QAV AMERICA 004 — Buffett’s Last Dance

Tran­script QAV U.S. 4

Cameron: [00:00:00] Wel­come back to QAV Amer­i­ca, Tony Kynas­ton. I think this is episode four. We’re record­ing this on the 6th of May. Aus­tralian time just did an Aus­tralian show, uh, where we were cov­er­ing some news around val­ue invest­ing and the big news and val­ue invest­ing this week. Of course, Tony the announce­ment of the retire­ment of your per­son­al sav­ior, uh, War­ren Buf­fett. Which

TK: Is, it’s not often yet, to be hon­est. It’s not often that I’ve had any­body in life, uh, any­one to look, look up to as. Far as War­ren in life, they don’t come along very often, I don’t think who’ve made such a big change on my life. So yes, I’m hap­py to call him my per­son­al sav­ior. Char­lie,

Cameron: is your per­son­al saver? In Char­lie, you mean? Char­lie’s also your per­son­al saver? Char­lie Munger. Yeah.

TK: I, I nei­ther [00:01:00] some­one to look up to for gram­mar, but um, yes, Char­lie and War­ren are my per­son­al sav­iors.

Cameron: Well, we just talked about Berk­shire Hath­away and War­ren for about, uh, 20 min­utes, so I’m gonna cut to that and we’ll be back to talk about an Amer­i­can com­pa­ny in a minute. I’m gonna cut to that.

War­ren Buf­fet

TK: Yes. Big news.

Cameron: Berk­shire the 60th. Annu­al meet­ing of Berk­shire Hath­away. He announced that he is retir­ing this year. Um, his 60th and final per­for­mance, and to be hon­est, I mean I watched most of his bit

TK: Oh,

Cameron: Char­lie. It’s not the Yeah, yeah. It’s

TK: Okay.

Cameron: Char­lie. Right. It’s just, uh, you know, I keep wait­ing for War­ren to do his bit and they go, what do you think Char­lie and Char­lie hav­ing some Bon Mo at the end of it.

Some punch­line.

TK: Yeah. Greg Abels. No. Char­lie, [00:02:00] no.

Cameron: No. Is this the sec­ond year with­out Char­lie or the first, I think it’s the sec­ond right.

TK: It’s,

Cameron: annu­al

TK: sec­ond. Yeah, sec­ond.

Cameron: Yeah.

TK: he was­n’t there dur­ing Covid ’cause he had, he had to lock down.

Cameron: That’s right.

TK: Yeah.

Cameron: Uh, so well look, it’s um, and War­ren’s sound­ing his age too at 94.

TK: yeah.

Cameron: pret­ty croaky.

He’s walk­ing with a cane, but I watched, I dun­no, maybe two hours of his thing. Like, still incred­i­bly enter­tain­ing, artic­u­late, just ter­rif­ic telling sto­ries about how a Berk­shire Hath­away lab invent­ed the rear vision mir­ror for a rac­ing car. Uh, they used to have a, they used to have two guys in a rac­ing car, one to look behind them, and their guy was sick and could­n’t make it, so they invent­ed the rear vision mir­rors.

It is like, so if you’re won­der­ing what Berk­shire Hath­away com­pa­nies are doing, just invent­ing things like rear vision mir­rors for cars and stuff like that. There’s some sub­sidiary [00:03:00] of a sub­sidiary of a sub­sidiary that was involved in it. But yeah.

TK: My favorite anec­dote, I, I haven’t, I’ve only lis­tened for the first half of it, and it’s avail­able on both pod­cast and YouTube if any­one wants to do your­self a favor and, and sit down to four and a half hours of it. But, um, my favorite anec­dote was, uh, when they were talk­ing about the cash pile that War­ren had built up and some­one asked him from the audi­ence, um, whether there weren’t enough, uh, fat pitch­es to swing at. And, uh, he said, well, yeah, it’s a bit like life. Um, uh, a a 10 year old’s gonna have a low­er chance of dying tomor­row than a 94-year-old. so you don’t always get the same odds every time, the mar­ket, wher­ev­er you are on the mar­ket cycle. and, and then he said, as to longevi­ty, it’s, I also point out that, that fe females live longer than males. I tried to con­vince Char­lie to have a sex change.

Cameron: It is a great line. It was a great line. Yeah.

TK: Uh.

Cameron: [00:04:00] kid got up and asked him, said that he’d always advo­cat­ed, um, mov­ing slow­ly and were there times when mov­ing quick­ly had ben­e­fit­ed them? Have you heard that one?

TK: Yeah, but go ahead. Tell her. It’s great.

Cameron: Well, no. He just says, you know, there are, there have been times when they moved quick­ly about one guy, I think it was the same guy that sold in the com­pa­ny. They end­ed up build­ing the rear vision mir­ror. But, he found a guy that his busi­ness part­ner had died and this guy did­n’t want to do busi­ness with the guy’s wid­ow.

So end­ed up call­ing War­ren and say­ing, Hey, you wan­na buy my com­pa­ny? And they moved quick­ly and did a deal, like in, you know, 10 min­utes with a hand­shake. he said, you know, ba basi­cal­ly they, they moved slow­ly. To build up the cash. So when they need to move quick­ly, they can. That’s basi­cal­ly, it’s not like you always move slow­ly, move slow­ly until you see the rea­son to move quick­ly and then you move quick­ly.

But, [00:05:00] uh, it was a good, was like a 20 minute answer to the ques­tion, but it was, it was long mean­der­ing, anec­dote filled answer. But it was great and I’m gonna

TK: Oh yeah.

Cameron: the end of an era for many rea­sons. But one of them is just that coun­try bump­kin down home soft, you know, just gen­tle, nice man of integri­ty, old school who does busi­ness with his head held high.

And, know, treats peo­ple with respect, uh, expects to be treat­ed with respect. He said some­thing about. You have to be will­ing to hang up with­in 10 sec­onds, but also like close a deal with­in 10 sec­onds as well. He was talk­ing about how Mo most of the peo­ple he just says no to very quick­ly.

TK: Yeah. Yeah, that, that, um, 30 minute

Cameron: quick­ly.

