In this episode of our value investing podcast, we do a deep dive into ‘Reminiscences of a Stock Operator’ by Edwin Lefèvre, detailing Jesse Livermore’s life and lessons and finish with some discussion about interest rates and the housing market.
01:52 US Portfolio and Stock Market Insights
02:16 Reminiscences of a Stock Operator
22:26 Housing Market and Interest Rates
Transcription
QAV 740 Club
[00:00:00] TK: Yeah, okay.
[00:00:06] CR: Gimme a 1, 2, 3,
[00:00:08] TK: One and a two, a one, two,
[00:00:10] TK: three.
[00:00:14] CR: Welcome to QAV, TK, episode 7 4 0. It’s the 1st of October, 2024. How’s your week been?
[00:00:25] TK: Good. Yeah, as we were talking about off air, went down to the south post, south of Sydney anyway, New South Wales, for a bit of a drive on Friday with Jen. She bought a donut at Berri and we had lunch and turned around and came back. But I saw the
[00:00:40] TK: Kiama blowhole again
[00:00:41] TK: for the first time in
[00:00:41] TK: 40 years.
[00:00:44] CR: How impressive is the Kiama blow hole?
[00:00:46] TK: Very impressive. Very impressive.
[00:00:48] TK: Yeah, yeah.
[00:00:50] CR: Have you been to Yellowstone? It’s in the blow holes at Yellowstone. Like old
[00:00:54] CR: faithful? No. No,
[00:00:55] CR: Is it, is it bit that good?
[00:00:57] TK: Yeah, I
[00:00:58] TK: haven’t been too unfaithful, but yeah, it’s
[00:00:59] TK: pretty impressive. Bit like that.
[00:01:01] CR: Hmm. How often does it blow?
[00:01:04] TK: every couple of minutes. It’s, it’s, it’s the waves going into the rocks and then there’s a, uh, like a chimney and it forces the way the water pressure into a spout.
[00:01:16] CR: it’s not a
[00:01:17] CR: thermal underground release of volcanic pressure. Oh, okay.
[00:01:23] CR: Chrissy and I saw Old Faithful last time we were at Yellowstone. Well, the only time we’ve been at Yellowstone together. Yeah, we happen to be there. We’re like, I know it goes off like every six weeks or something, I think, but we happened to be there when it went off and it was, it was great.
[00:01:37] CR: It was special. It was
[00:01:37] CR: impressive.
[00:01:38] TK: Once every
[00:01:39] TK: six weeks and they
[00:01:40] TK: call it Old Faithful.
[00:01:42] CR: Cause it goes off every six weeks
[00:01:43] TK: call it trying my patience or something into the head,
[00:01:45] TK: shouldn’t they?
[00:01:50] CR: Oh, TK. Well, listen, um, well, as of this morning, I had nothing to talk about on the show today, so I thought we haven’t done a US show for a while and the US portfolio is going bonkers, absolutely bonkers. So I thought today would be a good opportunity to do some American stuff. But before we get into that, uh, last week.
[00:02:16] CR: In your WWOWS quote from O’Shaughnessy, you mentioned this book, Reminiscences of a Stock Operator by Edwin Lefebvre, and I got a copy of it, and I started reading it.
[00:02:31] CR: And it was weird. Uh, it wasn’t what I expected. And so I’m going to tell a bit of a story about it for people this week, because it’s considered a classic written in 1923.
[00:02:46] CR: Here’s a quote from it that I pulled out. Uh, another lesson I learned early is that there is nothing new in Wall Street. There can’t be. Because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I’ve never forgotten that. Good Battlestar Galactica quote.
[00:03:07] CR: All of this has happened before and all of this will happen again. It’s from the reboot, anyway. But, as it turns out, um, the, the book is what they call a Romana Clef. It’s a sort of a fictional account based on a real guy. So it’s not about Edwin Lefebvre. He did work in the stock market at some point, but it’s mostly about a guy called Jesse Livermore was the real.
[00:03:39] CR: character. You ever heard of Jesse Livermore?
[00:03:42] TK: I haven’t, but I’ve heard of the Livermore
[00:03:43] TK: Laboratories.
[00:03:44] TK: Was he involved in
[00:03:45] TK: that
[00:03:45] TK: somehow?
[00:03:46] CR: No, not, not unless it was based on the brain matter that was left behind when he blew his brains out in his club
[00:03:54] TK: no. I thought he might have donated a whole heap of money like that. Carnegie
[00:03:58] TK: has
[00:03:58] TK: two scientific endeavours.
[00:04:00] CR: No, he donated a whole lot of his brains to the wall of his country club. Um, it’s a fascinating story and there’s a whole thing here that I’d never heard of before. So it’s set, um, in the early part of the 20th century. And this guy Livermore was like one of the craziest stock traders ever. Um, he was the guy back in the day, pulling off insane trades, making millions, losing millions.
[00:04:32] CR: Living larger than life. I don’t, I don’t know who a modern equivalent would be, sort of a cross between Trump and, uh, who was the, uh, Michael Milken back in the eighties. And, uh, I don’t know, the guy from Wolf of Wall Street, you know, one of those sorts of characters.
[00:04:53] CR: Um, it starts off, the book starts off pretty low key as did his life.
[00:04:57] CR: He was born Paul Livermore and he, at 14, he got a job as what they called a bored boy. For Payne Webber in Boston, making 5 a week to post stock prices. He writing them up on the boards is the top. Yeah, the ticker tape would come out and he’d write them up.
[00:05:17] CR: Within a year, he was working at a, or gambling at a bucket shop.
[00:05:22] CR: You ever heard of bucket shops?
[00:05:24] TK: I have heard of the term. Yeah, it’s, that’s, um, So, okay. So, from memory, it’s where they sell stocks over the counter.
[00:05:35] TK: They may not necessarily
[00:05:36] TK: be listed
[00:05:38] TK: in the US.
[00:05:40] CR: No, it was basically like, off market gambling of stocks. So,
[00:05:48] TK: That’s what
[00:05:48] TK: I’m, similar sort of thing.
[00:05:49] TK: It’s not
[00:05:49] TK: listed, but they sell it.
[00:05:52] CR: no, no, they were listed, but they weren’t actually selling actual shares.
[00:05:57] CR: So, People would basically buy and sell shares in inverted commas, and there was a ticket tape coming out, but no certificates were trading hands. It was like back alley, let’s pretend we’re share trading, like something you would do in high school when you’re learning about, How to sell shares, but with real money.
[00:06:24] CR: And these were like really, really dodgy. And so, yeah, they were made illegal by the 1920s because they were so dodgy. Basically, it was like this just free for all gambling syndicate in these little dives, like pretty well during prohibition, I guess, um, uh, maybe around about the time of prohibition.
[00:06:46] CR: Anyway, he was 15 and he was good with numbers. Livermore this is, and the character in the book. So he, and he kind of had a sense for how to figure out when a share price was going to go up, just sort of based on how much it was being traded, where the tension was between the buy and sells, he kind of figured out some sort of a model when he was 15.
[00:07:11] CR: By the time he was 16, he quit his job, went all in on trading. He was making about 200 a week at the bucket shops, way more than his day job ever paid him. By the time he’s 18, he’d made 10, 000, like a thousand percent return in a few years. And he was winning so much that he got banned from every bucket shop in Boston.
[00:07:36] CR: He was using fake names and disguises to try and get around the restrictions. Eventually, they figured him out. So, in 1923, he moved to New York, just in time for a big bull market. Turned his 10, 000 into 50, 000 in five days. Then the market corrected and he’d gone short. On a 400 percent margin and he lost everything because the ticket tape wasn’t updating fast enough to keep up with the trades.
[00:08:10] CR: So he left New York, went to St. Louis, started St. Louis, started trading in bucket shops again, borrowed 2, 000 to get back on his feet. In 1901, bet on the Northern Pacific Railway stock, turned 10, 000 into 5, 000. 500, 000 relatively quickly. 1906, he was on vacation in Palm Beach and for some reason took a massive short position on the Union Pacific Railroad the day before the San Francisco earthquake hit.
[00:08:45] CR: He made 250, 000 on that one overnight. Then in 1907, during the panic of 1907, His short positions made him a million dollars in a single day. J. P. Morgan, who’d become kind of a mentor to him at that stage, asked him to stop shorting stocks because J. P. Morgan apparently personally stabilized the entire stock market in 1907.
[00:09:16] CR: Used his own, he was like Buffett bailing out banks during the GFC, right? He used, he used his money and his position and his, his, obviously his control of newspapers. Remember that story? I think we talked about it in the psychopath epidemic. Um, the, uh, when Woodrow Wilson got elected, he got, Woodrow Wilson got elected on a, um, platform of isolationism.
[00:09:42] CR: The U. S. wasn’t going to get involved in World War I. But J. P. Morgan had so much money riding on Britain paying back loans that he bought like 20 newspapers around the country. And uses them to create this fervour that the U. S. had to go to war, so the U. S. went, got involved in World War
[00:10:02] CR: I. And he created the, the whole sinking of the Lusitania, um, bullshit excuse that they used to justify getting involved in World War I.
[00:10:12] CR: Created all of that to force the U. S. to get involved in World War I. Anyway. Morgan personally asked Livermore to stop shorting stocks to stabilize the market, and he did. Then he flipped his strategy, and when the market rebounded, he walked away with 3 million. Then he bought like a 200, 000 yacht, this is like 1907, a rail car that was all ducked out, an apartment on the Upper West Side, hanging out at exclusive clubs, multiple mistresses, just he was the man about town.
[00:10:47] CR: In 1908, he got tricked by a cotton trader named Teddy Price, who was convincing him to buy cotton because it was going to be this big thing, while he was secretly selling it. So, Teddy Price was secretly selling it through fronts and then convincing Livermore to buy it. Livermore lost everything. But, he went bankrupt.
[00:11:08] CR: But, um, right about the time of World War I, he managed to corner the cotton market. He, he flipped it, managed to get back, secretly cornered the cotton market, made an absolute fortune,
[00:11:26] TK: As we learned from, um, what was the company I did the pulled pork on? Was it Elders, I think, from memory? Made all its money during World War I because Britain came over and bought
[00:11:35] TK: everything.
[00:11:37] TK: No, it was wool, sorry. It wasn’t cotton. They bought every, the whole wool clip from Australia
[00:11:42] CR: yeah.
[00:11:43] TK: to build
[00:11:43] TK: uniforms, to
[00:11:44] TK: make uniforms
[00:11:45] TK: with.
[00:11:45] TK: Yeah.
[00:11:47] CR: This time, it wasn’t J. P. Morgan that personally intervened, it was Woodrow Wilson who personally intervened and asked him to stop cornering the cotton market, and he agreed, saying, I just wanted to see if I could do it. In the mid, by the mid 1920s, he was making He made like 10 mil yeah, he made 10 million dollars trading wheat and corn, putting a short squeeze on Piggly Wiggly, which I think we talked about. Did you talk about Piggly Wiggly once? They’re an American supermarket chain. Somebody was talking to me about Piggly Wiggly.
[00:12:20] CR: Anyway, shorted them. His biggest move came in 1929. He’d amassed Massive short positions using over a hundred brokers to cover his tracks. By spring of 1929, he was down 6 million on paper, but then when the Wall Street crash happened, he made over a hundred million dollars from his short positions on the crash.
[00:12:45] CR: A lot of people blamed him for the crash because of all of the short positions he was taking. He had to hire bodyguards. He was getting so many death threats after the crash. Um, but then he went bankrupt again, but his personal life was also this crazy story. He was getting a divorce in the thirties and then his ex wife in 1935 shot Their son, at 1.
