Transcript #605

QAV 605 CLUB

Record­ed Tues­day 31 Jan, 2023

Cameron  00:06

Wel­come back to QAV, every­body. This is episode 605. We’re record­ing this on the 31st of Jan­u­ary 2023. How are you, TK?

Tony  00:16

I’m okay. I’m recov­er­ing. In recov­ery mode.

Cameron  00:20

You’re in recov­ery, not just from alco­hol, but from COVID.

Tony  00:25

From COVID. Yeah, I’ve been pret­ty sick for the last four or five days with COVID, which I think I got from Barn­bougle. Don’t know for sure.

Cameron  00:34

That’s not a sex posi­tion, that’s like a golf course or some­thing.

Tony  00:40

It is a golf course, yeah, a golf course in Tas­ma­nia, which I was at week­end before last. Got back on the Sun­day night, Mon­day one of the guys on the trip texted every­one and said he test­ed pos­i­tive. And I’d played golf with him a cou­ple of times and chat­ted with him and sat behind him on the plane back to Syd­ney and all that. And then I test­ed pos­i­tive on Thurs­day, so I sus­pect it was Barn­bougle, but, you know, could have been some­thing in between, too.

Cameron  01:09

The old Barn­bougle. We’re gonna have to use that now for some­thing,

Tony  01:13

It was a great trip, so I’m sad it had a sor­ry end.

Cameron  01:18

How bad were your symp­toms? You said to me on Fri­day that you were doing okay.

Tony  01:24

Pret­ty bad. I mean, I’ve just got asth­mat­ic lungs, so I always get bronchial things dou­bly bad. Yeah, I was pret­ty bad Thurs­day, Fri­day, and then I got the antivi­rals on Fri­day. Did a tele health con­sult with the doc­tor and read out my symp­toms, and he said, sure, he’d pre­scribe them. So, sent me an escript and Jen­ny went and picked them up, and ever since then it’s been improved. So, they’ve helped.

Cameron  01:51

I haven’t heard of the antivi­rals before, although, when I men­tioned that you were tak­ing them to, Jan, my mom, she said that she caught it in Turkey and when she got back, they gave her antivi­rals, too. I thought it was just a rich white man thing, but she’s not rich or a man.

Tony  02:06

An old white peo­ple’s thing, I’d say.

Cameron  02:08

Oh, right. I thought only Don­ald Trump got the antivi­rals. So, what is this? Is this just a tablet that you take?

Tony  02:15

It’s actu­al­ly six tablets. I’m guess­ing it’s kind of so new that they rushed in with­out try­ing to get the dosage right into one tablet, but it’s three in the morn­ing and three in the evening.

Tony  02:26

Just once?

Tony  02:27

No, for five days.

Tony  02:29

Oh, right.

Tony  02:30

And inter­est­ing thing was the doc­tor said not every chemist will have them, so ring your phar­ma­cy and make sure before your wife goes down. So, I did that, and he said, “yeah, we’ve got them,” and he said, “but do you have,” a some kind of doc­tor’s pre­scrip­tion, some cat­e­go­ry which I for­get, and I said, “look, I’m not sure.” He said, “well, it makes a dif­fer­ence because there are about $1,500 a course if you don’t have the prop­er doc­tor’s pre­scrip­tion.” But as it was, it was fine, it was only $30. So, there’s quite a bit of gov­ern­ment sub­sidy going on with them.

Cameron  03:01

Along with the fifty mil­lion RAT tests that they’re going to have to throw out in a cou­ple of weeks.

Tony  03:07

Well, they can send some to my place because I’ve run out. I’ve been test­ing for the last week. I need some.

Cameron  03:15

Could­n’t get RAT tests for the longest time, now they’ve got too many. Just hard to get the bal­ance right.

Tony  03:22

It’s how gov­ern­ment pro­cure­ment usu­al­ly works, isn’t it?

Cameron  03:24

Yes. Well, I’m glad that you’re on the mend, Tony.