TK: he’s spo­ken about before where he had, says, I asked five ques­tions, and if they can [00:06:00] answer those, it’s a deal. So, no one’s, no, he’s nev­er, he won’t divulge what the five ques­tions are. Peo­ple have tried to work them out, uh, he has five, five ques­tions and, uh, which is amaz­ing.

And he act­ed very quick­ly dur­ing the GFC to, bail out some of the Amer­i­can banks and to be the lender of last resort and to do two very favor­able deals, deals for Berk­shire Hath­away to recap­i­tal­ize some of the banks at, at tremen­dous inter­est rates back to Berk­shire and con­vert­ible note deals. So, yep.

He’s, he’s

Cameron: I. And Greg had a good fol­low up to that too, where he said, you don’t under­es­ti­mate the amount of work that’s hap­pen­ing behind the scenes when we’re mov­ing slow­ly can move quick­ly when the right deal comes. They said there’s like, I can’t remem­ber the num­ber, but there’s like a hand­ful of busi­ness­es that they under­stand real­ly well, and they’re ready to move on

TK: Yeah.

Cameron: the right price, right oppor­tu­ni­ty comes across their table.

So their due diligence.[00:07:00]

TK: yeah. Sounds like a buy list, does­n’t it?

Cameron: Yeah, they have a buy list. Yeah, exact­ly. They’re just wait­ing for the price to get be ready and for times to be tough enough that peo­ple come to. But as always, peo­ple asked him about, um, well they asked about ai, uh, I think it was Aji. They asked about ai. War­ren said he would take one ADT over a hun­dred ais some­thing like

TK: For the next 10

Cameron: also said AI’s gonna have a huge impact on the Geico busi­ness, the insur­ance busi­ness. But they also talked about the u the prospects of the us A lot of doom and gloom, obvi­ous­ly about the US mar­kets and the future of the us. And War­ren, as always was very of, um. about the future of the us but then also

TK: Yep.

Cameron: that they’ve, they’ve bought a lot of for­eign cur­ren­cies, so I don’t think he’s as opti­mistic about the [00:08:00] future of the US dol­lar, but, uh, yeah.

TK: Well, he, um, made a cou­ple of com­ments and he, he, um, tries not to be too polit­i­cal, but you know, he, he, he said it does­n’t, it does­n’t, it does­n’t end well if one coun­try beats their chest and says, Hey, hey, look at us. We’re real­ly good. And, uh, the rest of you can, go away. said that, you know, world Trade helps all coun­tries, which I think is a, you know, is true. Uh. Some­one in writ­ing about, I think it was, it was War­ren. Um, but, uh, he, he does like to say nev­er bet against the us and he point­ed out at some stage that the, um, mar­ket in the US had risen from $66 to 11,497. This is a few years ago, I guess, despite two world wars of depres­sion and a dozen reces­sions or shocks and flu epi­demics.

So, know, he’s, always [00:09:00] point­ed out the long-term game of, of back­ing the US and the fact that it’s gonna, yeah, prob­a­bly still gonna be around for a while. I thought

Cameron: Yeah,

TK: though he is invest­ing heav­i­ly in Japan and over­seas, for

Cameron: Hmm. It’s cher­ry pick­ing the era though. I mean, he’s talk­ing about the suc­cess of the US dur­ing the cen­tu­ry when the US was basi­cal­ly the pow­er of the world. I mean, there was no oth­er. Um, com­pet­ing forces in that 100 year peri­od from World War I most­ly. After World War ii, the US did­n’t have any com­pe­ti­tion eco­nom­i­cal­ly or mil­i­tar­i­ly, real­ly.

It just, it had, uh, a, a very emp­ty run­way. And it’s not that ca it’s not the case any­more. It’s not gonna be the case for the rest of this cen­tu­ry.

TK: We’ll see, it’s, um, they’ve cer­tain­ly done well so far, the first 25 years of this cen­tu­ry, stock mar­ket’s up dra­mat­i­cal­ly and they’re fac­ing com­pe­ti­tion. But yeah. Um, maybe it’ll be tougher. I mean, I think they [00:10:00] did face com­pe­ti­tion in the first bit of the US in the 20th cen­tu­ry, the end of the British Empire. Um, and, uh, some parts of Europe any­way, so yeah, was, they had a lot of tail­winds for sure. All, all I’m doing is com­ment­ing on what Buf­fet’s say­ing. They may, they may have dif­fi­cul­ty going for­ward. Um, they may have had head­winds last cen­tu­ry. They still have head­winds. I think they’ll do. Okay.

Cameron: Well, we’ll see. Uh, let me move on and do you Moore? Do you have more

TK: I do, I’ve got some, I’ve got some quotes. Um, yeah, so, uh, let me just go, yeah, so just got, just on that, one of his quotes from the, the annu­al meet­ing was that, uh, he accepts that the Amer­i­can process has not always been pret­ty and is invest­ed with scan­dals and pro­mot­ers. Um, so I think that’s to your, you know, com­ments as well about us excep­tion­al­ism. but despite all that, he still says, don’t bet against Amer­i­ca. Uh, [00:11:00] there’s the, there was a, um, a talk about the invest­ment with Apple and Bank of Amer­i­ca. So, The, the quote is, um, Berk­shire has been sell­ing down its enor­mous stake in Apple and Bank of Amer­i­ca as the pro­ceeds have accu­mu­lat­ed into an enor­mous pile of cash, 536 bil­lion Aus­tralian dol­lars. The ini­tial invest­ment was one of the gravest trades of all time. As the firm, which has Berk­shire Hath­away accu­mu­lat­ed 900 mil­lion shares in the iPhone mak­er and Buf­fet equipped that Apple Chief exec­u­tive Tim Cook, made more mon­ey for Berk­shire Hath­away than he ever did. invest­ment grew from about 35 bil­lion to 173 bil­lion US in about six years. How­ev­er, uh, last year, Berk­shire began sell­ing and reduced its apple stake by two thirds. There was some spec­u­la­tion at the time that the sales were part of a suc­ces­sion plan. Giv­en that buf­fet’s 94 years old, buf­fet did con indeed con­firm that he was step­ping down, but he said he had no inten­tion of mak­ing [00:12:00] able, who appar­ent­ly did­n’t know about the suc­ces­sion plan, pri­or to the announce­ment in advance looked good by hand­ing him a wa of cash, the big liq­ui­da­tion of Apple stock proved jus­ti­fied as trade wars and sup­ply chain con­cerns have since sent the stock down as much as 20%. So I think he said some­thing like, when some­one asked him about the pile of cash, was it set up to make Greg look good? He said, no, I wan­na look good. Um, arti­cle today quot­ing some of the, um, Aus­tralian fund man­agers on, on, I. Buf­fett and I should say, uh, in a, you know, in addi­tion to the com­ments I’m about to read out, if you are lis­ten­ing to this and you haven’t read the col­lec­tive Share­hold let­ters, uh, of Berk­shire Hath­away and you haven’t read the Mak­ing of an Amer­i­can cap­i­tal­ist or the Snow­ball, just drop what you’re doing and go and buy both of those and read them because they are the best course you’ll do in invest­ing. [00:13:00] Full stop.

