Transcript #604

QAV 604 CLUB EDITION

Cameron  00:06

Wel­come back to QAV. This is episode 604, we’re record­ing Tues­day the 24th of Jan­u­ary. How’re you doin’, TK?

Tony  00:17

Very well, thanks, Cam. I just got back from Tas­ma­nia.

Cameron  00:20

Oh, how was Tas­ma­nia?

Tony  00:23

Yeah, real­ly good. Been play­ing golf at Barn­bougle.

Cameron  00:27

Barn­bougle?

Tony  00:28

Din­ner in Launce­s­ton. Yeah, real­ly good. Great place. We had good weath­er, so not much wind. It was love­ly.

Cameron  00:34

Yeah, that’s love­ly. And Alex tells me she and Sean are going down soon, too. You told me that actu­al­ly.

Tony  00:40

Okay. They’re going down I think the 12th of Feb. Some­time around then.

Cameron  00:43

I’m so jeal­ous. I got­ta get down there one of these days.

Tony  00:47

It’s a great place.

Cameron  00:48

Yeah. Got to do a QAV din­ner.

Tony  00:51

Yeah, that’s a good idea.

Cameron  00:53

Some of our Tas­man­ian lis­ten­ers organ­ise it so all we need to do is turn up.

Tony  00:58

Did­n’t we sit next to some­one who oper­at­ed a resort in Tas­ma­nia?

Cameron  01:02

At the whisky thing last year. Yeah. They invit­ed me to go down and be their artist in res­i­dence for a while down there. Writer in res­i­dence. And with that, let me see. Let’s get straight into it because it’s hot as hell in my office today. Port­fo­lio updates are where I like to start. I had a look at our port­fo­lio this morn­ing for the club newslet­ter. Since incep­tion, the dum­my port­fo­lio as of this morn­ing was up 19.6% per annum.

Tony  01:39

That’s gone up in the last cou­ple of weeks, has­n’t it. That’s good.

Cameron  01:42

It has, yeah. Shot up a good point, I think, in the last week. Hold on, let me see if that’s right. Yeah, no, sor­ry. That was last week’s num­ber. It’s dropped a bit since last week, I think.

Tony  01:53

Oh, okay.

Cameron  01:54

Let me see. It’s 18.72% per annum — I think it was 19% last week — ver­sus the STW, which is run­ning about 8% per annum over the same time peri­od. For the finan­cial year, though, the STW is up 20.98% ver­sus 8.8% for the dum­my port­fo­lio. So, we had a good week, we’re up ver­sus where we were last week, but still try­ing to catch up to the STW. In the last thir­ty days the num­ber one stock has been CLX, up 21.5%. In the last thir­ty days, SMR up anoth­er 14.7%, NCK, Nick Scali, up 10.5%.They’re the top per­form­ers in the last thir­ty days. CLX? I don’t even remem­ber who that is. Who is CLX and what do they do, do you remem­ber?

Tony  02:44

It’s a logis­tics com­pa­ny. I think it’s CLI Logis­tics.

Cameron  02:49

That sounds right. I won­der why their share price is doing so well late­ly. Peo­ple buy lots of stuff and got­ta move it around or some­thing. Any­way, who knows.

Tony  02:57

I know Nick Scali is prob­a­bly rid­ing the boom of price infla­tion, which is some­thing we talked about last week. I think Super Cheap Auto came out then JB Hi-Fi came out, both dur­ing con­fes­sion sea­son, say­ing “hey, our results are going to be bet­ter than what peo­ple think.” And that sort of washed through a lot of oth­er retail stocks as well, includ­ing Myer, which I just want­ed to touch on briefly. So, Myer is up, last time I looked it was like 81 cents, so a long way above when we last held it, I think, which was around 55 cents. But hav­ing a good run. And I did pick up an arti­cle in the Fin Review last week say­ing that the fund man­agers are start­ing to take notice of Myer because of the share price increase and are expect­ing to buy some more or per­haps even there be some cor­po­rate activ­i­ty in them.

Cameron  03:42

I seem to recall when I owned Myer it went up gang­busters and then it came down gang­busters, and I may have bro­ken even or got out a lit­tle bit ahead. But it was up like, I don’t know, 70–80% at one point last year.