Tony  03:28

Yeah, thank you. I was say­ing before off air all the symp­toms are back down to, like, dialled down to a one, so they’re pret­ty much gone. But the body just is so weak, it just wants to sleep and recov­er. Build up strength again.

Cameron  03:40

It’s prob­a­bly a good thin you’ve been off the booze for a few months. I’m seri­ous.

Tony  03:44

I dun­no, maybe alco­hol might have been a good block for it. Could’ve killed the germs on the way in. Who knows?

Cameron  03:50

It’s like that old Dave Allen sketch. Did you ever watch Dave Allen when you were a kid.

Tony  03:54

I loved Dave Allen when I was a kid.

Cameron  03:56

Me too. I remem­ber this sketch where he’d be, like, “a teacher stands up in front of his class­room and he has a glass of scotch.” I don’t know why I’m doing a Scot­tish accent when he’s Irish, but “a glass of scotch and an earth­worm. And he puts the earth­worm in the glass of scotch. The earth­worm dies.” He says “now stu­dents, what have you learned?” And they say, “if you drink lots of scotch, you won’t get worms.” The thing that I loved most about him when I was a kid is how hard he went after the church, which in the 70s was quite shock­ing. You did­n’t hear many peo­ple go after the church. It was him, Bil­ly Con­nol­ly would have a laugh, and the Pythons, but it was sort of a no-go place for pub­lic dis­course.

Tony  04:39

Not just that, but he’d have a go with Rev­erend Ian Pais­ley and the whole trou­bles in Ire­land. Yeah, he was quite fear­less. He used to do the Rev­erend Ian Pais­ley imper­son­ation: “there’ll be gnash­ing of teeth in the streets!”

Cameron  04:55

And famous­ly for peo­ple who don’t know who Dave Allen was, he was an Irish stand up, come­di­an, who had a TV show for­ev­er. But he was miss­ing the end of one of his fin­gers, and he used to do this great pick­ing his nose rou­tine by putting the knub in his nos­tril.

Tony  05:10

And he’s always say you could spot a butch­er in a bar because they’d asked for five scotch­es.

Cameron  05:16

And hold up two fin­gers. Good stuff.

Tony  05:21

And he used to sit and drink scotch dur­ing his set. He was­n’t real­ly a stand-up come­di­an, he used to sit on a seat, on a stool, with a smoke and a scotch the whole way through.

Cameron  05:31

Yeah. Let’s get into the stuff, the real stuff, our port­fo­lio updates, Tony. Did my week­ly report, my week­ly email for QAV club this morn­ing. The dum­my port­fo­lio is down a bit this week, we’re run­ning at about 17.5% per annum since incep­tion, Sep­tem­ber ’19, ver­sus the STW, which is run­ning at about 8% per annum over the same peri­od. And we’re down a bit this week, down from about 19, I think it was, last week, large­ly thanks to coal. In the light port­fo­lio, some of those are down as well. NHC, Newhope Coal, took a big hit this week. It’s down about 12% in the last week, but as I point­ed out in my light email that went out yes­ter­day, since I bought it for one of our live port­fo­lios last April, it’s up over 100% still. So, I’m not com­plain­ing it’s down a lit­tle bit. But yeah.

Tony  06:30

Fun­ny sto­ry. When I saw that I thought, “I won­der why coal’s down,” because I’m also affect­ed by this while I have White­haven Coal in my port­fo­lio. And so, I thought, “hmm, I’m going to ask Chat GPT.” So, I asked Chat GPT why coal’s down, and it gave me a fair­ly anodized answer say­ing, “because peo­ple don’t want to invest in coal and renew­ables are on the rise.” And I thought, okay, so I then asked it how come the price of coal has more than dou­bled in the last twelve months, and it gave the reverse answer that emerg­ing mar­kets are using coal and the war in Ukraine has raised the price.

Cameron  07:07

Well, the prob­lem with using Chat GBT is in its cur­rent iter­a­tion, it’s not con­nect­ed to the inter­net. So, it can’t tell you any­thing about what’s going on in the world today. Its knowl­edge base is based on every­thing that it’s read, but it does­n’t give you real time, up to date answers in this iter­a­tion. I think the next iter­a­tion Chat GPT 4, which is due out this year, will be con­nect­ed to the inter­net, so it’ll be able to answer that kind of ques­tion more accu­rate­ly, hope­ful­ly.