Cameron: Yeah.

TK: Uh, so John Aber­nethy, which is, um, he’s the chair­man of Cli­mate Invest­ment Man­age­ment. and I’ll declare, I’m a direc­tor of CIW now, um, and have been a, uh, a long time fan of John. Uh, but he said War­ren Buf­fett has an over­whelm­ing sup­ply of com­mon sense that gives him the capac­i­ty to invest both log­i­cal­ly and method and method­ol Of course, com­mon sense does not mean that he always gets, uh, things right, but it does allow him to make con­sis­tent­ly good deci­sions and to quick­ly iden­ti­fy and rec­ti­fy wrong ones. Both of these attrib­ut­es make him a great investor, and impor­tant­ly from a human per­spec­tive, a great men­tor to the invest­ment world through his pub­lished thoughts and let­ters. Um, Andrew Mitchell from Man­age­ment said one of my favorite war apho­risms is I don’t look to jump over sev­en foot bars. I look around for one foot bars that I can step over. When­ev­er a [00:14:00] day like Lib­er­a­tion Date tar­iffs come along, I remind myself of Buf­fet’s nev­er waver­ing view of Amer­i­ca and cap­i­tal­ism, and the pos­i­tive sum game that invest­ing is. That was a quote about, uh, the Dow going from 66 to 11,000. Uh, Chris Pro­ti of QVG cap­i­tal says I was 17 when I bought the War­ren Buf­fet way at Dem­mick and t on Can­ber­ra. I read it imme­di­ate­ly and thought, this is what I want to do. That was my first real intro­duc­tion to the world of stock pick­ing. What I’ve learned from him the most is ratio­nal­i­ty and dis­ci­pline, even when ques­tion­ing, even when answer­ing finan­cial ques­tions. He’s deeply ana­lyt­i­cal, always going back to the num­bers. It is incred­i­bly dif­fi­cult to main­tain out­sized returns when man­age man­ag­ing vast sums of mon­ey. Yet no one han­dles more that more than War­ren Buf­fet in terms of mon­ey, and still he’s con­tin­ued to gen­er­ate cred­i­ble, sus­tain­able returns. That com­bi­na­tion of scale and suc­cess is almost unmatched. Final­ly, his will­ing­ness to teach and [00:15:00] share what he’s learned is anoth­er remark­able qual­i­ty. He’s been gen­er­ous with his insights, help­ing oth­ers under­stand the prin­ci­ples behind his suc­cess. And last­ly, Jeff Wil­son from Wil­son Asset Man­age­ment. He says, uh, Char­lie and War­ren’s influ­ence was­n’t just about stock pick­ing, it was about instill­ing com­mon sense and sound prin­ci­ples for both invest­ing and life in gen­er­al. and Munger made com­plex finan­cial con­cepts acces­si­ble and prac­ti­cal teach­ing not only about invest­ing, but also about the skills and mind­sets need­ed for suc­cess. shared life lessons and tran­scend­ed the world of finance. Their abil­i­ty to com­mu­ni­cate the ben­e­fits of long-term invest­ing, dis­ci­pline, patience, and ratio­nal deci­sion mak­ing has left an indeli­ble mark for decades.

They showed us what it takes to suc­ceed in invest­ing, how to think inde­pen­dent­ly, and how to make deci­sions based on thought­ful analy­sis rather than emo­tion. So I echo all of those sen­ti­ments and if I ran the school sys­tem [00:16:00] in Aus­tralia, I’d make, I. For and times of War­ren and Char­lie, of the cur­ricu­lum for all peo­ple going through grade 12, before they enter the the work­force.

Cameron: Roger Lowen­stein, who wrote Buf­fet the Mak­ing of an Amer­i­can cap­i­tal­ist, uh, had wrote an arti­cle in the New York Times Today, the likes of War­ren Buf­fett, we will nev­er see again. And I just want­ed to read a cou­ple of para­graphs from that. He says, Berk­shire’s stock on that day in May that War­ren took over, the com­pa­ny CLO 1963, closed at $18 a share.

When he deliv­ered the news of his retire­ment, it was above $809,000, almost 45,000 times as high over the same span. The Dow Jones Indus­tri­al aver­age is up just under 45 times. How much did you sell your Berk­shire shares for

TK: No, don’t keep remind­ing me. That’s [00:17:00] a lot less than what they are now. it was, I, I, going from mem­o­ry, it was in the three hun­dreds from mem­o­ry thou­sands.

Cameron: ah, ago. So that’s

TK: It was,

Cameron: Yeah,

TK: I did it because I actu­al­ly was con­cerned what hap­pens to Berk­shire Hath­away when War­ren and Char­lie go, and it’ll be inter­est­ing

Cameron: price is down.

TK: Is it okay? I haven’t

Cameron: Yeah. Yeah. I heard it was down like 6% or some­thing after he deliv­ered the news. Lowen­stein goes on. Mr. Buf­fet has long stood out on Wall Street because he its fre­quent chi­canery self-deal­ing and greed, and the dou­ble talk that went with it. He revered the insti­tu­tions of cap­i­tal­ism.