Tony  03:59

That may be the issue with Myer. If peo­ple are buy­ing it because they expect some­one to lob a takeover offer, then if that does­n’t hap­pen, the price will drop again. And the oth­er thing that we should men­tion about, with all these retail­ers, is that their sales are up but a lot of that’s due to price infla­tion. So, sales are up because they’re buy­ing stuff at a high­er price and then pass­ing on that price rise to cus­tomers. So, they might be sell­ing as much in terms of unit vol­ume, but they’re just get­ting a bet­ter price for it. So, if infla­tion gets tamed then that will start to reverse itself which might hurt the retail­ers going for­ward.

Cameron  04:32

It’s cur­rent­ly trad­ing at 89.5 cents, Myer, up from 85 cents at close yes­ter­day. I saw some of the guys on the Mel­bourne chat group all excit­ed about Myer this morn­ing. I think what hap­pened to it last year from mem­o­ry is Jeff Wil­son dumped a big par­cel, and I’ll nev­er for­give him for that because he ruined my par­ty.

Tony  04:53

You get invit­ed into the Mel­bourne chat room, did you?

Cameron  04:55

I did get invit­ed. It’s crazy. They send, like, five hun­dred mes­sages a day in there. I think these guys have got noth­ing else to do but talk about invest­ing all day. It’s drink­ing from a water hose.

Tony  05:10

A fire hydrant?

Cameron  05:11

Yeah, that’s the one I meant. Before we move on from our port­fo­lio updates, I want­ed to just point out that we haven’t had any trades, we haven’t done any trades in the dum­my port­fo­lio for over two months.

Tony  05:25

Wow.

Cameron  05:25

The 21st of Novem­ber was the last time I trad­ed any­thing in the dum­my port­fo­lio. So, it kind of seems like it’s back to nor­mal-nor­mal. I know that you say even down­turns and chop­pi­ness are nor­mal, but, you know, I remem­ber the first cou­ple of years we were doing this, we very rarely had to trade any­thing in the dum­my port­fo­lio. Then, of course, in the last year, it was real­ly, real­ly chop­py. We were trad­ing things all the time and a lot of rule ones. For peo­ple that got start­ed at the begin­ning of last year, that was their intro­duc­tion. But yeah, with the dum­my port­fo­lio, and also with the light port­fo­lios, too, I haven’t real­ly had to sell. I’ve had to sell a cou­ple of things to be hon­est, but we hold about eighty stocks and the light port­fo­lios now, so there’s a big­ger spread of things to wor­ry about. But very, very lit­tle trad­ing going on in our port­fo­lios at the moment, which is kind of nor­mal, right?

Tony  06:20

That’s prob­a­bly why Alex Hay has­n’t rung me up and asked me out to lunch recent­ly, because I haven’t been trad­ing very much either. Same deal. I mean, we kind of fore­cast this because when the inter­est rates start­ed to rise, I said, “look, the mar­ket’s going to be unsteady for a while until it gets com­fort­able with this. Peo­ple are going to repo­si­tion their stocks to take all this move­ment and inter­est rates into account.” And now peo­ple are start­ing to think we’re near­ing the end of the inter­est rate rais­ing cycle — whether we are or not, who knows — and are get­ting com­fort­able with it. But I noticed the VIX is down, which is the volatil­i­ty index that’s trad­ed on the Chica­go Board, I think. That’s also mea­sur­ing volatil­i­ty in the stock mar­ket, which is down. So yeah, it makes sense that we’re not trad­ing very much.

Cameron  07:04

Right. Let’s talk about fees. So, on the show last week you asked peo­ple to give us some feed­back on how their fee sit­u­a­tion has changed, the fees that they used to pay to finan­cial advi­sors since they start­ed with QAV, and we got a cou­ple of emails that were quite inter­est­ing. Michael said, “I was pay­ing a flat fee of $4,000 a year after nego­ti­at­ing a down from a high­er fee for finan­cial advice. Now pay­ing a QAV and Stock Doc­tor sub­scrip­tion, so a sig­nif­i­cant sav­ing on fees.” So, that’s good, prob­a­bly cut his fees by a third to a half I imag­ine, depend­ing on which of our plans he’s on and Stock Doc­tor plans. Den­nis also sent us an email and said, “ongo­ing cost of finan­cial advice was about $350 per month aver­aged over the year, but that’s after the huge cost of the state­ment of advice which I over­paid for, appar­ent­ly. Any who, we’ve had a high turnover of stocks these last few months, so I’m unlike­ly to churn fif­teen stocks every three months for the rest of the year, right?” Right. “So, will def­i­nite­ly end up ahead on a few counts; not pay­ing a use­less finan­cial advi­sor and not pay­ing the high fees for the funds that also under­per­form the mar­ket. Win­ning. I snagged the Christ­mas spe­cial on Stock Doc­tor, so get four months free. So, that plus the QAV sub and I’m ahead about three grand. The finan­cial advi­sor was an addi­tion­al 1.3% on a $300,000 bal­ance which is about 4k, was as high as $400,000 bal­ance or more expen­sive then. So, please tell TK it’s total­ly worth the effort to DIY with QAV.” So, that’s good, good feed­back.