[00:13:17] CR: 30am, after a Thanksgiving party, at their place in New York, according to the, I looked it up in the New York Times, it said, The shooting was the aftermath of a Thanksgiving Day celebration, which began with a dinner party and ended in a quarrel, when the youth dared his mother to shoot him, after she had told him she would rather see him dead than drink to excess. And then he said, go ahead and shoot me, and then she did. And he said later, it was accidental.
[00:13:50] TK: Sounds like she was drinking to excess,
[00:13:53] CR: Yeah. Yeah. Um, anyway, then in 1934, when the Securities and Exchange Act came into being, his trading style was made impossible. He lost his fortune again, filed for bankruptcy for the third time in 1934 with debts in the millions, tried to bounce back with a finance advisory business in the late 30s, selling a technical analysis system that he called QAV.
[00:14:20] CR: No, I’m kidding.
[00:14:25] CR: It didn’t take off. And on Thanksgiving day in 1940, he shot himself at the Sherry Netherland Hotel in Manhattan, left an eight page suicide note to his wife that read, my dear Nina, Can’t help it. Things have been bad with me. I’m tired of fighting. Can’t carry on any longer. This is the only way out. I am unworthy of your love.
[00:14:45] CR: I am a failure. I’m truly sorry, but this is the only way out for me. Love, Laurie. So, that’s the story, basically, that,
[00:14:56] TK: Yeah, right.
[00:14:57] CR: Is told in this book, but the book was, came out in like the 1923. So it’s the first part of his career, not the,
[00:15:04] TK: No, okay.
[00:15:05] CR: not the tragic ending of his
[00:15:06] CR: career. But, um, one of his favourite books apparently was Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds.
[00:15:15] CR: And this guy was just an expert on manipulating, uh, stupidity. Um, with a big dose of his own, I
[00:15:25] CR: guess, but yeah, that, that quote I said at the beginning, and I think it’s the one that you, similar to the one you used in your quote last week, nothing’s new because people are greedy, always have been greedy, always will be greedy.
[00:15:37] CR: That’s why there’s speculation. And so the market will never change whilst people are greedy. That’s like, I remember Warren at the AGM last year, I think when Charlie was still around, somebody asked him about how AI was going to change investing. And he said, I don’t think it will because people will always be greedy or stupid, something about stupidity.
[00:16:01] CR: The biggest, you know, advantage that we have is other people’s stupidity, you know,
[00:16:07] TK: yes.
[00:16:07] CR: anyway,
[00:16:08] TK: Good memory.
[00:16:09] TK: You did
[00:16:09] TK: say that. Yeah.
[00:16:11] CR: so that’s, but like,
[00:16:12] TK: I haven’t, I haven’t, um, I actually skimmed over the section in O’Shaughnessy today while I was putting notes together for what I was going to talk about. And he goes through, like, the South Sea Island bubble. In detail, um, he goes through moving picture studios in the bubble with radios and the 60s with the nifty fifty and then the, you know, dot com boom and just the same thing.
[00:16:37] TK: People get greedy. But he actually then talked about, I didn’t pull this out because I thought it would take too long to get through, but he actually talks about research that, uh, people have done with fMRIs. To show that, um, not only, and we know this from Kahneman and Diversity that, you know, people get dopamine hits when they buy into something which has been going up, like an NVIDIA or the Mag 7 or whatever.
[00:17:00] TK: But, um, O’Shaughnessy talks about some research which I hadn’t heard of before, which talks about, When, when the market is at its high, the brain flips and it realizes that something’s wrong. There’s an uncomfortable feeling, but the way it solves the problem is it, it calms you down. Some other part in the brain fires up and calms you down to think that Because everything’s worked well in the past, it’s going to keep working that way in the future.
[00:17:26] TK: Even though you can’t explain it, even though it’s not logical, you’re quite calm as the crash happens.
[00:17:33] TK: And I thought That was
[00:17:34] TK: interesting.
[00:17:36] CR: That is interesting. But you know, the thing, Tony is, it is different every time. It’s always different, Tony. It’s never the same.
[00:17:43] TK: I think that, I think the chapter was cool. It’s,
[00:17:45] TK: it’s not different this
[00:17:47] TK: time.
[00:17:49] CR: Yeah, it’s always different, but the same at the same time.
[00:17:53] TK: Yeah, it’s always the same.
[00:17:55] TK: Might have a different
[00:17:56] TK: flavour.
[00:17:58] CR: yeah. What do you say? It
[00:18:00] CR: doesn’t rhyme, but it, it doesn’t, it’s
[00:18:04] TK: No, it rhymes. History doesn’t repeat, but it rhymes.
[00:18:07] CR: doesn’t repeat, but
[00:18:08] CR: it rhymes.
[00:18:09] CR: That’s right.
[00:18:09] TK: Yeah. I think Mark,
[00:18:10] CR: I’d never heard of the,
[00:18:12] TK: attributed to Mark Twain
[00:18:13] TK: originally. That’s the
[00:18:14] TK: first time I heard it.
[00:18:17] CR: I like, I’d never heard of Livermore before. And I’d never heard of, um, bucket shops and the whole thing. So I’ve been enjoying reading this. It’s
[00:18:25] CR: really crazy, crazy story. And, you know, people bitch and moan about regulation, but, um, that’s an example of why we have rules and regulations, you know?
[00:18:38] TK: Yeah. But you know, I mean, you know, he got up, he got hit to the canvas too many times, I guess, to get up, but someone like that probably would have worked out a way around regulations. It’s, um, it’s what those people do, like it’s, I think it’s a, that’s a basic law of the universe or of human nature that smart brains are in Canberra writing regulations, but smarter brains are making money outside
[00:19:08] TK: getting around them.
[00:19:09] TK: It’s,
[00:19:10] CR: Yeah.
[00:19:11] TK: Yeah, I read a, I read an article in today’s paper, you know, that guy Nick Bolton, who you may have come across from time to time, has made lots of money from being the thorn in the side of various transactions and, um, you know, holding out for higher prices because he has a cornerstone stake and things like that.
[00:19:29] TK: Um, and he, long story short, he was being sued, um, And his assets were frozen, but the court found out that he basically transferred everything overseas and it didn’t have jurisdiction to freeze his assets. So like again, you know, this, it’s the, it’s the same example, like even the courts can’t touch him.
[00:19:50] TK: There are rules and regulations, but he, he’s gotten around them again.
[00:19:55] CR: yeah. Oh, this, um, Jesse Livermore, like there’s a bunch of books, not just, um, Lefevre’s book. According to Wikipedia, there’s like seven or eight biographies that have been written about him, or partly about him. Um, but no films have been made about him. It’s surprising. Like, he sounds like the perfect,
[00:20:22] CR: Candidate for an amazing sort of biopic. Um, funnily enough, uh, 1933, not long before he killed himself, he got married again to a singer and socialite, Harriet Metz Noble. Who was from a prominent Omaha family made its fortune in the Met’s brewery company. Um, and two of, she was, he was her fifth husband, and at least two of her previous husbands had committed suicide, including Warren Noble, who hanged himself after the Wall Street crash of 1929.
[00:21:02] CR: That, uh, Livermore was accused of causing. So, um, I just wonder how much, I wonder how much Warren knows about the story of, uh, this woman and, and Livermore. I’m sure he knows about the Livermore story, of course.
[00:21:16] TK: So didn’t you just say he wrote a letter to his wife when he died? And I thought
[00:21:21] TK: you said it was Dear Nina.
[00:21:24] CR: Yeah, he must have called her Nina.
[00:21:25] CR: for some reason. Her name was Harriet Metz Noble, but I assume Nina. He also signed his name Laurie, and his name was, oh, Jesse Lauriston Livermore. So, must
[00:21:36] TK: Isn’t that interesting because the Livermore Labs is the Lawrence Livermore Labs.
[00:21:42] TK: wonder if he
[00:21:42] TK: did somehow donate
[00:21:43] TK: some money to set up the lab.
[00:21:45] CR: Well, his middle name
[00:21:46] CR: was Lauriston,
[00:21:48] TK: Lauriston, okay, maybe it’s someone different then.
[00:21:51] TK: Yeah.
[00:21:53] TK: It would make
[00:21:53] TK: a great movie though, you’re right.
[00:21:55] CR: Oh, other names, Boy Plunger, The Wolf of Wall Street, The Great Bear of Wall Street. So, he was the original Wolf of Wall Street, apparently. There
[00:22:05] TK: and the
[00:22:05] TK: bear.
[00:22:07] CR: Yeah.
[00:22:08] TK: In the same
[00:22:09] CR: and the bear.
[00:22:10] CR: Yeah.
[00:22:12] CR: Anyway, I’ve got a pull pork to do afterwards, but I’ll let you cover your notes for the week first. Mm hmm.
[00:22:18] TK: Yeah, well, I’ve got a few. Um, speaking of this time, it’s different. I was reading another article today. And it was about, um, the housing market and interest rates, so it was on the back page. Um, headline was the strong housing market is still a problem for the RBA. And it made me think of our friend Alan Kohler.
[00:22:41] TK: Um, couple of, couple of things sort of twigged my interest in this. Um, it’s about, it’s about, uh, What’s happening with interest rates, what’s happening in the market, in the housing market. I’m going to read a couple of quotes. Commonwealth Bank data showing the proportion of new mortgages being taken out by those with income between 200, 000 and 500, 000 has risen from about 13 percent in 2018 to about 33 percent today.
[00:23:17] TK: So that, that coupled with, um, here’s another quote, The good news for the banks is these new loans are less risky. Not only are borrowers being stress tested at a hypothetical rate of 9. 3%, which is the average mortgage rate plus the 3 percent serviceability buffer, but loans with debt to income ratios above six times have fallen from 24 percent of the mortgage flow to just 5%.
[00:23:41] TK: In other words, this is a much safer borrower. So, Alan Kohler told us when he came on the show five years ago that he thought the unemployment numbers were a bit, a bit of a furphy because there was this class of people he called the underemployed and that if he added them, so that was defined as people who had some work but wanted more.
[00:24:04] TK: And if he added them to the unemployment numbers, the unemployment rate should be something like about 13 or 15 percent was his, was his guess. Now that, I think the unemployment rate’s about four and a half, 5%. So that. Extra 9 or 10 percent of people, um, are probably unable to access mortgages. Uh, and, and therefore are never going to be able to buy a home, um, and, uh, coupled with the fact that, um, APRA, which is the banking regulator, is now asking banks to only write loans to people who can handle a mortgage interest rate of 9.
[00:24:40] TK: 3%, um, as a kind of way of, you know, making sure that The money’s safe and it’s going to be repaid. There’s a lot of people who can’t get mortgages in the market and the people who are have lots of money. So they’re pushing the house prices up. So I guess that’s coupled with lack of supply. But, um, again, this comes.
[00:25:03] TK: Back to this kind of confluence of a regulator, the RBA, which, which is, this article goes on to say, doesn’t think you’ll be able to cut interest rates because you’ve got these lots of quality loans out there who are still buying houses and there’s lack of supply, um, and therefore the RBA can’t Drop interest rates.
[00:25:25] TK: Um, so you’ve got the RBA not able to drop interest rates, you’ve got the banks who are going to become even more, um, robust, so, um, there’s going to be, and you’ve got people who are in the higher end of the, uh, uh, income brackets taking out mortgages, it, not only does it speak badly about, you know, um, inequality and affordability, but it, it, it, it’s also working at cross purposes again.