Most espe­cial­ly, he treat­ed the exec­u­tive’s duty to share­hold­ers as a sacred trust, lest he be accused of vio­lat­ing that trust. He kept his annu­al salary at $100,000. He nev­er took a stock option. The unholy tool by which chief exec­u­tives expro­pri­ate a piece of the busi­ness from the [00:18:00] share­hold­ers for whom they are fidu­cia­ries in cor­po­rate Amer­i­ca.

That made him all but unique.

TK: Cor­rect. A hun­dred per­cent. And, um, large­ly did­n’t sell shares along the way. He’s been giv­ing him the char­i­ty as part of the, um, the wealth pack, the giv­ing back­pack, yeah.

Cameron: Yeah. And lived rel­a­tive­ly sim­ply,

TK: Mm-hmm.

Cameron: same car, more or less. Uh, you know, he said he had a few divorces along the way and

TK: We had

Cameron: but

TK: Yeah.

Cameron: Right.

TK: Um, and he, you know, I, he lived sim­ply, I think, I think that may have changed over the years. I think he, I think he was a good mar­keter when it came to that sto­ry. Um,

Cameron: right.

TK: I’ve cer­tain­ly, I’ve been to his house in Oma­ha. It’s cer­tain­ly, you know, a clas­sic mid­dle class sub­ur­ban house in Amer­i­ca. but I think he prob­a­bly has lived out of hotels for a long time. Um, and at at one stage he, you know, there was a cor­po­rate air­craft for Berk­shire Hath­away execs to fly around. And so yeah, [00:19:00] he’s, he’s done Okay. On the lifestyle front. I’m not gonna, but I’m not gonna begrudge him that.

Cameron: but, he did­n’t live some sort of

TK: No.

Cameron: Gordy sort of lifestyle. Like he kept it rel­a­tive­ly sim­ple.

TK: Cor­rect. And you know, I turned on the TV again this morn­ing and there was some clip for some dude from the us. You know, sit­ting in a Maserati or dri­ving a Fer­rari, singing any song and on a yacht and, you know, drink­ing cham­pagne. And I’m just think­ing that’s, yeah, that’s, that’s not a good image in my opin­ion. War­ren’s image is much bet­ter. I

Cameron: All right. Any­thing more you wan­na say about War­ren before we move

TK: no, just, and we’re kind of sound­ing like he’s passed on. He has­n’t, it’ll, he’s, he’s prob­a­bly still gonna exert an influ­ence on Berk­shire Hath­away. But yeah, next year, next year’s a GM will be inter­est­ing. Um, War­ren leaves, I think in Decem­ber, uh, so it’ll be six months under Greg and Aji and, and Todd and Ted and every­body else. I sus­pect, [00:20:00] you know, War­ren’s thought long and hard about suc­ces­sion and how to struc­ture Berk­shire, so it’s hard to take over and break up and, and to give, um, Greg the right kind of, uh, train­ing to trust agent and to trust the invest invest­ment team, et cetera. So, um, yeah, it’ll be inter­est­ing to see what hap­pens.

Cameron: Do you think 30,000 peo­ple will turn up to the annu­al meet­ing once War­ren’s not there?

TK: I have thought about this. It’s more than 30. The, the, when I was there, it’s like there’s a big, used one of the are­nas which holds 40, I think 40,000 peo­ple. But if you don’t camp, how at, at, you know, ear­ly in the ear­ly hours of the morn­ing, I think I got there about 4:00 AM You don’t get a seat, you’re forced across the road into one of the hotel ball­rooms to see it live on tv. So it’s more like prob­a­bly dou­ble that turn up to Oma­ha to, um, to go to the A GM. uh, I think if War­ren turns up as a share­hold­er, I think yes, I’d be sur­prised if I was Greg Abel, I’d be invit­ing him up on stage to take some ques­tions. [00:21:00] I dun­no if War­ren will do that, but, um, if, if he, if the sort of peo­ple think he will, they’ll turn up. Um. I think, uh, some peo­ple will turn up just to see what, uh, how Greg per­forms and what’s hap­pened with, um, Berk­shire Hath­away to get some kind of com­fort that there’s essen­tial­ly no change in the strat­e­gy. But you know, it’ll be inter­est­ing to see.

Cameron: All right, let’s move on.

Before we get into your. dive for the week. Tony, I just wan­na touch on the per­for­mance of our US dum­my port­fo­lio. I men­tioned last week, I start­ed this in Sep­tem­ber, 2023, so it’s been going for 18 months. Now cur­rent per­for­mance over that time is 56.51%. That’s the return on it in that 18 month peri­od ver­sus the s and p 500, which is up about 27% over the same time­frame. So if I look at [00:22:00] the last year. We’re up about 38% over the last 12 months ver­sus the s and p up about 10%. And if I look at year to date, it has not been as glam­orous. We’re down 16 point a 5% year to date ver­sus the s and p down 4%, and I’m sit­ting on about $4,000. Cash in the port­fo­lio that I haven’t been able to invest yet. I did a buy list last week when I went to, uh, buy stuff. Every­thing was hav­ing a down day. I could­n’t find much. I think I found one thing we talked about last week. I did anoth­er buy list on the week­end, uh, with the inten­tion of try­ing to. Find time to spend that mon­ey. Yes­ter­day had a whole bunch of things blow up in my face yes­ter­day, so I did­n’t get to do it, but I’m gonna try and, which is about like, it’s about, I dun­no, 25% of our port­fo­lio that that’s sit­ting in cash, which is an ide­al.

So I’m try­ing to get rid of that as [00:23:00] soon as pos­si­ble this week. Alright. But it’s doing well. I mean, basi­cal­ly we said, I think last time when we. I start­ed think­ing about how we applied your frame­work to the US mar­ket. We weren’t real­ly sure how it would go. We have a dif­fer­ent data provider over there, stock edia than we were using here, which did­n’t have all of the data that we nor­mal­ly use.