Tony  07:35

Yeah. I just thought it was fun­ny I got dif­fer­ent answers to the same ques­tion asked dif­fer­ent­ly. But I did Google it to get the right answer, and it looks like the coal price has come off a lit­tle bit because win­ter is end­ing in the north­ern hemi­sphere, and it was­n’t as harsh as peo­ple pre­dict­ed. So, they haven’t used as much coal to heat their homes.

Cameron  07:53

That’s what I read, too. Of course, going into win­ter in the north­ern hemi­sphere there was a lot of con­cern because of the war and sup­ply issues. If it was a real­ly bad win­ter, peo­ple were going to be freez­ing. There’d be mil­lions of peo­ple freez­ing to death across the north­ern hemi­sphere. As it turns out, the gods were on their side, they had a mild win­ter, and now they’ve prob­a­bly over­bought a lot of coal. Not good for our port­fo­lios, but a short-term prob­lem, I’m sure. The dum­my port­fo­lio, just for the peo­ple that are inter­est­ed, for the finan­cial year, we’re cur­rent­ly run­ning at about 6.83% per annum ver­sus the STW, which is run­ning at 21.5%. So, it’s going from strength to strength. We’re doing okay, but we’re still nowhere near the STW on a short-term finan­cial year basis. So, get­ting back to ther­mal coal, this idea of the coal price being sea­son­al because of heat­ing require­ments in the north­ern hemi­sphere, should we fac­tor that in next year? Should we be sell­ing out of ther­mal coal as win­ter’s com­ing to an end? I had a look at the coal chart from last year. The coal price did­n’t start to go down until March last year. It’s com­ing down a lot ear­li­er this year. So, pref­ac­ing my ques­tion about sea­son­al sell­ing with that, that it’s not nec­es­sar­i­ly an accu­rate indi­ca­tor, you know.

Tony  09:21

It’s not. And I mean, it’s the clas­sic trade to for both oil and coal; to buy them before the Amer­i­can, or sor­ry, the north­ern hemi­sphere win­ter and to sell them after­wards. But if you look at Coal over the last cou­ple of years, it’s been going up pret­ty solid­ly any­way. So, yeah, I think the oth­er things that work with coal would been trump­ing the sea­son­al­i­ty of it, for sure.

Cameron  09:45

And that’s ther­mal coal, too, because when I looked at the chart over the last few years, the price is, sort of, crazy. Price has been real­ly strong for coal over the last few years. It’s not just, I mean, I know met­al­lur­gi­cal coal, cok­ing coal’s, you know, dri­ven by man­u­fac­tur­ing out of Chi­na and India and places like that, but ther­mal coal as well has been going through a ter­rif­ic streak over the last five years.

Tony  10:09

No, for sure. I think it’s a bit like oil in that it’s on the black­list in terms of invest­ments, so there’s not as much new devel­op­ment as there is to meet the demand needs. And so that’s why the price… It’s clas­sic sup­ply and demand. So, that’s why the price has been going up over the last few years. There’s still plen­ty of demand for coal, par­tic­u­lar­ly in, as you say, Chi­na and India, but oth­er emerg­ing coun­tries. In Asia in par­tic­u­lar, South­east Asia, Indone­sia, they’re heavy coal users still.

Cameron  10:38

Thanks for that. Chan­ti­cleer retired. Tony Boyd, who’s been the Chan­ti­cleer colum­nist for the last thir­teen years announced his retire­ment from the seat last week. He’s being replaced or has been replaced, one of the two, by anoth­er guy. But I was read­ing their farewell to him in the finan­cial review. It said, “along with his wise analy­sis of the big cor­po­rate news sto­ries of the day, Tony gen­er­ous­ly shared details of his own self-man­aged nest egg known as the Chook’s super fund with read­ers, includ­ing dur­ing peri­ods of under­per­for­mance unlike many pro­fes­sion­al fundies.” So, I went and had done a search on the Fin for the Chook super fund and read­ing some of the sto­ries. It does­n’t sound like it did very well, his fund, his self-man­aged super fund.