[00:25:54] TK: I mean, surely you’d want people who are finding it difficult to access the housing market to start accessing the housing market. In other words, get mortgages, um, to be able to sort of, um, house themselves, I guess, and, and, um, solve some of those. Problems with affordability. That’s not happening. The market’s moving the other way.
[00:26:17] TK: But the other interesting point about, about this article was that they were also talking about private credit. And the article says that, uh, another fascinating data point released yesterday, which showed private credit growth holding at an annual rate of 5. 7%, the fastest since May, 2023, and well up from the recent trough of 4.
[00:26:38] TK: 8 percent last December. So, you know, I’m wondering whether private credit is filling the gap. in these kind of low serviceability areas. And therefore, it’s not falling within the purview of APRA, who’s supposed to be making sure that the, the line market is well regulated, so we don’t have massive defaults and cause another economic downturn.
[00:27:00] TK: So, you know, it’s another example of, we’ve set up these structures to try and regulate things. Maybe they do their job too well, and it works against what we’re trying to solve. Um, and, and we don’t have, The mouse, I guess, in treasury to step up and, or the ability, I mean, the government doesn’t have the mandate to do it or doesn’t have the numbers to do it, but something’s got to give, I guess, is where I’m coming from.
[00:27:23] TK: And again, this is this whole one arm working against the other arm, the regulators making sure the housing market is very, very, very robust and safe. Um, which is probably keeping interest rates high because the RBA is saying, well, you know, inflation’s not going away because there’s people with access to credit and because the people who are accessing credit can service bigger debts, they’re getting more of it.
[00:27:46] TK: But then we have this housing problem, um, and people are then going to private credit avenues, perhaps, I haven’t seen data to suggest that, but somebody is because private credit is growing and that’s not as regulated as the banks. It could be sowing the seeds for the next. Economic downturn. And certainly when I’ve seen this before, when the unregulated credit market sort of takes off, it, it becomes a problem.
[00:28:10] TK: Eventually it becomes a bubble, and then it bursts.
[00:28:14] TK: Anyway, just, um, something which caught my attention. Um, and I hope someone’s looking at it and we’ll do something about it. A couple of other things. Um. I noticed that for the first time in a long time, Virgin UK is on our bio list this week, VUK has been close, if not the top of the bio list for maybe 12 months now.
[00:28:38] TK: Um,
[00:28:38] CR: Fuck off, Tony. Really?
[00:28:40] TK: yeah.
[00:28:41] CR: Fuck, you’re saying fuck off? Fuck off.
[00:28:42] TK: No, the
[00:28:43] TK: UK is, yeah. It’s gone. You
[00:28:46] CR: is off. Fuck off. Fuck off, fuck
[00:28:48] CR: off.
[00:28:48] CR: the list. is, that what you’re saying?
[00:28:50] CR: Delisted?
[00:28:51] TK: fair bit of money out of it and then, um, it, it, it shot up because, uh. A Scottish bank in the UK is taking it over, but it’s taken a long time for all that, the machinations of the takeover to wind its way through. But it was finally delisted this week.
[00:29:07] TK: So it’s valet to VUK. It’s been a great, a great, win for us value investors, but it’s hung around for a long time.
[00:29:17] CR: Really? I,
[00:29:18] TK: Yeah.
[00:29:20] CR: I read that article that said Qatar Airways was taking a chunk of it. Is that
[00:29:25] TK: that’s no different. That’s Virgin Airlines.
[00:29:29] TK: Virgin, uh, VUK is a
[00:29:31] TK: bank.
[00:29:32] CR: Oh,
[00:29:34] TK: Virgin Money UK. Yeah.
[00:29:37] TK: It’s the old Clydesdale Bank, which National Australia Bank
[00:29:40] CR: right,
[00:29:41] TK: demerged with when it bought many years ago and then got into trouble and had economic problems and then had to demerge it. So it was listed with a listing on both the UK market and the ASX because lots of the old NAB customers still had shares in this bank.
[00:29:59] TK: Um,
[00:30:00] CR: Yep.
[00:30:01] TK: it was originally called Clydesdale Bank, which was the bank NAB bought, but then Virgin took a stake in it or rebranded
[00:30:08] TK: as Virgin UK as a, as a bank. And now another bank, I think it’s the Midland Bank from memory in the UK has bought, has launched a bid and
[00:30:16] TK: looks like it’ll go
[00:30:17] TK: through And
[00:30:17] TK: finally take it over.
[00:30:20] CR: And so
[00:30:22] CR: anyone who was holding it has had to
[00:30:29] TK: Well, they’ll now get shares in, they’ll now get shares in Midland Bank
[00:30:32] TK: and have to wait for that whole process to, to go through.
[00:30:35] CR: really?
[00:30:36] TK: But I do remember talking about that, I’m going to say a year ago when the takeover started and we recommended to people that given that the price was trading at the takeover bid that they should sell.
[00:30:48] TK: So they wouldn’t get trapped in the UK when it got taken over
[00:30:51] TK: and lost its ASX
[00:30:53] TK: listing. Ha ha
[00:30:54] CR: I must have not made a note of that because I, uh, added it to, I added it to, uh, one of the possible buy lists, uh, uh, 13th of September. At 4. 24, it’s sitting at 4. 22 now and, uh, gone, right?
[00:31:16] TK: It’s
[00:31:16] TK: gone. Yep. I thought you had a list on your checklist, your buying checklist now with a list of companies that were on
[00:31:23] TK: the takeover.
[00:31:23] TK: Hmm.
[00:31:25] CR: I do. And that, that apparently is either not on there or I missed it. Let’s see, VUK is, oh it is! Being acquired it says! God, must have not come to my attention. I was thinking the buy
[00:31:42] CR: list. Need to improve my alerting system.
[00:31:47] TK: Hmm.
[00:31:47] CR: Oh goodness me, OK. Well Vale v UK, as you say. Buck is off.
[00:31:54] TK: Yep. The other issue I wanted to talk about today was iron ore prices. So, um, Stimulus is back in the Chinese economy. I saw the Chinese stock market was up 4 or 5 percent this week. And that’s started to cause the iron ore price to increase. I guess people, you know, think that the Chinese government will be successful in re stimulating the economy because they’ve got a stated growth target they want to meet.
[00:32:21] TK: And, um, the iron ore market has sold down based on slackness in the Chinese economy, but, um, that’s been turned around recently. Iron ore, last time I had a look, wasn’t a buy, but it’s getting pretty close. Um, FMG is back on the buy list. Um, it’s a buy on the bread later, but, uh, iron ore still isn’t a buy yet.
[00:32:40] TK: But, um, I think that might happen soon. So anybody who’s interested in, in iron ore stocks, just keep your eye on the iron ore price and, uh, see when it becomes a buy. It’ll probably happen between now. Shows, uh, we won’t necessarily see it, um, as it happens, but, um, yeah, people might want to have a look at that, because FMG is, um, you know, pretty close to its lows, and, uh, if it does go for a run,
[00:33:05] TK: it’s probably got a fair bit of
[00:33:07] TK: upside.
[00:33:09] CR: But Tony, the Chinese economy is tanking. We’ve heard this over and over again. How can,
[00:33:14] TK: Until last week.
[00:33:15] CR: be
[00:33:19] TK: Yeah.
[00:33:20] CR: I love I love
[00:33:21] TK: I’m tempted to do my Benny Hill impersonation of the Chinese cultural ambassador, but Alex, Alex told me that was, uh, not
[00:33:30] TK: allowed. So I haven’t, I won’t do it. But no, no, the Chinese government, um, loosened up credit policy last week as a stimulus to, um, try and reach its growth targets. And, uh, I think the Chinese stock market was up
[00:33:43] TK: like at least 5 percent on the day of the
[00:33:44] TK: announcement, maybe up more now.
[00:33:46] TK: Oh,
[00:33:51] CR: know what they’re doing. They have leadership that know what they’re doing. I like, I like these business journalists. They must be, I’m pretty sure they’ve got a calendar up on their wall and it’s like, uh, which cycle are we in this week? Is it like, bash China’s economy or talk about how China’s economy is turning around?
[00:34:10] CR: Where are we at? Mm.
[00:34:11] TK: yeah, yeah, we bash China’s economy and talk up the iron ore
[00:34:15] TK: price.
[00:34:17] TK: Yeah.
[00:34:18] CR: Well, there you go.
[00:34:20] TK: Yep. So, so China’s back in the good books, iron ore’s rising, and I think FM, FMG’s a buy on the, on the buy list, and then the
[00:34:27] TK: Breda later, we’re
[00:34:27] TK: just waiting for iron ore to become a buy as well.
[00:34:30] CR: Last time we talked about FMG, we said it was a red flag because of all of the senior
[00:34:34] TK: Oh, you’re right.
[00:34:35] CR: Ziggy Ziggy Twiggy.
[00:34:37] CR: Ziggy Ziggy Ziggy’s. Yeah.
[00:34:41] CR: Um, where, when do we, um, when do we give it the respite on the
[00:34:46] TK: good
[00:34:47] CR: Twiggy’s bullshit Red flag?
[00:34:49] TK: I don’t know.
[00:34:51] TK: Yeah, it’s a good point.
[00:34:53] CR: Mm.
[00:34:54] TK: I don’t know. I can’t advise people on that one. Suck it and see, I guess.
[00:34:57] CR: Right. Okay.
[00:35:00] TK: Well, you know, I can’t have rules for everything.
[00:35:04] TK: Yet.
[00:35:06] CR: a rook
[00:35:08] CR: Okay.
[00:35:09] TK: It’s a red flag until the Chinese
[00:35:11] TK: economy stimulates and then we
[00:35:12] TK: fall lockstep
[00:35:13] TK: in with a billion people in China.
[00:35:15] CR: do I add
[00:35:16] CR: suck it and C to the
[00:35:17] CR: Bible? The QAV
[00:35:18] TK: yeah, your checklist,
[00:35:19] TK: your buying
[00:35:19] TK: checklist, right under it’s under takeover.
[00:35:21] TK: Check
[00:35:23] CR: all else fails, suck it and C.
[00:35:26] TK: see what they reckon. Yeah.
[00:35:29] TK: Yeah, good question. I don’t know.
[00:35:32] CR: Mmm.
[00:35:32] TK: did have a, speaking of red flags, I’m going to tell you my tale of woe for the week, which is my own fault for not obeying my own rules. Um, people I think have, have noticed that I had a stock on our,
[00:35:46] TK: um,
[00:35:47] TK: what do we call it?
[00:35:47] TK: Our declaration
[00:35:48] TK: list, the stocks that
[00:35:49] TK: we own.
[00:35:50] CR: Ed disclosures. Ed said you hold, you held GNCA couple of weeks
[00:35:54] CR: ago.
[00:35:54] TK: Yeah, I sold it. Thanks, Ed. I checked the grain price and sold it. Um, I think it’s been going up since then, but I’m not looking at it. I may have peaked once.
[00:36:06] TK: Okay, I’ve got two tales
[00:36:07] TK: of woe this week. The first tale of woe.
[00:36:09] CR: that wasn’t it. Oh, right.
[00:36:11] TK: That wasn’t it.
[00:36:12] TK: No. The other one is Frontier Energy. So I, um, this is one of the stocks that Alex A got me into, you know, one of the, one of the backscratching ones I do with him occasionally because he’s getting a commission for floating a company. Um, and I get access to the float and it often works out well and it was for a long time.