And some of it was a lit­tle bit dif­fer­ent and I had to mod­i­fy the check­list process. But, uh, you know, up 58% in that 18 month peri­od is good. So it’s work­ing well.

TK: It is and no mag sev­en stocks to be seen in the port­fo­lio.

Cameron: No, they’re all bor­ing ass ship­ping and local finan­cial ser­vices com­pa­nies, uh, you know,

TK: thanks.

Cameron: uh, yeah, bor­ing, bor­ing com­pa­nies that are just gen­er­at­ing a lot of cash

TK: Hmm.

Cameron: that we can buy cheap­ly

TK: Yes, [00:24:00] exact­ly.

Cameron: are a great com­pa­ny at fair val­ue.

TK: Well, yeah, I think the val­ues are even fair. Bet­ter than fair. uh, you know, buy­ing a bank at three times cash flow is pret­ty Good price.

Cameron: than fair. Hmm.

TK: fair. Yep.

Do you

Cameron: that.

TK: stock stocks for begin­ners? So.

Cameron: yes,

TK: let our lis­ten­ers know uh, Phil Musk, Carel­lo friend of our, our show is, um, inter­viewed me last week and will put out a, US Stocks for Begin­ners Show where he, we talk about my back­ground and how QAV works. So any­one who’s inter­est­ed in know­ing more about QAV, look out for stocks for begin­ners in your pod­cast feeds.

Cameron: And thank you, Phil, for hav­ing Tony on yet again.

TK: Yeah. Thanks Phil. Good to see Phil. I haven’t seen him for a while. He was, um, he’s liv­ing up in the North coast now, telling me about look­ing over the riv­er. Sounds won­der­ful.

Cameron: I keep telling him we’ve got­ta catch up for [00:25:00] lunch, but

TK: Hmm.

Cameron: blow­ing me off. I’m start­ing to take it per­son­al­ly.

 now I, I did­n’t have time to do a prep for a deep dive on an Amer­i­can com­pa­ny today, Tony, but you took that for me, which I appre­ci­ate.

\ So just to explain to peo­ple before you get into doing your deep dive or your pulled pork as we call it. The rea­son we do these is for peo­ple that are new to QAV, just to explain in a lit­tle bit detail in each episode by tak­ing a case exam­ple, one com­pa­ny that we can, uh, look at in a lit­tle bit more detail. How we, uh, val­ue the dif­fer­ent fun­da­men­tal met­rics and why we val­ue them. So don’t often when we’re, when we’re doing our analy­sis, get too deep into the sto­ry of any busi­ness or the his­to­ry. We tend to just look at the num­bers. But we find it is help­ful if you take one par­tic­u­lar exam­ple and you, uh, break it apart and. inter­est­ing for me any­way, to learn a lit­tle bit more about some of the busi­ness­es that are on our buy list [00:26:00] each week, but also gives Tony an oppor­tu­ni­ty to talk about the num­bers and how we scored it and why it’s on the buy list. I guess

TK: No, I agree. I always nice to know a bit about what we’re buy­ing, but we are focus­ing on the num­bers and then a bit of the pic­ture about the com­pa­ny, um, behind it. it’s uh, it’s prob­a­bly more rel­e­vant to my Aus­tralian invest­ing expe­ri­ence, but do sort of learn, I. things along the way too.

And, um, that can come up dur­ing a pulled pork. one of the stages before I buy some­thing is to do a quick, um, mar­ket scan of any news. You know, some­thing you have to take into account and your, um, deci­sion to buy this stock ver­sus some­thing else on the buy list, not just the score.

so yeah, I think it’s, I think it’s worth­while doing a pulled pork, but it also does show, um. How you can have some­thing going on in the mar­ket, like how is the tar­iffs going to affect the Cana­di­an econ­o­my, which is pret­ty uncer­tain. [00:27:00] Um, and the busi­ness oper­at­ing in that mar­ket, but still scor­ing well on the num­bers, um, which gives me some it.

Cameron: All right, let’s get into it.

TK: I am gonna do a deep dive on a Cana­di­an com­pa­ny, cam, uh,

Cameron: Oh, okay.

TK: Bank of Com­merce, the IBC as it’s known, uh, and the code is cm. And of the rea­sons why I picked this is because my wife used to work for CIBC when we lived in Toron­to up until six odd years ago. my expe­ri­ence is a lit­tle bit out of date.

Um, but it was, um, it was nice to see a com­pa­ny I knew first­hand on the. On the buy list, even though we don’t live in Amer­i­ca. Um, and, uh, we don’t have any shares in CIBC any­more. Jen­ny had some she was work­ing there, but, um, they’ve been sold over the years. Uh.

Cameron: Mm-hmm.

TK: And the oth­er point, I guess to use as a pref­ace is that this is a dual list­ed com­pa­ny.

So it’s, it is [00:28:00] list­ed on the New York Stock Exchange. Um, cm, as I said, is the code, but it’s also dual list­ed in the Toron­to Stock Exchange as well. I’ll be US dol­lars in this analy­sis and the US list­ing as the basis for the com­men­tary. So CIBC, Cana­di­an Bank. What does it do? Well, it’s pri­mar­i­ly a retail bank, is prob­a­bly the first thing to say.

have expand­ed a lot out­side of just, um, pro­vid­ing mort­gages to peo­ple, to cus­tomers. They also, and cred­it cards, and I. Loans for, uh, to buy cars and oth­er per­son­al needs. Um, and like all the Cana­di­an banks now, they have got­ten into wealth man­age­ment in a big way. Um, and, uh, facil­i­tate share trad­ing and things like that.

But they’re basi­cal­ly a retail bank, so they’re not like your Gold­man Sachs or your Deutsche Bank out there doing big merg­ers and acqui­si­tions deals. They do a bit of that, but, but pri­mar­i­ly they’re a retail bank. Why is that impor­tant, cam? Because dur­ing the GFC, [00:29:00] the four. Big banks in Aus­tralia and the five big banks in Cana­da through, um, intact and large­ly unscathed, which was more than almost any oth­er bank in the world.