Tony  11:29

Well, when you say it did­n’t do very well, I think it prob­a­bly achieved mar­ket per­for­mance over the years and he saved him­self the fees. But it did­n’t out­per­form, no. And I think that was one of his admis­sions, was it has­n’t out­per­formed.

Cameron  11:43

Right, which I mean, again, just sort of, I don’t know, it always sort of sur­pris­es me when you have this guy who’s been a colum­nist for The Finan­cial Review, at least writ­ing Chan­ti­cleer for thir­teen years, I would expect — before we did this show — I would expect that these finan­cial jour­nal­ists who have access to all of the best investors, investor knowl­edge funds, would be doing real­ly, real­ly well with their own invest­ments. And as we know, when we had Alan on, not a big investor, as it turns out. Alan Kohler this is, we had him on ear­li­er in the show.

Tony  12:21

I’m pret­ty sure he used to be Chan­ti­cleer many decades ago.

Cameron  12:25

Real­ly? Okay. And then Tony Boyd, again, not real­ly killing it. I mean, doing okay as you say, mar­ket returns, but he could have bought, you know, a Van­guard or some­thing like that, and prob­a­bly got a sim­i­lar sort of result.

Tony  12:38

You would think that a finan­cial jour­nal­ist, espe­cial­ly some­one who’s con­nect­ed as him, would be get­ting lots of inside infor­ma­tion, real­ly.

Cameron  12:45

Well, inside infor­ma­tion or just, you know, good sol­id invest­ment advice. Or have devel­oped a skills or a method­ol­o­gy from the thou­sands and thou­sands of sto­ries about investors and invest­ing that he must have writ­ten over a decade plus. But no.

Tony  13:03

Well, I guess the sound of the phone not ring­ing is him not call­ing, but if he ever wants to inter­view some­one, I’d be hap­py to talk to him. But you’re dead right. I mean, it’s a well-trod­den path. These peo­ple, even if they’re not giv­ing inside tips, they should have been able to sep­a­rate the wheat from the chaff. And I had a look at that link you sent me for one of the arti­cles, I think the most recent one about his Chook fund, and he bought a bit­coin min­er which grew to be a large part of his port­fo­lio and then crashed 70% this year.

Cameron  13:36

Yeah. So, the last arti­cle that he wrote about the Chook’s super fun in August last year, there’s a table in here where he’s com­par­ing his returns to the index and to Aus­tralian Super, Media Super. Just for peo­ple that are inter­est­ed. So, it does ten years going back to FY ’12. Net returns, this is, for FY ’12: Chook Super­fund net return up 2.3% ver­sus the index, which was down 1.62. FY ’13 up 22 ver­sus the index up 16. FY ’14 up 17 ver­sus the index up 15. FY ’15 up 11 ver­sus the index up 5. FY ’16 up 4.7, the index basi­cal­ly just broke even. FY ’17 up 13, index up 11. FY ’18 he was up 11.5 ver­sus the index up 10.5, FY ’19 up 11, the index up 8. FY ’20 he was up 10, the index went down 0.79%. FY ’21 up 13.76, the index was up 20, and FY ’22 down 9.63 ver­sus the index down 3.78. So, I mean he beat the index and beat it nice­ly a num­ber of years there, but cer­tain­ly not get­ting QAV returns. But if I com­pare him to the super funds that he’s got here, Media Super and Aus­tralian Super, in most years he very safe­ly beat them — although they did­n’t go back as far as he did in FY ’22. And there’s a cou­ple of years that they beat him. But all in all, he beat the super funds.

Tony  15:23

And I think some­where else in the arti­cle it gives the CAGR for the last ten years, and I think from mem­o­ry he was some­thing like 9.68%, which was a slight out­per­for­mance of Media Super, which is what he was try­ing to beat.