Tony  08:44

Yeah, thank you for that for those two lis­ten­ers. That last lis­ten­er also includ­ed his lat­est state­ment, or it might be the lat­est annu­al state­ment, and he did­n’t men­tion it in the email, but he totalled over $20,000 worth of fees and costs on his port­fo­lio dur­ing the year. It breaks it down into $15,000 deduct­ed direct­ly from his account, and then $5,500 deduct­ed from his invest­ments. Biggest one out of all that was near­ly $14,000 for mem­ber advice fees, but there’s also an admin­is­tra­tion fee of $1,300, an oper­a­tional risk finan­cial require­ment cost of $60, trans­ac­tion cost of $37, etc., etc. But then also, too, fees and costs deduct­ed from his invest­ments, and it looks like he was advised to invest in a num­ber of ETFs which are all tak­ing sort of $500‑1000 out — one of them is tak­ing $3,500 out — which I imag­ine are the trail­ing com­mis­sion’s back to his finan­cial advi­sor. I’m not sure because it’s not men­tioned on the state­ment I’m look­ing at. But that’s, I mean, that’s a heck of a lot of dol­lars com­ing out for basi­cal­ly get­ting advice to put your invest­ments into four ETFs. I mean, that’s, to me, that’s just crazy. So, thanks for shar­ing that. One of the rea­sons for ask­ing for these exam­ples is just to point out that I’m hop­ing peo­ple know that, since we’ve been going for three or four years, DIY is not that hard. It does require a lit­tle bit of time, but it’s not that hard. And even if you’re doing it just to invest in index funds, you’d poten­tial­ly sav­ing up to $20,000 a year by doing it your­self. So, thanks for the feed­back, it’s real­ly worth focus­ing on fees going for­ward.

Cameron  10:33

It’s some­thing I had­n’t real­ly giv­en a lot of thought to, in terms of the posi­tion­ing of QAV and DIY. So, that was a real edu­ca­tion for me in par­tic­u­lar. Do you know this guy David Hains, Tony? Old golf bud­dy of yours I imag­ine?

Tony  10:54

I don’t know him per­son­al­ly, but I’ve cer­tain­ly fol­lowed his career. I was gonna men­tion him myself in after hours because he passed away on the week­end. But per­son­al­ly, out of all the peo­ple on the rich list, David Hains was always some­one I fol­lowed because, you know, sim­i­lar sort of career. Sim­i­lar in some ways, not oth­er ways. He made a start for him­self in turn­around sit­u­a­tions, but then even­tu­al­ly went off and set up Port­land House as an invest­ment firm and man­aged his own funds through that, then hand­ed it over to his kids. Along the way he also was a horse breed­er, and a very famous one. He owned Kingston Town, which is prob­a­bly after Far­lap the most suc­cess­ful race­horse until I guess recent­ly with Black Caviar and Winks. But a very suc­cess­ful race­horse and sire of many suc­cess­ful hors­es, includ­ing Kingston Rule, which he owned and won the Mel­bourne Cup with. So, yeah, I’ve always felt quite inspired by David Hains. He’s always been regard­ed as a nice guy. I did­n’t know him, nev­er met him, but yeah, I did enjoy read­ing any arti­cle I could about him. Pret­ty sure they had a chap­ter on him in some of the books like Mas­ters of the Mar­ket that had been put out there many years ago. And yeah, for me, hav­ing no one to talk to about invest­ing, to see that some­one else out there had done it was always very moti­vat­ing for me.