And you, you can remem­ber the, the, the cri­sis that the GFC that kind of kicked off the GFC was a lot of, uh, prob­lems with a cou­ple of banks in the UK and with, um, the banks in, uh, on Wall Street. So, um. Retail bank­ing, even though it was seen as a fair­ly stodgy busi­ness sec­tor, um, sailed through, uh, the GFC from a risk point of view.

And Cana­da and Aus­tralia were the only two sec­tors that did that. Uh, CIBC is head­quar­tered in Bay Street, Toron­to, which is the Wall Street of Cana­da. as an aside, bay Street used was often shut down as I was going to pick Jen­ny up after work. and it was full of. Film trucks set­ting up to use, uh, the Cana­di­an, finan­cial [00:30:00] dis­trict as a back­drop for series like suits and movies.

Um, sui­cide Squad was filmed up there. Um, and as of today, there may be a hun­dred per­cent tar­iff on over­seas pro­duced movies and TVs. So we’re all, um, wait­ing to see what hap­pens with that announce­ment. Um, what else can I say about CIBC? From my own per­son­al expe­ri­ence, I always found their branch­es in Toron­to com­fort­ing.

They were large and spa­cious and had chairs for peo­ple to sit in and bowls full of lol­lies to munch on, and I always thought that was an inter­est­ing strat­e­gy, being a, an old retail­er myself. Um, then I found out it was dri­ven by the desire to pro­tect old peo­ple dur­ing the Cana­di­an win­ter. So CIBC was try­ing to posi­tion their.

Their branch­es is a bit of a haven in the snow­storm, lit­er­al­ly. Um, and, uh, look after its cus­tomers when the weath­er was­n’t great. Um, dif­fer­ences? Um, the Cana­di­an bank­ing sys­tem were a big user of checks to pay for things. Um, they did­n’t [00:31:00] have, like we have in Aus­tralia, a pay, pay from account to account between the bank­ing, I.

Uh, the banks in Cana­da. So, know, um, if you had to pay a bill, you wrote a check and put it in an enve­lope, send it off to the gas com­pa­ny, and you did­n’t, um, online and do a, you know, pay any­one trans­fer like we have in Aus­tralia. Now, that may have changed since, um, I’ve left Cana­da, but it was cer­tain­ly a, um, an idio­syn­crat­ic part about the Cana­di­an bank­ing sys­tem.

Um, the oth­er, I guess, uh, thing to high­light was. The Cana­di­an pen­sion sys­tem is a bit dif­fer­ent to Aus­tralia and to the us in that, um, I think last count was about 40% Cana­di­an pen­sion funds are still what’s called defined, defined ben­e­fit plans. Um, we have almost none of those left in Aus­tralia.

We have defined con­tri­bu­tion. Plan. So a defined ben­e­fit plan gives a retiree a cer­tain mul­ti­ple of their last salary or of their last three years, um, as a, as [00:32:00] an ongo­ing pay­ment, almost like a, like a pen­sion pay­ment. And, um, the pen­sion plan bears the risk on being able to do that as opposed to defined con­tri­bu­tion plans, which say we all pay in a cer­tain amount and then the end user faces the, um, the risk if the share mar­ket goes down or if.

The world goes into reces­sion. Um, dif­fer­ent ways of man­ag­ing it. But I, I guess if you’re an actu­ary, head over to Cana­da. ’cause that’s, um, that’s where the action is if you’re an actu­ary. Not the, not that they see them­selves as being action ori­ent­ed, but that’s where they should head to. Um, but it has meant that in Cana­da there are some large com­pa­nies which have ben­e­fit­ed from that envi­ron­ment.

investors, uh, around the world may have heard of things like the Ontario Teach­ers Pen­sion Um. Omers, the Munic­i­pal Employ­ees Retire­ment Sys­tem of Ontario. Um, and also big com­pa­nies like Brook­field Asset Man­age­ment, um, which are com­pa­nies, um, oper­at­ing these, these kinds of, uh, [00:33:00] pen­sion plans.

And they, they’ve pooled the assets and are now invest­ing in a lot of com­mer­cial prop­er­ty around the world. All of unlist­ed assets, infra­struc­ture, for exam­ple, but also in large com­pa­nies. So that’s some­thing which, which, um, has sprung up from Cana­da that peo­ple may have expe­ri­enced. Uh, what can I say?

What does Cana­di­an Impe­r­i­al Bank of Com­merce say about them­selves? They have over 14 mil­lion per­son­al bank­ing, busi­ness, pub­lic sec­tor, and insti­tu­tion­al clients in North Amer­i­ca and around the world. com­pa­ny has four strate­gic busi­ness units, Cana­di­an per­son­al and busi­ness bank­ing, Cana­di­an com­mer­cial bank­ing and wealth man­age­ment, US com­mer­cial bank­ing and wealth man­age­ment.

Cap­i­tal mar­kets and direct finan­cial ser­vices. DIBC is part of the Big five in Cana­da, um, like the Big four in Aus­tralia. C like C, B‑A-A-N‑Z, West­pac and Nation­al Aus­tralia Bank. There are five com­pa­nies. Like that in Cana­da togeth­er, they Mabb, they make up for, uh, they make up [00:34:00] 84% of the mar­ket share in Cana­da for bank­ing.

Um, how­ev­er, CIBC is at the small­er end of the big five, um, depend­ing on how you mea­sure mar­ket share by rev­enue or by, oth­er ways. See the four or five, um, in, in terms of its mar­ket cap size, it’s about the same size as a NZ in Aus­tralia, which only some­thing to, um, Aus­tralian lis­ten­ers. Uh, RBC is the Roy­al Bank of Cana­da is the largest bank.

and, uh. Inter­est­ing­ly enough, uh, RBC has 26% of its rev­enue com­ing out­ta the US now. So in the last sort of 10 to 15 years, the Cana­di­an banks have diver­si­fied into the us. RBC lived the charge. So the tar­iff, um, and uh, tar­iff risks are, uh, a hot one for a bank like RBC and also for CIBC. But, um, it’s a small­er issue for them giv­en that they’re a small­er.