Cameron  15:39

Oh, yeah. Last para­graph. “Over the long term, the fund has beat­en its bench­mark. Media Super’s Bal­anced Fund has returned 8.7% a year over the past ten years com­pared to the Chook Super Funds 9.89% return per annum over the past eleven years.” So, you know, good work to Tony, but he’s got thir­ty-five years’ expe­ri­ence as a finance jour­nal­ist. I mean, again, I’m not try­ing to be mean here, but again… Because I was com­plete­ly igno­rant about this kind of stuff until we start­ed the show, my assump­tion would have been, as I said before, that the pro­fes­sion­als knew what they were doing, being the fund man­agers and the finance jour­nal­ist, guys like this, but appar­ent­ly…

Tony  16:30

Well, I mean, I agree with you. How­ev­er, the finance jour­nal­ist is about chas­ing sto­ries, isn’t it?

Cameron  16:36

Yeah, but they’re sto­ries about finance and invest­ing.

Tony  16:40

But it’s like, there’s prob­a­bly one sto­ry a year about how to do it your­self prop­er­ly or about val­ue invest­ing, and there’s anoth­er ten thou­sand oth­er sto­ries, so I under­stand why they get swamped. But I agree, I mean, why isn’t the edi­tor of the AFR or the edi­tor of Chan­ti­cleer out there telling peo­ple how to invest for them­selves in a much more prof­itable way than the stan­dard way of doing it?

Cameron  17:03

Yeah. I mean, you would think that was sort of your mis­sion state­ment, real­ly.

Tony  17:10

But again, it’s like how these indus­tries evolve. Evo­lu­tion­ar­i­ly, he’s not going to suc­ceed by teach­ing peo­ple how to invest bet­ter. He’s going to suc­ceed by earn­ing the trust of the cor­po­rate types who pro­vide him with more arti­cles, and more impor­tant­ly, with adver­tis­ing for the AFR. So, he’s not about to say, “well, you know, don’t invest in Bit­coin,” because then the AFR los­es all the Bit­coin adver­tis­ing. So, there is an evo­lu­tion­ary ele­ment to all these things, too.

Cameron  17:40

So, who has the job out there of teach­ing peo­ple how to… Tony’s putting his hand up in the back­ground. A visu­al joke for our YouTube watch­ers, all four of them. Yeah, but I don’t know, like, out­side of pod­casts, in the main­stream media, who is try­ing to teach peo­ple how to do it? I mean, you’ve got the Bare­foot Investor who I gath­er did a rea­son­ably good job with his books and the stuff that he did before he stepped away from that a year or so ago. Any­one else that you’ve seen that does a good job?

Tony  18:19

Well, you know, peo­ple like Roger Mont­gomery were the ones that were doing it when I first start­ed. Jeff Wil­son to a cer­tain extent, so yeah.

Cameron  18:27

But they’re not jour­nal­ists.

Tony  18:28

No, cor­rect. And I’ve got to tip my hat to indus­try super funds. I mean, they’ve done a great job of deliv­er­ing mar­ket returns at a low­er cost than the for-prof­it funds. So, that’s there, but no one’s teach­ing it. No, you’re right. And inter­est­ing­ly enough, peo­ple like the Bare­foot Investor proved there’s a mar­ket out there for it. But you know, as we’ve seen, every door you open in this indus­try, the incen­tive is not to teach you how to do this cheap­er and bet­ter. The incen­tive is there to pay some­one to do it for you so they can earn a liv­ing. So, like, the more I think about our last four years, the more that, you know, the path we’re going down is just to dis­in­ter­me­di­ate this indus­try. Teach peo­ple how to do it for them­selves, all around the world, poten­tial­ly, in the end, and you know, just wake them up to the fact that they don’t have to pay high fees for under­per­for­mance.