[00:36:31] TK: It was up, it was at least double what I paid for it. Um, and, uh, The red flag is, a little while ago, in the last couple of weeks, the ex premier of WA became the chairman, a guy called Mark McGowan, and it’s long been a red flag for me, whenever a politician, or a sportsman, or someone like a pop star, celebrity chef, goes on the board of a company, get out, because it’s just, it’s just wrong.
[00:36:59] TK: They’re not business people, they’re politicians, or they’re sports people, or they’re chefs, right? Anyway, I let it slide. Um, about a week after he became chairman, they announced the capital raising, heavily discounted capital raising, share price halved, went through the, the sell, line on the bread later.
[00:37:18] TK: And I thought, well, I’m not going to put any more money into this, but if it’s a capital raising, I’ll get that away. And then I’m sure the stock will recover from there. However, today it’s hard again. I’ve just announced that they lost some contract or government funding for alternative energy. It’s a solar powered energy company or dealing in alternative energies, and they just lost government funding or their share of some kind of government funding to, to build some big solar farm.
[00:37:45] TK: I haven’t got to the bottom of all the details, but yeah. Never owned much of it. Not a big part of the portfolio, but should have followed my rules. A on
[00:37:55] TK: red flags and B
[00:37:55] TK: on the
[00:37:56] TK: bread later and sold out and I didn’t. So I’ve been
[00:37:59] CR: So the red flag would’ve been the
[00:38:00] CR: politician
[00:38:02] CR: taking, would he join the board or he be? He became the chairman. Became the
[00:38:05] TK: Yeah.
[00:38:06] TK: Joined the board and
[00:38:06] TK: became chairman in one fell swoop.
[00:38:08] CR: Yeah. Right. So that should be, that would’ve been a red flag for you if you’d
[00:38:11] TK: Yeah. I remember looking at it going, what? My first thought is he’s just being paid off by someone for, you know, doing something good by the industry in the past. That’s pretty cynical of me, but um, and I, you know, no evidence for that, so don’t sue me, just a thought. Um, and, uh, but yeah, I’ve just seen it so many times.
[00:38:33] TK: And it’s just, it’s kind of, There’s almost a weakness, it’s a weakness in my nature on this occasion, but it’s a weakness in human nature. I call it, it’s almost like the silo theory. If someone’s a good footballer, or if someone’s a good politician, it doesn’t make them a good anything else. You know, like to get to the top of the pyramid in one day, In one particular industry or one particular endeavour, you’ve got to be, you know, really disciplined, have the right set of attributes to, to make that work for you.
[00:39:08] TK: Um, you know, to get to be a really good football player or the premier of a state or whatever. To then think that that makes you a good, business person or a good, you know, role model for
[00:39:19] TK: whatever else
[00:39:20] TK: you want to be a
[00:39:21] TK: spokesperson for doesn’t
[00:39:22] CR: But I. I assume when those things happen,
[00:39:25] CR: celebrity, footballer, politician, they’re just there as a door opener. Hey, would you like to meet Mark McGowan? Take a meeting with us.
[00:39:33] TK: yeah, lots are for sure.
[00:39:35] CR: I don’t assume that they’d get that
[00:39:37] CR: job because they’re brilliant business people. It’s just, it’s a way to get a meeting.
[00:39:42] CR: A better chance of getting a meeting because you’ve got a celebrity that you can, they can get a selfie with a celebrity.
[00:39:50] TK: Yeah, no, I think you’re right. It’s, um, uh, you know, the chances are, I mean, Frontier Energy, now that its share price is a quarter of what it was a week ago, um, because it lost government support, obviously does need Better entry into the political world. However, this guy isn’t providing
[00:40:08] TK: it.
[00:40:09] TK: He’s copped the pasting.
[00:40:11] CR: do you think they knew this was coming?
[00:40:12] CR: That’s why they brought him on? He’s, he’s tried to turn around?
[00:40:15] TK: Yeah, who knows. But like, if you wanted entree into the government world, you didn’t have to make him chairman. You could have just put him on the board, I guess, or retained him as a lobbyist or
[00:40:24] TK: whatever. Yeah.
[00:40:26] CR: maybe that was, you know, his stipulation. But yeah, lobbyist. Yeah, that’s all you need, you’re right. Hmm,
[00:40:32] TK: that was
[00:40:33] TK: my Tale of Woe,
[00:40:34] TK: and it,
[00:40:35] TK: so I think we need to add to
[00:40:35] TK: the
[00:40:36] TK: red flag list, you know,
[00:40:37] CR: I’m just glad, because, but, before you said,
[00:40:40] TK: sports
[00:40:40] TK: people on the board, sell the stock.
[00:40:43] CR: you’ll connect, you said, suck it and see, let me tell you my tale of woe. For the week, I thought it was going to be, uh, related to sucking it and seeing, and that was your tale of woe. I was waiting to hear a completely different kind of story. It was just a stock story. It’s not as titillating as I thought it was going to be.
[00:41:02] CR: were talking about going down to New South Wales, do a blowhole and then suck it and see in a tale of woe, my brain’s connecting the dots and
[00:41:11] TK: your brain goes where your
[00:41:12] TK: brain
[00:41:12] TK: goes.
[00:41:15] CR: yeah, too many years of doing shows with Ray. That’s where my brain goes.
[00:41:19] TK: yeah, yeah. So, um,
[00:41:23] TK: they’re my,
[00:41:24] TK: it’s my
[00:41:25] TK: stories. Yeah,
[00:41:27] CR: You doing a wows?
[00:41:29] TK: I am. Yeah. So it’s a little bit lengthy. I’ll try and move through it quickly. Um, I’m at the stage in the book. So we’ve spent the last few weeks going through really good quotes on, you know, how this time it’s not different, mania of markets, um, all that kind of stuff, how the human brain fools us. The rest of the book, it seems to be is, um, the output of his research.
[00:41:57] TK: So I wanted to talk about the preamble to the research and then, um, just use the first bit of research as an example. And I’ll pull, going forward in the next few weeks, I’ll pull some, um, more results. Um, so, talks about his rules for the research. And first of all, he says, um, an important metric is the size of the data set.
[00:42:21] TK: And he quotes a guy called Richard Brealey. Respect your data. Analyst, researcher, and British economist, Richard Brearley estimated that to make reasonable assumptions about a strategy’s validity, i. e. to assume it was 95 percent likely to be statistically relevant, you would need more than 25 years of data.
[00:42:41] TK: Short periods are valueless. So that was interesting, I thought. Uh, so he, he goes on to talk about the two data sets for his research. One is an S& P database from 1963 to 2009. That seems to have, um, to be more rich in the metrics. But he also uses another one from the Center for Research and Security Price, Prices, uh, from 1926 to 2009.
[00:43:06] TK: So he’s got some pretty big data sets he’s leaning on there. He says, My goal in this book is to bring a more methodical scientific method to stock market decisions and portfolio construction. To do this, I have tried to stay true to those scientific rules that distinguish a method from a less rigorous model.
[00:43:26] TK: Among these rules are, 1. An explicit method. All models must use explicitly stated rules. There must be no ambiguity in the statement of the rules to be tested. There is no allowance for a private, unique interpretation of the rules. In other words, no suck it and see. No fudging. Point two, a public rule.
[00:43:47] TK: The rule must be stated explicitly and publicly so anyone with the time, money, data, equipment, and inclination can reproduce results. The rule must make sense and must not be derived from the data. Number three, a reliable method. Someone using the same rules and the same database must get the same results.
[00:44:08] TK: Also, the results must be consistent over time. Long term results cannot, uh, Long term results cannot show all their benefits in just a few years. Uh, yeah, so, um, I found it interesting out of those list of rules. They’re, they’re pretty obvious, and I think it’s, in having a checklist, we’re kind of abiding by those rules as well.
[00:44:31] TK: They’re publicly telling people how we invest, what the rules are, um, and they can do it themselves, following those same rules. So I, I kind of like what he’s saying there. I found it interesting about the um, the rule must make sense and must not be derived from the data bit. So he goes on to explain why.
[00:44:50] TK: It, and he uses an example. It takes approximately 40 minutes for an express train to go from Greenwich, Connecticut to Grand Central Station in Manhattan. In that time, you could look around your car and find all sorts of statistically relevant characteristics about your fellow passengers. Perhaps there are a huge number of blondes, or 75 percent of the people have blue eyes, or the majority were born in May.
[00:45:14] TK: These relationships, however, are most likely the result of chance occurrences and probably wouldn’t be true for the car in front of you or behind you. When you went looking for these relationships, you went data mining. You found statistical relationships that fits one set of data very well, but will not translate to another.
[00:45:33] TK: As statisticians have been known to quip, if you torture the data long enough, It will confess to anything. Thus, if there is no sound theoretical, economic, or intuitive common sense reason for the relationship, it’s most likely a chance occurrence. If you see strategies that require that you buy stocks only on a Wednesday and hold them for 16 and a half months, you’re looking at the result of data mining.
[00:45:58] TK: So I thought that was interesting.
[00:46:00] CR: yeah,
[00:46:01] TK: Really good quote. Okay. See, he talks a lot more about methodology. Um, what he does is, in a nutshell, is he, um, ranks his data set, uh, first of all breaking it up into 12 monthly portions, uh, and he ranks them into deciles by whatever he’s measuring. So the first one he measures is high PE versus low PE stocks.
[00:46:26] TK: And deciles means that he takes the 2, 500 stocks that he had in his universe and he breaks it up into groups of 250 based on a stack rank of PE ratio. Um, and then he, he, to, to make it even, um, I guess more accurate, he, he buys, um, portfolios, uh, once every month. So he buys 12 portfolios for the year based on buying the top decile, based on PE ratio and the bottom decile based on PE ratio.
[00:47:00] TK: And then he averages the returns over the 12 months to get Average for, for whether you, yeah, so there’s no skew for buying in January versus February or after results or before results, all that kind of thing. So that’s what he does. Um, but he has some rules. So he says, um, he does that buying and holding for 12 months.
[00:47:18] TK: However, he has a list of six red flags that, and will remove a stock from the portfolio within the 12 month period if they, one, if they fail to verify their numbers. As required by the Sarbanes Oxley Act, they replace the stock in the portfolio. So in other words, if they, it’s kind of like ours with a qualified audit, if you can’t trust the numbers.
[00:47:41] TK: Two, if a company is charged with fraud by the federal government, they replace the stock in the portfolio. 3. If a company restates numbers such that they would not have qualified at the time of purchase, they replace the stock in the portfolio. 4. If a company receives a takeover offer from a third party, we replace the stock if the price of the stock moves to within 95 percent of the takeover price.
[00:48:03] TK: So I thought that was a good rule for our dummy portfolio as well. Um, anyway, interesting. Uh, five, if a company drops by 50 percent from the point of purchase and is in the bottom 10 percent of all stocks for the previous 12 months of price performance. So that’s his rule one, but it’s a 50 percent rule one.
[00:48:21] TK: Which I found interesting. And six, if a stock from one of our dividend strategies cuts its dividend by 50 percent or more, we replace the stock in the portfolio. So they were his red flag, his sell triggers, if you like. So he rebalances every 12 months, but if something happens in between, he sells on those basis.
[00:48:40] TK: Okay, some results. So, uh, O’Shaughnessy, as I said, used PE/Sales analysis. The first one he did was, uh, PE ratio. He, he reports that from 64 to 2009, the decile of the lowest PE stocks, which he calls Decile 1, from what he calls the all stock universe. And he, sorry to interrupt the quote, but he takes out small, takes out microcap stocks.