Uh, bank and, [00:35:00] haven’t been as suc­cess­ful at get­ting into the US as, um, RBC, but I’ve got a cou­ple of quotes here about the issue. this one. Um, actu­al­ly from an RBC cap­i­tal mar­kets ana­lyst who says, Cana­di­an bank stocks could see anoth­er nine to 16% down­side if Pres­i­dent Trump’s tar­iff threats mate­ri­al­ize and can Canada’s econ­o­my weak­ens?

Our obser­va­tions indi­cate that banks with the largest mar­ket expo­sures to eco­nom­ic uncer­tain­ties tend to be penal­ized by the mar­ket. Uh, medi­an prices of large Cana­di­an bank stocks have declined approx­i­mate­ly 7% since Trump’s Feb­ru­ary one tar­iff order on imports from Cana­da, but says val­u­a­tions do not reflect the worst case sce­nario.

Uh, bro­ker­age says that, uh, CM and BNS two banks with high­line expo­sure to Ontario and Mex­i­co have been hit the har­vest while b and o and NA, with low­er risk. Pre­mi­ums have held up bet­ter. So again, their, [00:36:00] um, oth­er banks in Cana­da, LA last month, top Cana­di­an banks said they would wait for clar­i­ty on US gov­ern­ment tar­iffs before increas­ing, um, rainy day reserves and tak­ing a cau­tious stance as trade risk cloud, the eco­nom­ic out­look.

So that’s, um, on the fact that the trade. Uh, issues and tar­iff, tar­iffs on Cana­da and Mex­i­co will affect these banks. How­ev­er, if you look at the sen­ti­ment chart that we have for cn, um, it’s actu­al­ly been rea­son­ably bull­ish. Um, I’ll just call it up. If I look at, uh, CN in, uh, the New York Stock Exchange.

Just bear with me while the court went up. The graph says that, um, it’s load­ing. Here we go. Still [00:37:00] load­ing.

Uh, look like it’s hav­ing prob­lems load­ing at the moment, but, but, um, from look­ing at it before, it’s, um, the trend is upwards in the, in the fair price for, for, um, the IBC and it’s above its spy line, um, and, and above its cell line. So it’s, um, cer­tain­ly get­ting strong sen­ti­ment even though there’s a lot going on, um, in the us uh, us.

Um. Or in this mar­ket, in bank­ing mar­ket in Toron­to. Um, the oth­er thing which

Cameron: open in front of me, Tony. It’s, it’s like it’s trad­ing at near­ly an all time high, is inter­est­ing. I look at it, look­ing at it’s 10 year charts, cur­rent­ly trad­ing at about $63 78 all time high­er. Was only, um, like late last year and it was slight­ly north of that. Maybe 64, 60 $5. But, uh, it’s, uh, look­ing very, very strong.

TK: Yeah, which is sur­pris­ing every­thing that’s [00:38:00] going on, uh, with, with tar­iffs and how it would affect the Cana­di­an econ­o­my and, oper­at­ing in the US as well. I. The oth­er, um, the oth­er inter­est­ing thing is, uh, that they’re an, they’ve announced that their, uh, CEO’s going to tran­si­tion, um, to retire to retire­ment in Octo­ber, uh, and be replaced by a chap called Har­ry Cohan, um, that cur­rent­ly the head of the Cana­di­an Banks Cap­i­tal Mar­kets Divi­sion.

So he will serve as c uh, chief Oper­at­ing Offi­cer as of April one this year, and take over as CEO in Novem­ber one. Uh, inter­est­ing thing about him is that he start­ed off in, um, he’s come up through the ranks in CIBC, so think it’s always good to see suc­ces­sion from with­in. Um, you’ve cer­tain­ly got some­one who under­stands the busi­ness inside and out.

he says, I under­stand the risk quite well. This is about the trade, the trade, uh, issues between the [00:39:00] US and Cana­da. I under­stand risk quite well. It’s one of my strengths. We’re not wor­ried col­umn said in an inter­view with Reuters, which I think is a bit of hubris real­ly, but to say you’re not wor­ried.

But, um, any­way, hope­ful­ly he’s a bit, uh, a bit more, um, san­guine when he, when he, uh, the busi­ness. And takes over the busi­ness. He says, we can con­trol the con­trols and we think we’re good at that. We went through Covid, we’ve been through oth­er ups and downs. Reuters reports that Colum joined CIBC in Van­cou­ver as an intern in its grad­u­ate.

Uh. Pro­grams. He held senior bank­ing roles in Europe and Asia before rejoin­ing CIBC in 2008. So at the end of the GFC, became the head of the Cap­i­tal Mar­kets unit in 2015. Um, what else can I say? Uh, an RBC Cap­i­tal Mar­kets ana­lyst said that Colum brings sol­id expe­ri­ence in cap­i­tal mar­kets that will be be ben­e­fi­cial to the bank, even though his per­son­al and com­mer­cial bank­ing expe­ri­ence is [00:40:00] rel­a­tive­ly lim­it­ed.

Um. Yeah, so I can go on, but we’ve cov­ered most of the issues that they talk about there. Uh, so. Let me, let me talk about their results. And this is, I think, what was dri­ving the share price recent­ly. And I wan­na also high­light that, uh, we use the Q1 results deliv­ered on Feb­ru­ary 27, for our QAV analy­sis, which I’ll go through in a minute.

but the next results are going to be announced on May 29. And giv­en all that’s hap­pen­ing, all we’ve just spoke about with the, um, tar­iffs that have been imposed on Cana­da or Mex­i­co, the results may change and guid­ance may change. So we may not see a huge change in num­bers in the three months, um, the tar­iffs were announced, but cer­tain­ly guid­ance may change.

But the last, uh, set of results were very good. Rev­enue was up year on year, 17%. Earn­ings per share was up 22%. Um, both sol­id, uh, results. Uh. NIM. So net [00:41:00] inter­est mar­gin is some­thing ana­lysts will focus on was 1.5%, and that’s broad­ly in line with what we see with Aus­tralian banks. on equi­ty was 13.3%.