Cameron  12:18

Well, I’d nev­er heard of him before or Port­land House, but I read Chantecler’s obit for him, I guess, in the Finan­cial Review this morn­ing. And it’s enti­tled “Five Lessons from David Hain’s Rich Life.” “The late David Hain’s incred­i­ble sev­en-decade career is a tes­ta­ment to curios­i­ty, humil­i­ty, and most of all, class.” and he talks about Hain’s office Port­land House: “built in 1872 and pur­chased by Hains in 1963, the state­ly Vic­to­ri­an ter­race stood in stark con­trast to the office tow­ers, hotels and lux­u­ry retail­ers that dom­i­nate the so called ‘Paris End of Collins Street’. Once inside, the feel­ing that you’d step back in time only grew stronger. After mak­ing their way up a few creak­ing flights of stairs past a stun­ning Howard Arkley paint­ing on the ground floor, vis­i­tors would even­tu­al­ly be shown into Hain’s per­son­al office. Port­land House Group might have been home to one of Aus­trali­a’s old­est and most sophis­ti­cat­ed hedge funds, but Hain’s per­son­al sanc­tu­ary seem to have been untouched for decades: gleam­ing wood pan­elling, leather cov­ered chairs, an antique mahogany desks, and cer­tain­ly noth­ing as crass as a com­put­er or lap­top. The inhab­i­tant of the office was a throw­back to anoth­er era, too. Hanes, who has died at the age of nine­ty-two, was a gen­tle­man in every sense of the word; unfail­ing­ly cour­te­ous and eter­nal­ly under­stat­ed for a man who built a $2.9 bil­lion for­tune.” And he talks about the bits that just sort of remind­ed me of you read­ing through this. He said, “even two years ago, I spoke to Hanes for the Aus­tralian Finan­cial Review’s plat­inum year cel­e­bra­tions about his first inter­na­tion­al trip back in 1958, and he hap­pi­ly admit­ted some parts of the mar­ket were beyond him. ‘I don’t under­stand things like Bit­coin and stock prices based on sales growth,’ he said. ‘I just don’t know where it leads, but I don’t think any­one else does either.’ ” What else? Yeah, they talked about golf and hors­es, and that obvi­ous­ly made me think of you. So, “the final les­son from Hains is one he learnt from a sev­en-year stint learn­ing the game of golf from leg­endary coach Nor­man Von Nida, who also got Hains into breed­ing cham­pi­on race­hors­es. Talk­ing to the Finan­cial Review in 2009, Hain’s said Von Nida had shown him that class mat­ters in sports, as it enables par­tic­i­pants to over­come prob­lems and still win. Hains would come to think about peo­ple and busi­ness in the same way, he said. A busi­ness has to have class to be real­ly suc­cess­ful, so does an investor, and David Hains had it in spades.” As you do, Tony, you’re very classy, a very classy man.

Tony  15:00

Thanks, Cam. We were just talk­ing about not lik­ing to wear suits and things like that before we start­ed record­ing, so…

Cameron  15:07

That’s classy. You don’t have to dress up to be classy.

Tony  15:09

Yeah, right. I would­n’t hold a can­dle to David Hains, but cer­tain­ly has been very moti­va­tion­al and inspi­ra­tional to see him out there doing what he’s done, for sure. And there were some oth­er lessons I noticed in that arti­cle which were worth talk­ing about. He shied away from tak­ing on debt, and the qual­i­ty side of things, you’re right, he used that in horse breed­ing as well as in the share mar­ket. And that’s one of the things that we look at, qual­i­ty, in our invest­ing. Qual­i­ty at Val­ue. So, yeah, a lot to learn from him and he and his fam­i­ly. I think his daugh­ter runs the horse breed­ing oper­a­tions now and his sons do the hedge fund stuff. So, vale, David, and thanks for shar­ing your life with us, I guess, in print.