Cameron  19:21

And I got an email from a lis­ten­er recent­ly, like in the last week, who’s think­ing about becom­ing a QAV Club mem­ber and he had a bunch of ques­tions. And one of the ques­tions he asked was, “are any of your lis­ten­ers get­ting the same sort of returns you’re get­ting?” And I said, well, the report­ing that we get back from them is that yes, they are. And in fact, in many cas­es, they’re doing bet­ter than we are. I said, “lis­ten, don’t take my word for it. Sign up to the two-week free tri­al, get on the pri­vate QAV Club Face­book group and ask them. Ask the ques­tion, and see what sort of feed­back you get, because we know that a lot of the Club mem­bers are kick­ing it out of the park. They real­ly have learned how to fol­low the sys­tem very well. And you know, the returns speak for them­selves,” as I think we men­tioned on last week’s show. Yeah. Okay, well, that’s Chan­ti­cleer. FMG. We talked about FMG, Fortes­cue Met­als, a week or so ago with the sud­den res­ig­na­tion of yet anoth­er CFO. You were sug­gest­ing that maybe there was some bad news to come, and the CFO was try­ing to dis­tance him­self from it. Well, the oppo­site hap­pened. They came out with what Chan­ti­cleer called a “stun­ner” result. For­rest says Chi­na’s ready to roll.

Tony  20:40

That doyen of finan­cial inves­ti­ga­tion, Chan­ti­cleer? Well, to be clear, I was­n’t say­ing that the result would nec­es­sar­i­ly be bad, I was say­ing that the CFO could­n’t put their name to the result. Sor­ry, alleged­ly, I’m sug­gest­ing the CFO could­n’t put his name to the result.

Cameron  20:57

That could pos­si­bly be one expla­na­tion. But yes, they came out with a very good result. Fortes­cue shipped 49.4 mil­lion tonnes of iron ore, set­ting anoth­er record for the Decem­ber quar­ter and tak­ing exports for the first half of the finan­cial year to a record 96.9 mil­lion tonnes. It was the fifth con­sec­u­tive year of first half export growth, which kind of reminds me about Chi­na’s report­ing on its econ­o­my, which you’ve tak­en some swipes at in the past. It’s always a record year, regard­less of what hap­pens. It’s going to be a record year.

Tony  21:34

The thing I find amus­ing about Chi­na’s report­ing is that, in every oth­er west­ern coun­try, it takes two or three months for the gov­ern­ment to report the stats. In Chi­na it comes out in a cou­ple of weeks.

Cameron  21:43

When you’ve got two bil­lion peo­ple doing the report­ing, Tony, you can get it done quick­ly.

Tony  21:48

Espe­cial­ly when they do what they’re told.

Cameron  21:52

Chan­ti­cleer says, “but if there’s one num­ber that real­ly points to For­rest’s jug­gling skills, it is sure­ly the US $700 mil­lion increase in cash Fortes­cue enjoyed over the quar­ter due to a US $4 bil­lion which helped net debt, that is cash minus debt, fall to just us $1.2 bil­lion.” Now, I know as we said on the recent show, you’ve long been a big fan of Andrew For­rest as a busi­ness­man and an entre­pre­neur. So, okay, on one hand we’ve got the CFO sud­den­ly resign­ing and then a week or so lat­er we have this very, very good-look­ing result. As a scep­tic, as I know you are, how do you read this as an investor?

Tony  22:35

I’m still cau­tious because of the finance res­ig­na­tions. It seems like a good result. And I checked the num­bers today, Fortes­cue Met­als Group has fall­en off the buy list because the price has got­ten a bit high, so the price to cash flow is below our low­er hur­dles. So, it’s a bit of an aca­d­e­m­ic dis­cus­sion, real­ly. If it was still on the buy list, it’s a tough one, isn’t it? On the one hand we have red flags, and on the oth­er hand we have a good result. So, I’m still cau­tious. I mean, that is the clas­sic red flag, isn’t it? And typ­i­cal­ly, if there is a prob­lem, and I don’t want to make alle­ga­tions here against any­one, but when I’ve seen this sort of thing hap­pened in the past, that the inde­pen­dent direc­tor resigns or the CFO resigns and the com­pa­ny keeps churn­ing out good results, it does­n’t do it for­ev­er. So, won’t be this one that caus­es the prob­lem, it’ll be in a year-or-so’s time when things catch up with what­ev­er was going on that the CFO was­n’t hap­py with.