Again, we don’t focus on return on equi­ty our cal­cu­la­tion, but that’s a good num­ber for a bank. com­mon equi­ty tier one ratio was 13.3%, so we. We’ve spo­ken about the, the tier one ratio when we’ve done pulled porks on Aus­tralian banks before, but basi­cal­ly it’s the amount of cap­i­tal, um, which does­n’t have to be cash, but it can be, um, things that they can liq­ui­date in the short term, which is a buffer for any sort of run on a bag if there’s a, a down­turn in the econ­o­my.

And reg­u­la­tors will set, um, a tier one cap­i­tal ratio and tier two and tier three. Um, um. Scaled to be, uh, how quick you can liq­ui­date the, the assets which are avail­able to pay­out cus­tomers who want to redeem their sav­ings from the, from the bank. And the high­er that num­ber gen­er­al­ly [00:42:00] seen as being the, the stronger the bank.

And 13.3 is, is a pret­ty strong num­ber for, tier one ratio. So not only is the bank doing well year on year, but it’s also pret­ty robust as from a reg­u­la­to­ry point of view. So that’s good. As I said, these results occurred pri­or to lib­er­a­tion days, and so the next results, results will be an impor­tant update.

Um, but, you know, um, to use a, to, to bor­row a war­rant, a apho­rism, we’re buy­ing straw hats in win­ter with this bank. It’s, it’s, um, cheap based on its cur­rent met­rics, and the sen­ti­men­t’s still strong, so it has­n’t been sold off because of Lib­er­a­tion Day. So, um. We’ll see what, what hap­pens in the future.

But at the moment, it’s worth look­ing at QAV num­bers. Um. To ana­lyze the stocks, the stock price I used was $63 72. That’s less than our intrin­sic val­ue num­ber one cal­cu­la­tion of 77 point 39, but above our intrin­sic val­ue num­ber two cal­cu­la­tion of [00:43:00] $37. And peo­ple can go to the web­site and have a look at what, um, those cal­cu­la­tions are.

But basi­cal­ly it’s a, a deep val­ue intrin­sic val­ue cal­cu­la­tion and one which is more in line with how ana­lysts will, um, put a price on this com­pa­ny. Uh, as I said, sen­ti­ment is an uptrend. Oh, here we go. I’ve got my notes here. The buy price is cur­rent­ly $55, um, 23, and the stock price is $63 72, so it’s above the buy price.

DT aver­age dai­ly trade for this com­pa­ny is $70 mil­lion, so it’s, it’s very liq­uid and would suit most, uh, per­son­al investors. I think prob­a­bly all per­son­al investors price to oper­ate in cash flow is just above three times, so it’s a very cheap, um. Pay­back. If you invest in this com­pa­ny based on the oper­at­ing cash, it’s throw­ing off, Wikipedia ranked this com­pa­ny as 69 out of, um, a hun­dred, which is a bit on the low side.

We, we, uh, give it a score on our check­list if the qual­i­ty is above 60, a rank­ing of 60 in Wikipedia. [00:44:00] I think the rea­son for it is, um, even though, CIBC gets an F score of six out of nine, which is real­ly good. And an F score is a way of valu­ing the qual­i­ty of the finan­cials of com­pa­nies. There’s no ZED score, which is anoth­er way of, um, look­ing at the bank­rupt­cy risk for com­pa­nies.

And so we can’t score it for that. And I think we, well, I’ve seen this before, um, that the qual­i­ty rank­ing, uh, styles or sys­tems. Like in the Stock Doc­tor in Aus­tralia often have prob­lems adapt­ing them­selves for bank­ing com­pa­nies and finan­cial ser­vices com­pa­nies. ’cause they basi­cal­ly come out of scor­ing indus­tri­al com­pa­nies.

Um, and banks have a dif­fer­ent kind of, um. play of the met­rics than, um, than indus­tri­al com­pa­nies. So I think that’s why the, qual­i­ty rank­ings a bit low­er in stock. Edia, there’s no DZ score, but over­all stock edia rank, uh, CIBC is 96 out of a hun­dred, which is quite high. So, um, that’s good. We score it for that.

Um, PE [00:45:00] ratio is just over 10 times and it’s in the range for the last three years, so we don’t score it for being, um, above or below that range. Um. Can’t score it on pe. Earn­ings per share growth is fore­cast at 11%. But if I put 11% over the, uh, PE score, get­ting a, a. Price to, uh, earn­ings growth of 1.06 and we look for a thresh­old of 1.5 before we give it a score in QAV.

So no score for that. Uh, yield is high, but not, um, high­er than the aver­age mort­gage rate. So yield is 4.17%, so we don’t score it for that. per share is $59, so I can’t score it for book val­ue, so we can’t buy it for less than book, but we can buy it for less than book plus 30, which is 77 point 48.

So that’s, um. That’s good that we can buy it for just above its assets. Uh, this com­pa­ny’s been around for a long time and it’s a large bank, so don’t have an own­er founder, so I can’t score it for that. book val­ue is increas­ing, so we like to see [00:46:00] con­sis­tent­ly increas­ing equi­ty over the last three years, so we score it for that.

So over over­all, the qual­i­ty score is 64% and when we plugged it into the check­list, we get a QAV score of 0.21, which is quite good a, for a bank. So it’s good. Um. I think I’ve out­lined the risks as we’ve gone through the analy­sis, but just to say again, to high­light the next earn­ings call will be an inter­est­ing one, which comes up in a week or so.

Um, and so I high­light this as some­thing to put on the buy list for cus­tomers in the US for, for lis­ten­ers in the us. Um, they might wan­na wait until the, the only call comes out to see how, um, the num­bers pan out after that, to watch.

Cameron: Thank you Tony.

Have a great week. We’ll be back next time. If any­one has any ques­tions, don’t for­get to go to QAV america.com and uh, find my email address on there.

Shoot me an email if you’ve got ques­tions for the show for next week.

TK: Yeah, please. We need a, we need a US Trent [00:47:00] to ask us lots of ques­tions. One of our lis­ten­ers in Aus­tralia,

Cameron: Glad you explained that.

TK: good.

[00:48:00]