[00:49:06] TK: from his universe of stocks because he felt that um if they had small ADTs people couldn’t really buy them anyway or they could buy them and push the price around so um he calls it the all stock universe which is the all the stocks on the S& P less microcaps. Um, so, So the decile of the lowest PE from 64 to 2009 turned 10, 000 into 10, 202, 345, a compound rate of return of 16.
[00:49:38] TK: 25 percent per year. That’s 9, 000, 000 more than you would have earned with an investment in the All Stocks Universe as an index. Conversely, 10, 000 invested in 1963 in a decile of stocks with the highest PE ratios and rebalanced annually grew to just 118, 000 by the end of 2009. 1. 2 million less than if you bought the index, but the compound return was only 5.
[00:50:07] TK: 53%. It was behind the all stocks of 11. 22%, that’s the index, um, and it also did worse than the investment in UST bills, where 10, 000 invested in December 31, 63, grew to 120, 000, an average compound return of 5. 57%. And he goes on to say, buying high PE stocks, regardless of their market cap, is a dangerous endeavour.
[00:50:32] TK: You shouldn’t let the flash of the latest grammar stock draw you into paying ridiculous prices for earnings. Yet investors do this frequently and seemingly with greater determination as the years have gone by. Witness investors pushing Polaroids PE to 164 in 1961, Best Buy to 712 in 1997, and Yahoo to 4, 900 in 1999.
[00:50:56] CR: and today it’s the Mag 7,
[00:50:59] TK: Correct. Yep.
[00:51:00] CR: mm hmm,
[00:51:01] TK: So, I mean, just think about those numbers. What a huge, it goes into a lot of detail, like that’s the summary of a whole chapter of What works on Wall Street. Um, and he points, he points out interesting things like that, um, there were some 10 year periods where IPE stocks did outperform, uh, low PE stocks, but in the longer term, high PE stocks, 5.
[00:51:23] TK: 5 percent CAGA, Versus 16 point, whatever it was, 16 point, uh, something, uh, for 16. 25 for low PE stocks. So that’s the first thing is triple, um, low PE is triple the, the, the high PE stocks, but the time period and what that means to your investment is just staggering. So it’s a long time period, 64 to 2009.
[00:51:47] TK: What’s that? That’s, uh, 46 years.
[00:51:50] CR: odd years,
[00:51:51] TK: Yeah. And he takes 10, 000 at the start. And it turns into 120, 000 at 5. 57 percent CAGR, but it turns into 10. 2 million at 16. 25 times
[00:52:06] TK: CAGR. Huge difference in the end result based on that difference in CAGR. It’s just so important is to get that long term CAGR right. So, great, uh, great
[00:52:16] TK: analysis of his, I think.
[00:52:21] CR: Yeah, where my head always goes when I hear these stories about, you know, the, the high PE stocks is, yeah, but what if you could build a system where you could get all of the high frothy growth and then get out at the right time and then buy the next? Period of high frothy growth.
[00:52:43] TK: what if you could? what are the rules?
[00:52:45] CR: yeah.
[00:52:45] CR: yeah,
[00:52:46] TK: I’ve tried, I’ve tried, you know, I’m still trying, I can get in, and I can get it on the way up,
[00:52:55] TK: but the crash is always hard and fast, and you just can’t get out in time. It’s like, it’s like you said with that fMRI research, it’s the brain starts to convince itself that the past growth will be future growth and keeps going on forever, even though you have this uncomfortable feeling that it can’t,
[00:53:13] TK: um, you get tricked into it.
[00:53:16] CR: eating a steak.
[00:53:19] TK: Eating a steak?
[00:53:19] CR: and I had a long conversation before we
[00:53:21] CR: went to air about diets and calorie tracking and how dieting is like investing. There’s so many strategies out there that everyone says works. You can’t change them every six months. You just need to pick one that seems to be backed up by science and evidence and then just stick to it.
[00:53:41] TK: which I haven’t been able to do, because one works in the short term for me, but never works in the
[00:53:46] TK: long term.
[00:53:49] TK: And I’m always reminded of Professor Scott from Psychology 100, who used to tell us about the glucostatic level of the human body, that every body has an equilibrium between energy in and energy out.
[00:54:03] TK: You can change it for a while, but you can’t
[00:54:05] TK: change it for a long time.
[00:54:07] CR: Yeah. All right. Good stuff, Tony. Thank you for that. Well, um, I have a pulled pork today. Uh, no, uh, You did, last time I think we did a US show, you did the Willis Lease Finance Company, what you’re talking about Willis, which has been the number one performer. Um, I haven’t talked about the portfolio performance yet today, but nothing much has changed since last week.
[00:54:39] CR: Um, I did do my weekly update blog post this morning. Um, our Australian stock exchange. Doctor Dummy Portfolio is doing 16. 28 percent per annum versus the market around about 9%, so about 1. 8 times better we’re doing. Last 30 days it’s up 3. 27 percent per annum versus the STW up 1. 33%, so again about double.
[00:55:06] CR: The, um, Stockopedia portfolios, which are newer, the Australian portfolio there is up 18 percent since inception, which was July 23, versus the index up 13. But the US dummy is up 70 percent since inception, which was September 23, versus the S& P up 34%, so double. And when I look at the, um, stocks, In the US portfolio that have done the best, Willis Lease Finance Company is still the number one performer.
[00:55:43] CR: It’s up 214 percent since we bought it. Number two is Land’s End, which is up 150%. And I thought I would do that as my pulled pork this week. Now, I hasten to add, it’s not on the U. S. dummy, well, I haven’t done a buy list for the U. S. dummy portfolio for a few weeks, I think, um, 12th of September was the last time I did one, but it wasn’t on that one, it had a You know, QAV score of negative one, cause I didn’t even look at it.
[00:56:19] CR: Mostly because the share price is up 150 percent since we bought it, uh, little under a year ago. So we added Land’s End, LE is the stock portfolio. We added it to the U. S. portfolio on November 20th, 2023, when the stock was trading at 6. 92. Today it’s around 17. 27. Um, and I thought I’d go into the background.
[00:56:45] CR: Now, most people have probably heard of Land’s End. They’re a clothing retailer, been around since 1963, but it’s actually got an interesting story. So, uh, founded in 1963 out of Dodgeville, Wisconsin, dodgy name for a retailing company, but out of Dodgeville, I could get, um, my old friend, uh, Doug LaFollette.
[00:57:14] CR: Friend of David Markham’s, Secretary of State. He was of Wisconsin. I don’t think he is anymore, but for many, many years, he was the Secretary of State of Wisconsin. He’s, I’ve done a number of podcasts with Doug over the years. Um, they specialize in sort of, like, I, I had a look at their website this morning and my take was it’s Country Road, it’s country, US Country Road, basically.
[00:57:37] TK: Yeah. Preppy.
[00:57:38] TK: quality casual
[00:57:39] TK: wear. I used to sell it.
[00:57:41] CR: New, Oh, did you for when you were at Coles?
[00:57:45] TK: MyerDirect, we had a deal with Land’s End. We used to sell there because it was a catalogue retailer, now an online retailer. I think they’ve got a small number of stores now, but yeah, we used to have a deal with them where
[00:57:55] TK: we sold their
[00:57:55] TK: stuff through our catalogues
[00:57:56] TK: at MyerDirect.
[00:57:57] CR: Right. Chrissy said, New England Yacht Club. So that’s basically. Thumbs it up. Yeah.
[00:58:04] CR: Which is. You know, fitting because they started off as a yachting supply company. That’s literally the foundation of the business. So these days they also sell luggage and home furnishings, most of it’s online. They have 28 retail stores, mainly in the upper Midwest and Hawaii.
[00:58:23] CR: But yeah, it started off as a mail order yachting supply company out of Chicago. The founder, a guy called Gary Comer, launched the business with 30, 000 in 1963. He was a big time sailor. And this was sort of a side hustle for him after working as an advertising copywriter at Young Rubicam in Chicago for 10 years.
[00:58:50] CR: No university degree, just got started as a young copywriter, worked his way up. Had a couple of friends that were like Olympic yacht champions or something and he formed a business with them. And People may know that Land’s End when written out as L A N D S apostrophe, end. He actually had a sailboat whose name was Land apostrophe S and that he was named, that he named the company after his sailboat.
[00:59:25] CR: But there was a typo when he got all of the original catalogues printed and he couldn’t afford to have them reprinted. So they just stayed with that. So ever since the last 60 odd years it’s been Lands apostrophe N. It just sort of stuck. In the early days, it was all about sailing supplies and gear, but then they expanded into casual clothing and home furnishings.
[00:59:49] CR: But 1978, they’d moved to Wisconsin. And he was a pretty brilliant marketing guy. He introduced a catalogue that they called the Magalog. It was
[01:00:02] TK: Make America Great Again
[01:00:03] TK: log?
[01:00:04] CR: Yes, that was it. The MAGA log?
[01:00:08] CR: Good. Um, it was like a combination magazine and catalogue. Lots of very glossy photos, articles, stories mixed in with the promotional stuff and the catalogue stuff.
[01:00:25] CR: Yeah, like he would have an issue where he’d have a reporter writing about his train ride home at Christmas or they did a story on wool farming in Australia or Madras Fabric from India. For its time, it was pretty unique. Apparently it was like you could read it as a magazine as well as, uh, buy from it.
[01:00:47] CR: Very high end, very glossy. It was also one of the first companies to have a toll free number in their catalogue, making it easier for people to call in orders, remove the friction back when it cost money to make phone calls. Um, they also really got in early on the rise of technology. Credit cards in the US, which led to a whole boom in shopping over there.
[01:01:14] CR: Comer stayed on as president until 1990, when the company went public in 1986. He stayed on for a few years and he stepped down. They were taken over by Sears Roebuck eventually in 2002, um, when the valuation of the company was 2 billion. And today it’s worth a couple of hundred million dollars. So, um, it’s been a tough 20 odd years for the company, obviously explosion of online shopping and companies that dominated that one paradigm.
[01:01:52] CR: It’s a bit like, um, who was, uh, the. Guy who wrote the book, uh, Christian, damn, gee, there was this, this is, there’s this classic book in the late nineties, early two thousands that all me and my com friends were into. Can’t remember the name of the guy, but he was like a, a business guru in the US, but it, um, The Innovator’s Dilemma.
[01:02:19] CR: That was the name of the book. Did you ever read that?
[01:02:21] TK: I do.
[01:02:22] CR: Um, Innovator’s Dilemma. Who was
[01:02:25] CR: that? Clayton
[01:02:28] TK: guys.
[01:02:28] TK: Ah,
[01:02:29] TK: Christian, yep.
[01:02:29] CR: it. Yeah. Harvard
[01:02:32] CR: professor and a businessman. And he talked about how companies that dominate one paradigm rarely tend to dominate the successive paradigms because they get so stuck in a particular way of doing business that they miss the, the
[01:02:49] TK: They can’t disrupt themselves, you know.
[01:02:52] CR: Exactly. Oh yeah. Can’t disrupt their own cash. They have so many silos in the business that are dedicated to maintaining their current, you know, little,
[01:03:00] CR: um,
[01:03:01] TK: and Sears Roebuck is a good example of that. It was a catalogue
[01:03:05] CR: Exactly.
[01:03:06] TK: Didn’t transit to online retailing as
[01:03:09] TK: well.
[01:03:10] CR: They’re not the Amazon of the online world, right? Yeah. So anyway, um, it, it, it, um, struggled. Uh, he though in later part of his life was a big philanthropist, um, gave money to lots of causes, children’s healthcare, education, climate change research. He funded a lot of that very early on and passed away in 2006 from prostate cancer.