Cameron  23:29

When the results came out on the 27th, or the night of the 26th which was Aus­tralia Day — so, some­where between the 25th and the 27th — the share price jumped. It went from $22.43 on the close of the 25th. On the morn­ing of the 27th, it was over $23.21. But then it slid right back down to $22.03 by the 30th. It has been edg­ing back up to $22.56, but it’s just around about the same place it was the night before the results came out now. So, what does that mean?

Tony  24:07

Oh, well, it prob­a­bly means that the big investors thought the results were going to be as they were as they came out.

Cameron  24:14

Fac­tored in?

Tony  24:15

Yeah, they were fac­tored in, there were no upward sur­pris­es for them, and, you know, it was busi­ness as usu­al for them. No one was rac­ing to jump in and buy up shares dra­mat­i­cal­ly.

Cameron  24:24

Well, they were. It spiked on that first morn­ing. It jumped near­ly 10% and then slid back down again with­in twen­ty four hours.

Tony  24:34

Yeah, so my read of that, for what it’s worth, would be that there were some insti­tu­tion­al buy­ers who were wait­ing for the results, saw that they came in good, pulled the trig­ger straight­away. And then in twen­ty four hours when every­one had a chance to look at it, they went “yeah, okay. It’s what we expect­ed,” and so the buy­ing dried up.

Cameron  24:52

But as you say, it’s not in our buy list. So, it’s some­what aca­d­e­m­ic for us, but we’ll see what hap­pens. The last sto­ry I’ve got, Tony, to talk about, is the stuff that’s hap­pened with Adani over the last week or so. I first got hint that this was com­ing in the Wall Street bets Sub­red­dit, which I con­tin­ue to fol­low for my own amuse­ment. These are the guys that were pump­ing all of the short-sold stocks over the last cou­ple of years. An activist investor group, Hin­den­burg Research, came out with a very large damn­ing report on Adani last week. Here’s the Guardians arti­cle on it: “US activist investor who accused Adani of biggest con in cor­po­rate his­to­ry dares Indi­an group to sue. Hin­den­burg research accu­sa­tions denied by Adani as base­less while activist investor claims legal action will reveal account­ing fraud. Hin­den­burg’s research report has already wiped bil­lions of dol­lars of val­ue from the sprawl­ing empire of Gau­ta­ma Dani, the world’s third rich­est man, and drawn into con­tentious Carmichael Coal and Rail project in Queens­land.” And then a cou­ple of days after that, I saw an arti­cle in the Finan­cial Review: “Adani route hits $92 bil­lion as fight with Hin­den­burg inten­si­fies. The Adani group took anoth­er blow on Mon­day with the stock rout going to US 66 bil­lion or 92 Aus­tralian bil­lion and it’s dol­lar bonds sold as the fight with short sell­er Hin­den­burg research esca­lat­ed. While the broad sell off con­tin­ued with Adani total gas and Adani trans­mis­sion down as much as 20% again, there were signs of a divide emerg­ing among traders. Adani Enter­pris­es, the flag­ship of bil­lion­aire Gau­tam Adani, as well as Adani ports and spe­cial eco­nom­ic zone rebound­ed fol­low­ing a rebut­tal of Hin­den­burg’s fraud alle­ga­tions.” So, I want­ed to just ask you what you think about these activist investors com­ing out with reports like this and crash­ing the share prices of these com­pa­nies? Now, I believe Hin­den­burg are short sell­ers, this is sort of their MO; they pick a tar­get that they think is doing some­thing dodgy, they short sell it, then they dri­ve the price down. As an investor, what are your thoughts about these sorts of guys?