Cameron  15:52

Indeed. All right. I want to just recount a Face­book thread that hap­pened dur­ing the week that I thought was ter­rif­ic. Kurt asked a ques­tion, “I was hop­ing to find out from the QAV com­mu­ni­ty whether you pre­dom­i­nant­ly have utilised the QAV method for invest­ing, or whether there have been oth­er finan­cial strate­gies men­tioned on the show that you found help­ful. I would be keen to hear as I have an appoint­ment with my finan­cial advi­sor soon and would like to float a few of these strate­gies.” Yeah, hope you lis­tened to the ear­li­er con­ver­sa­tion about fees, Kurt, take that into account. Gary said, “hi Kurt. I have three sep­a­rate port­fo­lios: one joint with my wife, non-QAV, all LIC as that’s what she is most com­fort­able with. My SMSF has a 30/70 LIC to QAV blend. The QAV side is only down due to mar­ket tim­ing and a few mis­takes along the way, but in the last two weeks has gained back near­ly 75% of the loss­es. My oth­er port­fo­lio is 100% QAV and sit­ting around 20% per annum after three years. This is the only port­fo­lio that I add mon­ey to. I’m look­ing into adding addi­tion­al to SMSF for tax­a­tion rea­sons, though.” So, well done, Gary, 20% per annum after three years; right on the mon­ey there. Ed also replied. He said, “I was intro­duced to QAV via James S just on two years back. Pri­or to this I was just doing bog-stan­dard index invest­ing in both my SMSF and in a com­pa­ny struc­ture. I tri­alled an amount of mon­ey for twelve months, $170,000, while still run­ning the index­es. I made a few mis­takes with ADTs buy­ing Josephine’s thanks to good ol’ FOMO and impa­tience. Dur­ing this time I went back and lis­tened to every episode, some­thing I appre­ci­ate not every­one can do, nor do you real­ly need to know as so much of it has been refined: the buy list every Mon­day, the Bret­te­la­tor, Sir Andrew Flit­man sheet — he should be knight­ed along with TK and Cam — com­mod­i­ty sta­tus, etc.” TK and Cam, for the record, Ed, whilst we appre­ci­ate the ges­ture strong­ly reject the con­cept of roy­al­ty and would not accept a knight­hood. Andrew Flit­man on the oth­er hand comes from the old coun­try, so I don’t know. Let him respond to that. He might be up for it. I per­son­al­ly would do a John Lennon and just tell him to stick it up their ass.

Tony  18:13

A knight­hood, yes. Maybe an Order of Aus­tralia. As some­one once said, OAM: Ordi­nary Aus­tralian Male.

Cameron  18:19

Yeah, okay, that’s good. “By lis­ten­ing to all the shows, I’ve learned a shed­load, and think the Bible they’ve writ­ten gives you the baby with­out the deliv­ery.” I still don’t know real­ly what that means, but any­way. “Now that I’ve learned so much and I’m under­stand­ing it more, I decid­ed back on the first of July ’22 to roll all of my cash in and sim­ply stick with the sys­tem and not devi­ate from it. It’s work­ing well, so now no need to do the index invest­ing when run­ning twice mar­ket.” S,o I want­ed to thank Kurt for ask­ing the ques­tion, valid ques­tion, and Gary and Ed in par­tic­u­lar for their replies. There may have been oth­ers that I haven’t seen since then, but con­grat­u­la­tions to Gary and Ed for work­ing the sys­tem, and obvi­ous­ly it’s doing well for them. And thanks for shar­ing, we always appre­ci­ate it when… You know, I think that’s the proof is in the pud­ding for me. It’s one thing for you to claim your returns and peo­ple right­ful­ly can be scep­ti­cal of those. But when I see the dum­my port­fo­lio run­ning at 18–19% per annum after three and a bit years, and I’ve been doing most of the dum­my port­fo­lio buy­ing and sell­ing for the last cou­ple of years, and I see these guys get­ting the same sort of returns doing it them­selves, that’s the proof is in the pud­ding for me. It’s like, the sys­tem works if you work the sys­tem, it just works. Again, feel sad for the peo­ple that start­ed at the begin­ning of last year just before the mar­ket down­turn. It was obvi­ous­ly a rough year. But if they stick with it and stay dis­ci­plined, I have zero doubt that they will be able to claim the same sorts of returns a few years from now.

Tony  19:54

Oh, yeah, absolute­ly. I guess, in my hum­ble opin­ion, it has to work, right? Because we take a share mar­ket, which if you do noth­ing and buy an index fund gets sort of 9 or 10% per annum, and then you back out all the risky stuff, all the bad stuff. It’s got to beat the index, and I guess that just from my expe­ri­ence of being able to hone things over many years and then assign val­ues, etc., it’s been refined. But yeah, I mean, just stay­ing away from Bit­coin, just stay­ing away from tech stocks with high PE val­ues, all that kind of stuff. Stay­ing away from things which are patent­ly over­val­ued; they might be qual­i­ty stocks like your CSLs, but to me, they’re very high­ly val­ued stocks. Yeah, makes sense to me that you’ll get bet­ter than index, and if you refine it a bit, you’ll get dou­ble mar­ket. That to me, that’s almost like com­mon sense. But any­way. And now it’s hap­pen­ing for these guys. So, thanks for shar­ing. The oth­er point I want­ed to point out was that I think both of these guys did­n’t just jump in boots and all, they test­ed it for a while, and I think that’s quite a smart thing to do. Get used to it, make your mis­takes with a small­er amount of mon­ey, and then when you get com­fort­able with it, jump in if you decide it’s for you.