[01:03:38] CR: So anyway, the catalogue business, um, Really took off in the 80s and 90s, um, they jumped into e commerce early, added live chat customer service to their website way ahead of their time. Had some cool partnerships, they were the official jersey supplier for the US National Rugby Union team. Didn’t even know they had such a thing.
[01:04:00] TK: It’s
[01:04:00] CR: Um, They started selling on Amazon in 2016, but anyway, they had some ups and downs with Sears, Sears themselves declared bankruptcy and they pulled out all of, out of all the Sears stores in 2019. Today, they’re back to running things independently. Most of their sales are online. Um, and then they have some through their inlet stores.
[01:04:22] CR: By the way, the founder’s motto is still used at the company, which I like, take care of the customer, take care of the employee and the rest will take care of itself. Didn’t stop their valuation going from 2 billion down to 300 million, but you know, it’s, I like the motto anyway.
[01:04:43] TK: a great model,
[01:04:44] CR: he was a good guy
[01:04:45] TK: we used to have these
[01:04:46] CR: for decades.
[01:04:48] TK: long winded debates about whether, who had the, yeah, what was the most important constituency? Customer, staff, or shareholder? So he said, take care of the customer, take care of the staff, and screw the shareholder. Would have been the
[01:05:03] TK: response to that model when I was working at Coles Myer.
[01:05:06] CR: And now, what would you say?
[01:05:09] TK: Oh, I was always
[01:05:10] TK: pro customer.
[01:05:11] TK: If you don’t look after your customer, you, um, forget the rest.
[01:05:14] CR: You have no shareholders, right?
[01:05:16] TK: Correct. Yeah. But I used to, I used to get those robust
[01:05:19] TK: debates
[01:05:19] TK: about it,
[01:05:22] CR: I remember when Google’s motto was, don’t do evil, or don’t be evil.
[01:05:27] TK: which they quietly got rid of.
[01:05:28] CR: gone. Yeah, yeah, they did. A long time ago.
[01:05:32] TK: Yeah.
[01:05:34] CR: Anyway, so I’ll get into their financial results. Um, Again, as I said before, they’re not on the buy list today. And in retrospect, I’m not sure they should have been on it a year ago when I bought them, but that’s another story, which I’ll get to.
[01:05:50] CR: So their quarterly results, last quarterly results came out September 5th, 2024. And there’s some interesting, You know, this is a new space for us, the US market, interesting to pick through the way that they put the spin on numbers over there. These guys like to promote something called GMV, Gross Merchandise Value.
[01:06:15] CR: Their GMV increased in mid single digits. In the last quarter compared to Q2 of 2023, GMV is the total value of everything they sold across business to consumer and business to business channels, as
[01:06:35] TK: So it’s sales?
[01:06:37] CR: Yes. Yeah, you would think so, right?
[01:06:40] TK: Oh, always it’s sales, less things
[01:06:42] TK: like credit cards.
[01:06:44] CR: yeah, I don’t know, I couldn’t pick that apart, it’s
[01:06:48] TK: Yeah. Okay.
[01:06:49] CR: value, gross merchandise value, the value of what they sold, maybe, whether or not that’s the retail value, or the wholesale value, or the
[01:07:00] TK: Yeah. I’ve never heard, never heard the term before. And I’m skeptical of
[01:07:05] TK: companies that pull
[01:07:06] TK: out their own
[01:07:06] TK: metric like I’ve got to say.
[01:07:09] CR: I don’t know how common this is in retail in the US, but I just, I,
[01:07:13] TK: Never heard of it, no,
[01:07:14] TK: 20 years in retail in
[01:07:15] TK: Australia.
[01:07:17] CR: I scooby dooed it. I was like,
[01:07:19] CR: when I read it, because I had never seen it before, particularly because as you drill down into the results, their GMV increased, but their net revenue decreased
[01:07:29] TK: Yeah. Right.
[01:07:30] CR: to 317. 2 million from 323.
[01:07:33] CR: 3 year on year.
[01:07:36] CR: So, I was trying to figure out how GMV can go up while revenue can go down. I asked GPT. It said it could be due to discounting or promotions or the fact that third party sales, where they don’t make as much of a margin, are becoming a bigger part of the mix. And when you drill into their results, they actually do say third party revenue was up.
[01:07:59] CR: 23.
[01:07:59] CR: 4 percent year on year, but they said that a lot of that was through licensing and wholesale arrangements, so Yeah, the numbers are a little bit funny, but again, it kind of reminds me of Charlie’s thing about EBITDA, like it’s just bullshit numbers.
[01:08:18] TK: Yeah. Yeah.
[01:08:21] CR: Dodgy, fudgy numbers that you can have something that you can say went up.
[01:08:27] TK: Yes, exactly. Look, it might be important if it, if it’s, well, I think it means it’s mean the stuff that they source themselves and then sold. So the, the preppy polo shirts and jumpers and shoes and dockers and things like that, um, is my guess,
[01:08:42] TK: but it’s
[01:08:42] TK: only a guess. I got no idea what it is.
[01:08:45] CR: It reminds me of our conversation before we went to air about losing weight. Like for the first couple of years, I was telling Tony, the first couple of years I was doing Kung Fu, I wasn’t losing weight. And I was like, what the hell? I’m like working my ass off. I’m doing like 10 hours of training a week.
[01:08:58] CR: How can I not be losing weight? And Chrissy would be nice. She loves me. She goes, well, you’re probably putting on muscle. So you’re not losing weight, but you might be losing fat, but putting on muscle and it’s just balancing out. That’s, that’s like. GMV, that’s the
[01:09:14] TK: Ha,
[01:09:14] CR: loss.
[01:09:15] TK: ha, ha, ha, Ha,
[01:09:16] CR: Find a way to put a positive
[01:09:18] CR: spin on it.
[01:09:18] CR: After a while, I realized
[01:09:20] CR: my waist wasn’t going down. So, you know, I wasn’t losing fat off my waist unless I was putting muscle on my butt. Um, I wasn’t really losing weight. So yeah.
[01:09:32] CR: Eventually I had to start focusing on am I losing centimetres off my waist? That’s the only metric that really
[01:09:38] TK: right, yeah,
[01:09:39] CR: you know,
[01:09:41] TK: yeah,
[01:09:42] CR: and I have, I’ve lost eight centimetres off my waist in 10 weeks.
[01:09:45] CR: So,
[01:09:46] TK: congratulations,
[01:09:47] CR: I’m expecting my mid year
[01:09:48] CR: bonus from my boss at some point. Um, so, uh, gross profit came in at 151. 9 million up 8. 8 percent from 139. 6 million the previous same quarter of the previous year. So that is a good. Sign. Revenue was down, but profit is up. So, you know, they’re, they’re Selling less, but making more money from selling less, which I guess isn’t always a good thing.
[01:10:21] CR: It can be a good thing, but not always. Depends on, you know, where they’re, you know, what they’re cutting back, you know, you can get fire all your employees and, and, uh, your profit will go up, but not for very long. So not always a sustainable metric, depending on where it’s coming from.
[01:10:41] TK: yeah, and you can also likewise sell one piece of clothing for a lot of money. and make more money this year and then it’s so damn good, so damn good, no one has to buy anything for the next three years. So yeah, um, yeah, it’s always a dance in retail. It’s, um, about volume and margin. You’ve got to have a certain amount of volume to make the whole engine tick, to keep the stores going, to keep all the costs covered, all that kind of stuff, um, warehouses online, all the rest of it.
[01:11:08] TK: So you can’t fall below a certain threshold, you can’t fall below a certain market share, because you’ll start to get Erosion to your competitors, all that kind of thing. But at the same token, you can’t make less margin to increase your volume too much,
[01:11:21] TK: otherwise your profit
[01:11:22] TK: suffers. So
[01:11:23] TK: yeah, it’s a dance.
[01:11:26] CR: And I said that was a gross
[01:11:27] CR: profit. Um, their net profit was actually a net loss. Um, but their net loss for the quarter was actually lower than the net loss was a year earlier. So their net loss this quarter was 5. 3 million versus 8 million year on year from the previous Q2. Still operating at a loss, but heading in the right direction.
[01:11:54] CR: This is sort of, you know, we did an episode a few weeks ago called Recovering, and we were looking at recovering stocks. This is sort of a
[01:12:00] CR: recovering story, these guys.
[01:12:03] TK: good point.
[01:12:04] CR: One area they’ve really improved in seems to be inventory management. They’ve reduced inventory by 21 percent year over year, and it’s actually the sixth consecutive quarter of improved inventory levels.
[01:12:19] CR: So, I don’t know anything about retail, but that sounds like, uh, a good place to be in. They’re
[01:12:25] TK: Oh, yeah, if you, yeah, so I did do a little bit of research myself. They’re better at discounting at the moment, which is why their profit’s improving. So, there’s a, again, there’s a, particularly in catalogue retailing, which I can talk to a lot, which they are, if you If you order too much merchandise and then it doesn’t sell, you’ve got to discount it heavily to move it.
[01:12:51] TK: That affects your profit margin and your sales because you’re selling it for half the price. And if you don’t buy enough stock and something’s very popular, your customers get pissed off and they go elsewhere because you don’t have enough stock to back them up. The sales that would have happened. So it’s a real balancing act.
[01:13:07] TK: And the, I guess the benefit of being a catalogue retailer is you have a lot of data. Cause you know, you know, um, here’s the whole range. Here’s what sold to which people, to which customer segment, you know, a bit about your customers because they, you know, they’re on your database. So you can decile it by frequency and by how much you think they earn and all that kind of stuff, and then how much they buy from you and what they’re buying.
[01:13:29] TK: And, um, and then you can try and optimize the stockholding behind the things that you think will appeal to them. So they’re getting, Land’s End are obviously getting better at that, which is really important in retailing, because if you get, so basically retailers go through a cycle. So, um, Land’s End might work differently to Myer Direct, but I doubt it.
[01:13:49] TK: They’ll probably have four or so big sales. Cycles a year. Christmas will be one. Easter may be one, but in America it could be spring. And then you’ll probably have, you know, kind of a mid year or mid winter, and they might, they’ll probably have a fall catalogue. So four big selling events. They’ll launch a new range around that, you know, so jumpers in winter, t shirts in summer.
[01:14:15] TK: Kind of basics like that. Um, and I’ll try and sell them at full margin. If they get that right, they sell out just enough stock and they make a lot of money. If they get it wrong, um, they have to go through what’s called a quit cycle, because you’ve got to get rid of the t shirts before it gets too cold, and there’s usually a Um, some math behind that.
[01:14:35] TK: So it sells, if it doesn’t sell, uh, at the end of say four weeks and you mark it down by 10%, if it doesn’t sell at the end of two weeks you mark it down by 20%, if it doesn’t sell after two months you mark it down to 50 percent off. And you try and clear your stock for at least cost, so you get out of it clean.
[01:14:52] TK: If that doesn’t work and you’re holding t shirts out of season, um, A, your warehouse sales are Costs go up because you’ve gotta store it and um, or b, you just write it off and, and burn it basically. Or give it away to St. Benny’s or whatever and take a bath. But that’s probably the biggest risk of this kind of retail business is being caught with stock.
[01:15:13] TK: You can’t sell or can’t get out of for a cost and it becomes a write-down. So that’s, um, the real balancing act in this business sounds like they’re
[01:15:22] TK: getting better at it
[01:15:22] TK: though, which is good.
[01:15:25] CR: Yeah, the CFO, who has the wonderful name of Bernie McCracken, um,
[01:15:31] TK: Brother of Phil. Cousin of Bendover. Scottish golfers.