Tony  27:14

Mixed. So, you’ve got to be care­ful that the peo­ple like the Hin­den­burg group aren’t just doing this to crash the share price after they’ve short­ed it. And, you know, in this case they’ve made a lot of alle­ga­tions and the mar­ket’s react­ed quick­ly and sold the shares. And it would take, I guess, a fair bit of a deep analy­sis to work out whether what they’re say­ing is true or not. And, you know, I’ve not­ed in today’s press that Adani’s back up 10% as peo­ple have tak­en Adani’s response and put it up against the Hin­den­burg Report, and they’re start­ing to make their, sort of, detailed minds up about it. But yeah, there’s a fair bit of shock­ing alle­ga­tions in the Hin­den­burg report, which if true, are bad. And they talk about mon­ey laun­der­ing and hid­den con­trol and the break­ing of laws on the Indi­an Stock Exchange, and things like that. So, I can’t real­ly com­ment on this case, because I don’t know much about Adani or Indi­an stock exchange laws or Hin­den­burg. But in gen­er­al, I find the most detailed research on com­pa­nies often comes from these short sell­ers, and they gen­er­al­ly have to real­ly, you know, stump up a good argu­ment to have any cred­i­bil­i­ty if they’re going to go up against the com­pa­ny and try and take them down like this. So, that’s the first thing, is that they gen­er­al­ly do detailed research and it’s pret­ty good, as opposed to a lot of ana­lysts who sim­ply take the com­pa­ny PR notice and copy it into a Microsoft deck, a Pow­er­Point deck, and put it out. Includ­ing the AFR that does as well. So, that’s one thing in favour of them. And their argu­ments always been with the demise of inves­tiga­tive jour­nal­ism, who out there is doing the detailed research against the com­pa­ny? The bro­kers aren’t moti­vat­ed to do that because they’re look­ing for work from these com­pa­nies. So, if you look at the bro­ker rec­om­men­da­tions and num­ber them, there’s usu­al­ly very few sell rec­om­men­da­tions. The buy rec­om­men­da­tions are gen­er­al­ly the most, and then the hold rec­om­men­da­tions between buy and hold, gen­er­al­ly some­thing like two thirds or more of all rec­om­men­da­tions are in that cat­e­go­ry. So, the stock­bro­kers have to stick their neck out quite far before they make a sell rec­om­men­da­tion, because they’ll realise, they won’t get cor­po­rate work from that com­pa­ny going for­ward. So, it’s real­ly only these activist investors that we get out there chal­leng­ing the results of com­pa­nies, and they do have a good track record of pick­ing up on the Enron’s of the world and the hous­ing cri­sis dur­ing the GFC in the US. So, there is a fair bit of cre­dence to them. Hav­ing said all that, Aus­trali­a’s in a bit of a dif­fer­ent mar­ket com­pared to the rest of the world, because, as far as I know, we only real­ly have one activist investor like this because the defama­tion laws and the reg­u­la­tions are so strin­gent around com­ing out with these kinds of alle­ga­tions that it’s often not worth the while of an activist investor in Aus­tralia. And again, you can see how the indus­try has evolved that way. If you look at who donates to polit­i­cal par­ties, it’s not activist investors. It’s the BHPs and the West­field­’s — not the West­fields, West­field is gone now, sor­ry — the big cor­po­rate Aus­tralians. And so, in the past if some­one comes out with this kind of report, num­ber one, they’re sued. Num­ber two, the phone gets picked up to the Trea­sur­er say­ing, “hey, this is real­ly bad for Aus­tralian busi­ness and the Aus­tralian econ­o­my. Can you tight­en the rules, please?” So, you don’t see much of it in Aus­tralia. Hav­ing said that, there is one com­pa­ny that’s worth peo­ple’s inves­ti­ga­tion called Bronte Cap­i­tal, and they run a long, short fund. They have some track record of doing activist invest­ing around the world. I don’t think they tend to oper­ate in Aus­tralia because of our laws, but they are based here. And it might be worth­while get­ting some­one from Bronte on the show, not so much to nec­es­sar­i­ly talk about activist invest­ing, but they’ve devel­oped a list of red flags over the years which would be inter­est­ing to go through and get their take on on things like the Fortes­cue Met­al CFO res­ig­na­tion. But also, oth­er red flags that they’ve used suc­cess­ful­ly to short com­pa­nies with.

Cameron  54:13

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.