Cameron  21:05

Yeah. And it won’t be for every­body, because not every­body has the right kind of tem­pera­ment, which we’ve talked about ear­ly on. Some­thing that Buf­fett says, right, it takes a cer­tain kind of tem­pera­ment to do this style of invest­ing.

Tony  21:18

Yeah, because as we said, last week, it’s bor­ing. Get­ting rich slow­ly is bor­ing. It’s good fun, but it’s bor­ing.

Cameron  21:27

It’s bor­ing, but it also takes a cer­tain tem­pera­ment to be able to ignore what your cab­bie tells you and what your hair­dress­er tells you, and your friend who knows a guy knows a guy who made a lot of mon­ey out of a tech stock or Bit­coin, and all of the hype. There’s not so much of it around at the moment, because all of those things crashed last year and did­n’t real­ly recov­er, but I know the first cou­ple of years we were doing this, all of the hype around Bit­coin… I spoke to Torsten, our friend Torsten Hoff­man the oth­er day. Torsten was pro­duc­er of our film Mar­ket­ing Mes­si­ah, one of the pro­duc­ers, exec­u­tive pro­duc­er, on it, and he’s made two films about Bit­coin and cryp­to, and he knows every­body in Bit­coin and cryp­to cir­cles around the world. He’s cur­rent­ly mak­ing a new film which sounds real­ly inter­est­ing, it’s on space: he’s inter­viewed Neil deGrasse Tyson, and it’s all… He said, like, every­one thinks the space stuff is Bran­son and Musk and Bezos, he said that there’s like a thou­sand com­pa­nies doing real­ly cool stuff that no one’s heard of, and so he’s focus­ing most­ly on them. He’s been bug­ging me for as long as I’ve known him: “are you going to get into Bit­coin?” Bit­coin Bit­coin Bit­coin, “you’re not a real investor if you’re not putting at least 50% of your invest­ments into Bit­coin.” I said, how’s you Bit­coin port­fo­lio doing? He goes, “yeah, it’s not too bad.” He said, “I got in seri­ous­ly in 2019,” and so we had a look at it, and it’s basi­cal­ly dou­bled since 2019, where it is now. Yeah, that’s alright, three and a half years, if you got in in 2019. If you got in in 2020, it’s down 60% from prob­a­bly where you bought in. But I point­ed out to him that rule of sev­en­ty-two says the QAV port­fo­lio dou­bles every three and a half years, too, with­out the risk of Bit­coin; with­out los­ing sleep and hav­ing to be lucky about how you timed it and all that kind of stuff. So, same returns as Bit­coin over the same time­frame with­out all of the bull­shit, right?

Tony  23:33

Good point.

Cameron  23:34

Of course, if you bought in 2019 and sold at the peak, if you had the balls to do that, or the luck to get in and out, they did very well. But how many peo­ple did that? Prob­a­bly not many.

Tony  23:50

That FOMO is still there. I had some­one run into me a month or so ago and ask me whether he should be buy­ing lithi­um stocks. So, there’s always that kind of FOMO in the mar­ket some­where.

Cameron  24:02

Yeah. But peo­ple are always look­ing to get rich quick. I mean, that’s just human nature, right?