[01:15:42] CR: said they, uh, they’re focused on profitability and balance sheet efficiency. So they seem to be doing a good job at improving things. Anyway, um, looking ahead. Their expectations for the future sound positive. For Q3 2024 they’re expecting net net re bleh bleh bleh Expecting net revenue between 300 and 340 million with the GMV continuing to grow.
[01:16:08] CR: They’re Forecasting their net income slash loss to fall to between negative one and a half million loss to one and a half million dollar profit. So, they, uh, looks like they’re going to turn it around. They think they’re going to turn it around and become profitable again in the next quarter.
[01:16:25] CR: Um, and for the fiscal 2024,
[01:16:29] CR: they’ve set net revenue to a range of 1.
[01:16:33] CR: 4. 3 billion net income between 5 and 11 million. So they’re expecting to be quite profitable in the full fiscal year. So that’s a good story. They’ve had lots of ups and downs, but they seem to be turning it around. Stronger balance sheet, better inventory management. Now, when I did my last US analysis, as I said, September 12th, they weren’t on the buy list, mostly because the share price has gone up.
[01:17:05] CR: But, um, I can run through what they looked like when I bought them in November last year, because I still have that buy list. They had a QAV score at the time of 0. 49. But I want to point out that this was a much earlier version of the US checklist than the one we have today, when there was a lot of gaps in the data.
[01:17:29] CR: And in fact, um, there wasn’t a lot of data when I go back and look at it for these guys. It was based on very little. Average daily trade by the way back then was about 621, 000. It’s more than double that now. Um, So it’s like the same amount of shares are trading, but the share price has doubled, so the average daily trade has doubled.
[01:17:52] CR: But back then, the PropCaf was 1. 53. Today it’s 5. 40. Still low, still good, but not on our buy list for a whole bunch of other reasons. But, um, yeah, the PropCaf was very low, and I think, um, I think that’s kind of what saved me when I bought this thing, because really there was nothing else. The only other thing that I had that it scored for back then was price was less than book plus 30.
[01:18:19] CR: But when I looked at the sheet, In detail, there was no book plus 30, because back then, because Stockopedia doesn’t track equity. Um, and the first version of the Stockopedia checklist didn’t have an equity measurement in it, but yet my scoring still went, well the price is above zero, so I’ll give it a score for that.
[01:18:42] CR: I’ve since fixed that, I’ve figured out how to use equity per share. measurements and create my, um, own, uh, book plus 30 score. They do have a price to book thing in Stockopedia and I figured out how to sort of reverse engineer things. But anyway, um, today the equity per share is 7. 17. The financial health, the quality rank in Stockopedia terms.
[01:19:09] CR: was 68 back then, today it’s only 41. Just a reminder for people, the quality rate, Stockopedia says, aims to find the best quality listed companies. It is based on a blend of measures that include an assessment of company franchise, profitability, cash flow margins, Company Risk, Bankruptcy, Volatility, and the fundamental trend, which is the F Score.
[01:19:34] CR: These inputs are computed for every company in the market on a daily basis, ranked, blended, and then re ranked as a percentile from 0, worst, to 100, best. So it’s quality rank has dropped. As its, um, share price has gone up, I, I assume that that’s part of the calculation for
[01:19:56] TK: I don’t know, It shouldn’t. Share price
[01:19:58] TK: shouldn’t change quality. I wouldn’t have thought.
[01:20:01] CR: Well, it’s, I don’t know, it’s got something to do with the F score, but I, we’d assume that’s improving. The F score, it has an F score today of 5 and a Z score of 1. 04, which is early distress. So, you know, we looked at this before, Zed score, if they’re borrowing lots of money, it tends to increase their Zed score. So I don’t know, back then it had a stock rank of 79. Today it’s 81, which is the sort of weighted combination of value rank, quality rank and momentum rank. So it hasn’t changed a great deal in terms of its stock rank. Um, It’s EPS and it’s forecast EPS were and continue to be both negative because it’s, um, earnings per share is negative.
[01:20:52] CR: But, um, my final conclusion is that it was a lucky win
[01:20:58] TK: Well, I mean, we
[01:20:59] CR: year ago,
[01:21:01] TK: I don’t know. I mean,
[01:21:02] CR: I think it was mostly the low PropCaf.
[01:21:04] CR: Yeah. We know
[01:21:06] TK: seen that,
[01:21:06] TK: before, yeah,
[01:21:07] CR: yeah,
[01:21:08] CR: PropCaf, Prop, PropCaf is such a big factor that I think that’s what. Made this a win. It had a really like a less than two PropCaf. Um,
[01:21:21] TK: And we’ve seen research, we’ve certainly seen regression testing to suggest that PropCaf is the heavy lifter in QAV. The quality side’s important, but, um, it kind of helps
[01:21:32] TK: us rank the low
[01:21:33] TK: PropCaf
[01:21:33] TK: companies.
[01:21:35] CR: Yeah. So it was really the only thing it had going
[01:21:38] CR: for it a year ago. And, um,
[01:21:42] TK: Can I just, um,
[01:21:43] CR: a good buy.
[01:21:44] TK: can I just, um, step in here, because I, I’m still trying to get my head around this whole idea of the Z score. Um, and it’s bankrupt, the ability to predict the bankrupt, um, or bankruptcy, and we know that, uh, as Elio from Stockopedia pointed out, just because it predicts the bankruptcy doesn’t mean management won’t take action to prevent the bankruptcy, so you get recovering stocks perhaps in this category.
[01:22:12] TK: But I jumped into the balance sheet. In Stockopedia for this Land’s End, and I’m looking at, um, I’m looking at total assets, which, um, are listed as 811 million. I’m looking at total, uh, liabilities of 570 million, and therefore equity of 242,
[01:22:35] TK: and that doesn’t strike me as being too bad. I mean, um, liabilities are below assets, which means the company has positive equity, but, you know, debt to equity is high, but it’s not, it’s not too bad.
[01:22:53] TK: It’s like there’s still plenty of equity there. The, OK, the borrowings are up, but, um, As we know from our own experience in Australia, cash flow pays down debt. So maybe that’s what some people are seeing, that that’s a good thing and it will pay the debt down even further and increase profitability. But yeah, I, I, I’m struggling to see, my point is I’m struggling to see how a company with, um, debt levels that, whatever I said it was, so liabilities of, um,
[01:23:24] TK: Where are we?
[01:23:25] TK: 570 million. And in fact, I couldn’t quite understand what Stockopedia was saying about this, because total debt in Stockopedia is 249 million,
[01:23:34] TK: but total liabilities are
[01:23:36] TK: 270. So I couldn’t
[01:23:38] TK: reconcile
[01:23:40] CR: Tony. If you click, if, sorry, if you click the Z2 score thing, if you go to the bankruptcy risk section of Lands’ End you click on Z2 scores, it’ll show you why it’s giving it. This ranking. So there are four things that it looks at. The first is our liquid assets, a significant proportion of the assets.
[01:24:00] CR: And it says their working capital slash total assets is, um, point has to be greater than 0. 2375 working capital over total assets, sorry, has to be greater than 0. So they get a cross, a check mark against that metric. The second one is do reinvested earnings make up a significant portion of the assets?
[01:24:32] CR: Retained earnings over total assets has to be greater than negative 0. 1355. And these guys have a negative 0. 14, so they get a bad mark for that.
[01:24:45] TK: makes
[01:24:46] CR: The fourth is, are the assets relatively productive in terms of earnings? The rule is EBIT over total assets has to be greater than negative 0. 082. These guys have negative 0.
[01:25:00] CR: 12, so they get a checkmark for that. The fourth is does firm value compare favourably to its liabilities? The rule is market value of equity over book value of total liabilities greater than 1. 439. Theirs is 0. 93. So they score a cross for each of those.
[01:25:28] TK: So basically the current lack of profit is
[01:25:32] TK: Highlighting its bankruptcy risk. And I kind of get that. That makes sense. But we know for a while, as the company’s cooling out, that they think they’ll either get back to zero or be profitable next, next period, next
[01:25:45] TK: half. Was it next
[01:25:45] TK: half or
[01:25:46] TK: next year? Anyway, in the near future.
[01:25:48] CR: quarter. Yeah, next quarter they
[01:25:51] CR: think it might get close to being profitable, but certainly in the next fiscal year, on the whole fiscal year positive. And, and that’s why the F score I think is looking good. So the F score is a five. It’s on the higher end of, And that’s made up of 1, 2, 3, 4, 5, 6, 7, 8, 9 metrics.
[01:26:10] CR: They get a 5 out of 9 for that. And the fourth, the nine things, by the way, is the company making a profit? Currently, no. Is it generating cash? Yes. Is it making more cash than it’s reporting as profit? Yes. Is it more profitable than it was last year? No. Is the company’s
[01:26:29] TK: Well, yes,
[01:26:30] CR: No.
[01:26:32] TK: it’s making a smaller loss
[01:26:33] TK: this year.
[01:26:34] CR: Um, it’s looking at return on assets.
[01:26:40] TK: Okay.
[01:26:41] CR: So apparently in terms of return on assets, last year it was negative one and a half. Um, this year it’s negative 13. So I’m not sure why it’s looking at that as the metric. They have a big explanation, but I’m not going to go through it. Next one is, is the company’s long term debt reducing or stable?
[01:27:02] CR: It gets a no for that. Is it increasing its ability to pay short term debts? It gets a no for that. But then the last three, it gets a yes for is the company trading without having to raise funds from shareholders. Yes. Is pricing power improving and all costs reducing? Yes. Is it more productive than last year?
[01:27:22] CR: Yes. So these are Piotrowski’s nine things and it’s getting a five out of nine for that. So it seems to be. You know, that’s sort of the turnaround story, I think, versus the bankruptcy risk is it’s cash flow story. And who was, who did you do as a pulled pork last week? I remember it had a bad Z score, Qantas.
[01:27:45] CR: Qantas had a bad Z score, but a good F score too, right?
[01:27:49] TK: Yeah. Right. Yep.
[01:27:51] CR: it’s
[01:27:51] TK: Yeah. This whole, this whole, um, bankruptcy risk I think is a, to me is a bit of a strange concept because it’s, you know, um, I understand it’s saying that there are, there’s more financial stress in the company, but perhaps with Lands’ End it’s recovering, perhaps with Qantas it’s recovering.
[01:28:09] TK: So I don’t get the feeling that Qantas is about to go bankrupt. Belly up? Um, it may, but like so could any other company. So I’m, yeah, I’m not sure about bankruptcy risk. I had, I found, um, I forget now what it’s called, but I looked at Land’s End’s bankruptcy risk. I googled that and came up with another, uh, service that said, um, they rated Land’s End’s chance of bankruptcy at 16%,
[01:28:40] TK: which they said was low.
[01:28:41] TK: So.
[01:28:42] CR: hmm,
[01:28:43] TK: And they claim to use the F score, or Z score, sorry, as part of that. Um, so yeah, it’s just something I don’t know much about, but it’s something I’m becoming more and more, you know, um, more and more less likely, or less likely to, um, to use as an input into our
[01:29:00] TK: calculations.
[01:29:02] CR: Well, if I look at the Qantas one, it’s interesting. Qantas, you know, I said Land’s End got four, Crosses for the
[01:29:10] TK: Mm hmm.
[01:29:11] CR: Qantas gets 2, but seems to have a worse distress ranking.
[01:29:16] TK: Right. Yeah.
