the deal. You may well lose 25% in the short term, but you’re going to get double market in the long term, and when it turns, you’re going to probably double the size of your portfolio. So, you’ll be up 75%. Would you take that deal?” And you probably would. So, please don’t stumble at the first hurdle.
You’ve got to take a long-term view with this, and the money is not really gone when your portfolio goes down by 10% or 20%. It’s not really gone anywhere, it’s just ones and zeros somewhere.
Well yeah. It’s a token.
It’s a token, that’s right.
It only goes if you sell up and take it out of the market and put it in the bank. Then you crystallise your losses. Yeah, losing a bit of money is one thing, but losing confidence is everything. That’s the old saying.
As I was saying to Stuart and Jemima on the call this morning, and one of the things that I’ve heard you say and Buffett say and Ben Graham say, is long-term success as an investor is more about temperament than intelligence. It’s about being able to just persist, have discipline, follow a system, weather the storms, ignore the hype, ignore the doom and gloom during the dark times and ignore the rampant hype during the bubbles — equally as important.
Yeah, equally as important. And just about five minutes ago we were saying how good Nvidia’s done last week, I would really caution any listener out there who’s going “urgh, it hasn’t worked for me, QAV. I’ve lost 10%. But if I had put it in Nvidia, I’d be double my money now.” I think, please don’t go and put it in Nvidia. Even Kathy Woods who runs the Ark funds is being laughed at because she’s going, “AI is a new bubble. I can’t value Nvidia on the kind of lofty PEs it’s trading at the moment, like I just can’t.” Even she can’t countenance that kind of high valuation in tech. So, you don’t want to be late to the train.
Yeah. But what we do know is, you know, as history has proven for a very long time, companies that have a good track record of generating cash and good management tend to outperform businesses that don’t have a good track record of doing that over the long haul. And if you can buy those companies at a discount to their intrinsic valuation, you’ll do well more often than not. You know, not all of them will become a winner and you’ll have to rule one some and you’ll have to 3PTL some. But over the long term, more will do better than won’t, and you will end up with double market results.
That’s what we know. That’s what history has taught us, anyway. I mean, past performance may not predict future performance, but your thirty years and Buffett’s sixty years of testing that thesis has worked so far, and there have been downturns and global financial crises, and, you know, various wars, and god knows what else in that period of time.
Yeah, far more serious in the current period that we’re in.
Plagues. It’s been plaguey in Brisbane at the moment. They’re doing burn offs the last couple of days, and the air is full of smoke and haze.
Any how. And they’re having earthquakes down in Melbourne this week. It’s the end of times people.
“Dogs and cats…”
“…living together.” Might have to do an update to Marketing the Messiah. “Guys, we were wrong, he is coming. It’s two thousand years late, but he’s coming back. It’s the end of times.” For the people out there that are second guessing or doubting themselves, you can do that. You can pull out and whatever, crystallise your losses as you said, or you can just take a long-term view, cool your jets, relax, debrief. Don’t even look at the numbers. Just keep following the rules.
Yeah, I mean, just think about what we’re saying. There are businesses out there that generate cash hand over fist that aren’t out there on the front page of the newspapers every week. The more boring, the better that they are, because we can buy them cheaper, and we can get them on four or five times cash flow. And yet, people get drawn like moths to the flame and, you know, want to buy the latest big success story. Hop from the peak of one market to the peak of another market. We’re going to do a pulled pork today one of the ones I mentioned: Qantas, QBE, Macquarie Bank. They’re all there. They’re all so cheap on a cash flow basis. And yet, because they’re not out there making headlines every day — and I know Qantas does but for the wrong reasons sometimes — but they’re not out there sexy, the price that were offered to buy these things is really cheap. And if you buy a good business cheaply, how possibly can you go wrong? All that can happen is management can stuff up, in which case they’d be replaced, and you might go backwards for a while. The economy could stuff up, so politicians can stuff up. Yep. And that will get fixed at the next election. And you might have to cool your jets for a while. But yeah, it’s the age-old wisdom of the market. You’re being offered cheap businesses all the time. But there’s always other noise around there to distract you: “look at this, look at that. Look at this!”
And there will be global financial meltdowns and crises and wars and trade wars and plagues. And all of that will come. As, you know, one thing I’ve learned from you over the last few years is just that’s business as usual, right? That’s normal. Things come, the market tanks, then the market recovers, then it tanks and then it recovers, and then it tanks and then it recovers.
And we love the volatility. I just love it.
Volatility is your friend.
Yeah, if Eugene Fana was right, and the market is completely efficient and price discovery is perfect, then there’s nothing to buy. But we know that he’s wrong, because every day there are good companies out there throwing off lots of cash flow who are offering their shares to you at a very, very cheap price.
And as Warren Buffett said at the AGM a couple of weeks ago, the secret to investing success is other people doing dumb things. That will never change.
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