Tony  24:07

Yep. If that’s every­thing. I’ve got a pulled pork on SEQ to do. So, this was a request from one of the lis­ten­ers, and they asked the ques­tion, “can we do a pulled pork on Sequoia Finan­cial Group because their share price dropped 10% yes­ter­day” or the day before. So, I said sure. For those who aren’t famil­iar with this stock, it’s on the buy list. It’s right down the very bot­tom, it’s right on the bor­der of our cut off of with a QAV score of 0.1 but I’ll run through it. So, this com­pa­ny is basi­cal­ly quite a broad rang­ing wealth man­age­ment com­pa­ny. So, it does the sort of wealth man­age­ment we were talk­ing about before with all the fees that go with it, I guess. I’m not famil­iar with the com­pa­ny enough to know what fees it charges, but it’s a wealth advi­sor help­ing you struc­ture your invest­ments. It does a lot of self-man­aged Super­fund admin­is­tra­tion, pro­vides tech­nol­o­gy to accoun­tants to do that. It’s got­ten into a few stock mar­ket newslet­ter type busi­ness­es and mar­ket data pro­vi­sion busi­ness­es, so I bet­ter speak well of them because they may well come along and knock on our door and make us an offer one day, Cam, to buy us out. So, they do that. They bought a legal advice com­pa­ny called Top Dock, which I think may have been the one that we spoke to about obtain­ing an AFSL licence at some stage, but any­way. They pro­vide cor­po­rate advi­so­ry, espe­cial­ly in the small cap sec­tor, they will raise mon­ey for small to medi­um sized com­pa­nies. They do spe­cif­ic invest­ments and spe­cialised invest­ments, par­tic­u­lar­ly in the alter­na­tive class; so, if you’re run­ning an SMSF and you want to have access to things that aren’t list­ed on the stock mar­ket that might inter­est you, they can arrange that for you. They do insur­ance bro­ker­age, they have a stock broking sec­tion called Mor­ri­son Secu­ri­ties, finan­cial plan­ning, etc., etc. So, very wide-rang­ing com­pa­ny, how­ev­er, it’s not a big com­pa­ny: mar­ket cap is $74 mil­lion and aver­age dai­ly trade is $55,000. So, it’s not for every­one, but cer­tain­ly big enough for some peo­ple. Why did the price drop 10% recent­ly? Well, they put out an ASX release dur­ing con­fes­sion sea­son, it went out on the 23rd, advis­ing that their prof­it would be below what they had bud­get­ed for, and I guess, there­fore, what peo­ple who are fol­low­ing the com­pa­ny may have fig­ured into their spread­sheets in plan­ning for, or dis­count­ed cash flow val­u­a­tions and plan­ning for what they want to pay for the com­pa­ny. In detail, it looks like they’ll be 40% below bud­get in terms of prof­it, rea­sons being that a num­ber of their units have under­per­formed. So, they are hav­ing busi­ness inte­gra­tion issues with some com­pa­nies that they acquired, it’s going slow­er than expect­ed. Some of their direct invest­ments have under­per­formed, which has been a fair­ly com­mon thing in the last six to twelve months for fund man­agers. They’re wait­ing for a claim with their per­son­al PI insur­er, so their pro­fes­sion­al indem­ni­ty insur­er, which is tak­ing longer than expect­ed to pay out. So, a num­ber of things which they claim are hap­pen­ing slow­er than they thought, which, you know, they claim won’t have long term impacts on the com­pa­ny. I would tend to believe them with that, but it’s also par for the course when they’ve got so many dif­fer­ent oper­at­ing units that some may under­per­form. To get into all that, so if we accept the fact that they’ll be under bud­get this year, under fore­cast this year, but they’re short-term issues, then we can still focus on their num­bers and look to the future with them. Peo­ple should bear in mind that we’re doing this pod­cast on Jan­u­ary 24 and we’re only a week away from report­ing sea­son, so these num­bers will be updat­ed fair­ly soon. I’m doing my analy­sis on a share price of 61 cents, and that was on the week­end when I think, well, when the last down­load that Alex did was pro­vid­ed. But the share price now is 55, so it has gone down from there, which will improve some of these met­rics, but I’m using 61 in my num­bers. There’s no con­sen­sus tar­get, so we can’t com­pare 61 cents against any­body else’s val­u­a­tion for the com­pa­ny. How­ev­er, Stock Doc­tor rank it strong and steady with finan­cial health, so that’s good. The inter­est­ing one, the price to oper­at­ing cash flow for this com­pa­ny is 7.82 times, so it does­n’t score for us on that met­ric. So, it’s start­ing to get away from us in terms of val­u­a­tion, but that will come back if the price is drop­ping, so that will improve their score. So, we’re not get­ting a score for that met­ric. IV 1 is only 22 cents, the share price is above that so it’s not scor­ing there. We don’t have IV 2 because there’s no con­sen­sus esti­mates on future earn­ings, so I can’t score it on that. This com­pa­ny does pay a div­i­dend, but the yield is only 2.3%, which is low. So, we don’t score it for that. And again, that yield is going to