[01:29:18] CR: I look at Qantas’s, it gets a no for are liquid assets a significant proportion of the assets? Yeah, this is working capital over total assets.
[01:29:28] CR: It gets a no for that. Do reinvested earnings make up a significant proportion of the assets? It gets a yes. Are the assets relatively productive in terms of earnings? It gets a yes. But the last one does firm value compare favourably to its liabilities. It gets a no for that. This is market value of equity over book value of total liabilities.
[01:29:51] CR: It should be greater than 1. 439 and Qantas is 0. 57.
[01:29:58] TK: But again, that
[01:29:58] CR: yeah, I agree with you.
[01:30:00] TK: peculiarity for the airline industry, though. We know, like, I know from the pulled pork that if you’re running an airline, you’ve got huge leases to keep, you know, for the fleet, and you balance it against your cash flow. So,
[01:30:11] CR: Hmm.
[01:30:12] TK: unusual to see airlines with what looks like high levels of indebtedness, but it’s not really.
[01:30:17] TK: It’s, that’s standard for the industry. It’s the way the industry works. It’s a bit like saying a bank has high levels of indebtedness. So what does CBA come up with? You know, because a bank takes on debt to lend out again as mortgages. So I’m
[01:30:32] TK: wondering if this
[01:30:32] TK: is,
[01:30:34] CR: has a bankruptcy, has no,
[01:30:36] CR: uh, no bankruptcy
[01:30:37] TK: Oh, okay. So They
[01:30:39] CR: don’t get a Z score,
[01:30:40] TK: yeah, right. okay.
[01:30:42] CR: but their F score is a two out of
[01:30:45] CR: nine.
[01:30:46] TK: Yeah.
[01:30:51] TK: Biggest, uh, biggest company on the ASX.
[01:30:55] CR: Yeah.
[01:30:58] TK: Look what they’re saying, it’s not generating
[01:31:00] TK: Cash
[01:31:01] CR: Yeah.
[01:31:04] TK: So I guess my point is that,
[01:31:06] CR: on assets
[01:31:07] TK: I guess my point is that, you know, these are, these averages are put together for industrial companies and they might not work in all industries.
[01:31:15] CR: Yeah,
[01:31:16] CR: Good insight. anyway, that’s my Land’s End story. It’s done. Um, it’s been great, but I think it was all just a low PropCaf sort of win there. Um, there wasn’t a lot of real other data to go on a year ago. It just worked out well.
[01:31:34] TK: there’s something we’ve said,
[01:31:36] TK: we’ve often said that, you know,
[01:31:37] CR: the frothing, the frothiness of the US market probably had a lot to do with it as well, you know.
[01:31:42] TK: there’s plenty of cash sloshing around to be invested, but, um, but we’ve said it in the past too, PropCaf is like having a low PropCaf, um, is a great thing because if management’s good, they’ll be able to use that cash to Repair the balance sheet, pay down the debt, you know, expand the business, etc, etc.
[01:32:00] TK: So, you know, out of all the, out of all the problems that you can have, um, I, PropCaf is actually, it’s a goldmine, really,
[01:32:10] TK: to
[01:32:10] TK: help a
[01:32:11] TK: company turn around.
[01:32:14] CR: Well, Tony, uh, you, you got a hard out, um, about now. I don’t think we have time for after hours. Do you want to tell me, give us one thing in after
[01:32:22] CR: hours?
[01:32:24] TK: Uh, I watch Chaos, the, um, series you recommended.
[01:32:27] TK: Really good. Jenny
[01:32:28] TK: and I sat down and watched it from end to end on the
[01:32:31] CR: Oh, Really Are you away? I’ve only seen a couple of
[01:32:33] CR: episodes. Yeah.
[01:32:33] CR: Are
[01:32:33] TK: Oh, no, it’s good. Gets
[01:32:34] TK: better. It’s great. Really enjoyed it.
[01:32:37] CR: Goldblum’s fun, isn’t he?
[01:32:38] CR: He’s great.
[01:32:39] TK: Oh, all of the acting’s really good. Cliffy, I’m a big fan of Cliffy Brown. He’s really good in it. Um,
[01:32:45] CR: Who’s that?
[01:32:46] TK: Poseidon? Mmm.
[01:32:47] TK: Yeah.
[01:32:49] CR: yes. The Māori New Zealander guy. I, I, you look familiar, but I looked through his, um, IMDB apart from Once Were Warriors, which I haven’t seen for 30 years. Uh, I don’t know what I knew him from, but I know the face. He’s great as Poseidon. Yeah.
[01:33:07] TK: Yeah. so
[01:33:07] CR: When he’s in the bathtub with the king of Crete and he’s
[01:33:10] CR: sticking his toe in his mouth
[01:33:15] TK: Yeah.
[01:33:16] CR: that was gold. Yeah.
[01:33:18] TK: Yeah, so that was really good. Um, reading Thirteen On Theory, the Mark Seymour’s book about hunters and collectors. That’s
[01:33:25] CR: Oh wow.
[01:33:26] TK: just, I mean, great, because I grew up with the story, so it’s, yeah.
[01:33:30] TK: Um, band venues in Melbourne from the 80s,
[01:33:33] CR: hmm. Mm hmm.
[01:33:35] TK: and, and people actually knew Jack Howard, the trumpet player. He taught Alex Trumpet at Wesley
[01:33:41] CR: Oh, wow.
[01:33:42] TK: Yeah, so, um, yeah, good. And we, I’ve hired others
[01:33:45] TK: and collectors to play at
[01:33:46] TK: uni
[01:33:47] TK: campus events, so yeah.
[01:33:49] CR: What does release
[01:33:50] CR: the sausages mean?
[01:33:52] TK: Oh, it just caught my eye. It was a, um, Keir Starmer, the British Prime Minister, um, misread from a teleprompter about the Israeli situation that the hostages had to, instead of saying the hostages should be released, he said, and of course we should release the sausages.
[01:34:12] TK: So the guy must have been hungry, I guess, making lots of speeches and misread the teleprompter.
[01:34:17] CR: Oh, there’s, I need a t shirt with release the sausages on it. That’s great. I thought it
[01:34:22] CR: was, I, I, I did a postal vote for our upcoming Queensland election because there’s no more democracy sausages. So I’m like, I’m not, not lining up to vote if I don’t get my democracy sausage.
[01:34:33] TK: What do you mean there’s no more
[01:34:34] TK: democracy sausages?
[01:34:35] CR: Last couple of times we’ve voted. There’s no, I think since COVID, they stopped democracy sausages and they never started again. So I’m
[01:34:42] TK: oh, okay.
[01:34:43] CR: I’m not voting in person if I don’t
[01:34:45] CR: get my sausage.
[01:34:47] TK: Yeah, I mean I like voting beforehand anyway because I get to choose when and where
[01:34:52] TK: I go.
[01:34:54] CR: right. plan. Quickly, my highlights. I spent a lot of time over this week doing server maintenance. I apologize to anyone who’s had server or website problems. I think I’ve got it. Nailed, but I thought that last time. But this way, this time we haven’t had any, uh, real issues for about a week, so, um, I think that’s good.
[01:35:13] CR: David Lynch has emphysema, did you hear about that?
[01:35:15] TK: No. Okay.
[01:35:17] CR: Can’t leave his house, um, won’t be doing any more directing unless he said he can do it remotely, and that doesn’t sound like fun, so, I think we’ve seen the end of Lynch.
[01:35:26] TK: Oh, No.
[01:35:26] CR: Chrissy and I watched a couple of episodes of Boy Swallows Universe, um, really enjoying that.
[01:35:33] CR: Great. The kid who plays the young kid. Oh, Hunter said he
[01:35:35] CR: auditioned for the role of the older brother. Um, but the, the kid who plays the younger brother, so good. Like really great performance. Uh, we also started watching Will Harper, the Will Ferrell thing on Netflix, where a really old friend of his, who was a writer at Saturday Night Live, transitioned
[01:35:55] TK: Right. No.
[01:35:58] CR: you know, Going out in public.
[01:35:59] CR: So Will Ferrell does a road trip across the U. S. with him and they go on a, you know, um, redneck bars in Idaho and, and uh, Will Ferrell just sort of gets in everyone’s face about his friend transitioning to see how they react. It’s, it’s kind of fun. Um, new album by The Kills. Um, don’t know if you’ve ever listened to The Kills, but they’re one of my favourite current bands.
[01:36:24] CR: They got a new album out, which is good.
[01:36:26] CR: GPT released advanced voice mode finally to everyone last week, which is, uh, super impressive stuff. Chrissy and I did our private class with our Sifu last week and we got approval to do our brown belt grading in a couple of weeks. That was like the pre assessment.
[01:36:42] CR: Boris, he gave us the nod, said you’re, you’re ready, you’re ready Grasshopper,
[01:36:47] CR: so we’re excited about that. I just can’t injure myself again, before then I gotta not hurt my back, which is already
[01:36:54] CR: dicey. And I’ve been reading Jim Carroll’s The Basketball Diaries, which is completely bonkers.
[01:37:01] TK: Wow.
[01:37:02] CR: mentioned him earlier, uh, in an earlier
[01:37:05] TK: Carroll
[01:37:05] TK: banned. Yeah.
[01:37:06] CR: Yeah, Basketball Diaries, Leonardo DiCaprio film, 20 odd years ago, based on it. He was doing heroin at 13. Um, also like 16 was getting his poetry published. But these are his diaries as a teenager, as a high school student, talking about Catholic priests, feeling kids up. And, you know, he started, you know, Giving oral sex to homeless, not to homeless guys, to rich guys under a bridge to make money for his heroin habit when he was a teenager.
[01:37:34] CR: And it’s, growing up in New York in the 60s, it’s just a crazy story. He ended up with Andy Warhol at the factory and dating Patti Smith and having the band and blah, blah, blah, working with Lou Reed and stuff. But anyway, it’s just a crazy story about Life in the, like doing burglaries is 12, 13 and get money for drugs and um, really sort of rough, rough childhood living in the Bronx in the 60s and 13.
[01:38:07] CR: Like I can’t, I just can’t imagine somebody, he said he started doing heroin because he thought that was the one you didn’t get addicted to.
[01:38:14] TK: No.
[01:38:15] CR: He got, he got that and weed mixed up.
[01:38:17] CR: So then he switched to
[01:38:17] CR: weed for a while, but he ended
[01:38:18] CR: up back on heroin. But anyway, it’s a good book. Really, really gritty and harrowing sort of life for a young kid in the sixties, but I’m enjoying it. That is QAV for this week, episode 740. Thank you, TK.
[01:38:34] TK: No, you’re
[01:38:35] TK: welcome. Thank you for doing the pulled pork
[01:38:37] TK: this week.
[01:38:38] CR: That was fun. I enjoyed it. Learned a
[01:38:40] TK: Oh, by the way, I watched the second episode of The Penguin. They’re releasing it. Week by week. So good. Oh, so good. It’s like, it’s less, it’s HBO, so it’s quality, and it’s more a gangster flick than, or gangster series than, uh, uh, DC comic.
[01:38:58] TK: It’s, and Colin Farrell
[01:39:01] TK: just hits it
[01:39:01] TK: out of the park.
[01:39:02] TK: He is so good. It’s great.
[01:39:05] CR: Well, I looked it up, it’s on Binge, and I cancelled my Binge subscription, so I’m gonna wait till the whole thing’s out, then I’ll subscribe to it, and binge it, and then
[01:39:13] CR: unsubscribe again. Yeah, Alright. Thank you
[01:39:17] TK: Okay. All right. See ya.

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