improve as the share price drops, how­ev­er it’s kind of small. And, you know, I’d ques­tion why they both­er pay­ing a 2% yield. I sus­pect giv­en that there is some con­cen­trat­ed share own­er­ship on the reg­is­ter, I sus­pect it’s a way for them to get mon­ey out. When they have to pay them­selves a div­i­dend, they have to pay it to every­one. So, 2.3% is the yield but low. Net equi­ty per share for this com­pa­ny is 36 cents, which is below the share price, and book plus 30% is 47 cents which is still below the share price even at 55 cents, so it does­n’t score on book val­ue mea­sures. Direc­tors hold 12% which is good, so we score it for an own­er-founder. In terms of the man­u­al­ly entered data, it does have the low­est PE of the last six halves, so it gets a score for that, and equi­ty has been con­sis­tent­ly increas­ing, so it gets a score for that. So, it scores 82% for qual­i­ty which is why it’s get­ting a QAV score of 0.10, which is why it’s on the buy list at the bot­tom. That will improve as the price drops. But one thing I did want to high­light is for this com­pa­ny we’re only able to score it on eleven of the metrix, and the check­list I think from mem­o­ry, has eigh­teen. So, there’s a num­ber of things we’re not using to score this com­pa­ny. I tend to ignore that, but I just want­ed to high­light to peo­ple that it’s not being scored across the full range of items that it could be. Risks and poten­tial pos­i­tives for this com­pa­ny: it’s small and it has many mov­ing parts, so it’s fair­ly diver­si­fied. And the ratio­nale for that will be that, you know, when every­thing’s fir­ing you make a lot of mon­ey, and when half of things are fir­ing and half of things aren’t, you’re not los­ing mon­ey. How­ev­er, it does get dif­fi­cult to man­age a com­pa­ny the more com­plex it gets; espe­cial­ly a small one where the founders are prob­a­bly doing a lot them­selves. So, that’ll be an issue for this com­pa­ny. They’ll prob­a­bly at some stage have to start boost­ing man­age­ment if they keep get­ting much more com­plex. In some ways it’s okay at the moment, because a lot of the things they’re into would be able to be run by the one per­son, but even­tu­al­ly it’ll be a prob­lem if it’s not man­aged prop­er­ly. And I have no evi­dence to say it’s not being man­aged prop­er­ly, but I just raise it as a poten­tial risk. Anoth­er poten­tial risk is that the wealth man­age­ment indus­try’s been going through upheaval since the Hayne Roy­al Com­mis­sion, and all the banks have divest­ed, which is a pos­i­tive for small com­pa­nies like this, because they pick up the slack. So, their wealth advice sec­tion should be doing well. How­ev­er, the ones that are left in the mar­ket, the two big ones, AMP and IOOF, if they get their act togeth­er on wealth advice they’ll be, you know, pret­ty strong com­peti­tors for this com­pa­ny. And when I say get their act togeth­er, they’re both try­ing very hard to either lob­by the gov­ern­ment to change the rules regard­ing finan­cial advice to make it cheap­er for the aver­age per­son to get finan­cial advice, and/or they’re invest­ing in IT to be able to offer wealth advice through what’s called Robo advice, which is using IT to struc­ture advice for peo­ple fol­low­ing a set of rules. So, again, if AMP and IOOF do that well, they will be a strong com­peti­tor for this com­pa­ny, as well. And then there is the lega­cy issue of Hayne. I mean, it does increase the com­pli­ance costs for any sort of wealth advis­ing com­pa­ny, and they have to be very care­ful now to make sure that they are act­ing in the clien­t’s best inter­est, that they are not cross sell­ing or ver­ti­cal­ly inte­grat­ing, sell­ing their own prod­ucts. Although I think Kane may have let that one go through, but any­way, it could be an issue again in the future. So, there is a bit of a spot­light on this indus­try at the moment, so there’s pos­i­tives and neg­a­tives for that: the big play­ers are on the ropes so small play­ers can pick it up, but if the big play­ers ever do come back strong, the small play­ers will find it hard. On the pos­i­tive side, though, small com­pa­nies do have the abil­i­ty to pro­vide the per­son­al touch. And that’s impor­tant, I guess, for a lot of peo­ple, and prob­a­bly impor­tant for a lot of peo­ple in small com­pa­nies who might want finan­cial advice because they may not be get­ting as good a ser­vice from the big banks as they could be, and so hav­ing a one-on-one advi­sor would be use­ful to them. So, that’s Sequoia Finance.

Cameron  1:11:42

The QAV Pod­cast is a pro­duc­tion of Space­craft Pub­lish­ing Pro­pri­etary Lim­it­ed, autho­rised rep­re­sen­ta­tive of AFSL 520442, AFS rep­re­sen­ta­tive num­ber 001292718. Please don’t make any invest­ment deci­sions based sole­ly on lis­ten­ing to this pod­cast. This is pre­sent­ed as gen­er­al advice only, not per­son­al finan­cial advice. We don’t know your per­son­al finan­cial cir­cum­stances. Please see a finan­cial plan­ner before mak­ing any invest­ing deci­sions.