Transcript QAV #511

QAV 511 Club

Cameron  00:03

Wel­come back to QAV, TK. This is episode 511. We’re record­ing this on the 22nd of what­ev­er month it is, March 2022. How are you?

Tony  00:18

Yeah, good.

Cameron  00:18

Hurt your back play­ing golf-you hurt your back some­how?

Tony  00:21

I did.

Cameron  00:22

Told you. Golf’s not good for you, man. It’s bad for your health.

Tony  00:26

You know what, I played yes­ter­day because like, yes­ter­day and today and Sun­day are the only three days in about the last month it has­n’t rained or is going to rain in Syd­ney. So, had a back mas­sage on Fri­day because I had­n’t had one because I was away for a long time and I thought I should get one. And some­times they can trig­ger some prob­lems. So, it was a bit sore on the week­end, bit sore yes­ter­day before I went, decid­ed to go, was moti­vat­ed to go because I know if I don’t play yes­ter­day I know I’m not gonna play for anoth­er week, at least. I came home with a sore back. Played with a nice Irish guy, got to the pro shop, all the way and I’m going “I don’t know if I can play today, I’m a bit sore.” Got to the pro shop, thought I’ll just, maybe I’ll play nine holes and see how I go. And they go “oh, we’ve got this guy vis­it­ing all the way from Ire­land. Would you mind pair­ing with the him?” No, it’s okay. So, played the before 18. Which was great, he was a real­ly nice guy.

Cameron  01:18

Oh, good.

Tony  01:19

Good guy. We became best friends. He was bitch­ing and moan­ing that he it cost him 65 bucks to catch a taxi from his hotel in Dar­ling Har­bour to the golf course. I said “its okay, I’ll give you a lift home.” “Oh, that’s just real­ly won­der­ful of you mate, I’ll buy a beer after­wards.” So, we had a few beers after­wards.

Cameron  01:35

Oh nice. That’s great. Look at you. You should be paid by the Aus­tralian Tourism Bureau. Did you slip him a QAV busi­ness card, Tony, and say, if you know, get into this, you won’t wor­ry about the $60 Uber fare.

Tony  01:51

I did­n’t, no.

Cameron  01:52

Okay. Well take care of your­self, because we had a won­der­ful din­ner in Bris­bane last week. Thank you to every­body who came along. It was a great night. But one of the top­ics of dis­cus­sion was your health, Tony. And I think it was Ed Nixon who said, you know, he wants to learn every­thing that you know and be as good as you are before, you know, some­thing trag­ic hap­pens to you.

Tony  02:18

Was it a wake, or was it a din­ner?

Cameron  02:21

I may be putting words in his mouth there. He did say, no, we were talk­ing about, yeah, look, I said that’s my objec­tive too. I, you know, “Tony could get hit by a bus tomor­row, or catch COVID, or what­ev­er, we need to learn every­thing that he knows” before you pass off the mor­tal coil. You know, we need to do the trans­fer of the Dhar­ma.

Tony  02:41

Yeah, well, right. But, there’s three years of it tran­scribed, so I’m not sure what more I can do.

Cameron  02:47

Ah, there’s always some­thing new and you change the rules all the time.

Tony  02:51

Yeah, true.

Cameron  02:52

No, it’s good. So, thank you to every­one who came. All right, into the news. Hamish Dou­glas resigns from the Mag­el­lan board this week, Tony. Is that a big deal? I’ve read var­i­ous-some new sources are going, “this is the end of an era.” Some are say­ing, “ah, no big deal. He’ll be back. He’s just tak­ing some time off.” I don’t know. Resign­ing from a board of the com­pa­ny that you’ve been run­ning for twen­ty-odd years sounds like a bit of a major step to me.

Tony  03:17

Yeah. I mean, I’m not sure. I think he’ll be back myself. He’s been under a lot of stress, been through a divorce. Maybe in six months or twelve months, I think he’ll come back. But yeah, I mean, just the whole Mag­el­lan sto­ry shows you, well, just what we’ve been talk­ing about: if one per­son gets sick or gets stressed, then the whole thing falls in the hole. It’s key man risk, right.

Tony  03:38

Yeah.

Tony  03:38

And that book I fin­ished read­ing recent­ly about the UK, “Built on a Lie”, which was real­ly good. And it’s the same sort of sto­ry, key man risk. He was real­ly good for twen­ty-thir­ty years of invest­ing, only buy­ing blue chip com­pa­nies, avoid­ed the GFC, avoid­ed the dot com bub­ble, all this kind of stuff. And then hubris got to him and he thought he could invest in biotech start-ups. And then that turned to liq­uid. And that was one thing he need­ed, was liq­uid­i­ty, and he did­n’t have it because he could­n’t sell them. So, he got squashed. So, sim­i­lar sort of sto­ry. It’s a shame it’s hap­pen­ing, but it does hap­pen. Well, it’ll be like War­ren Buf­fett when he pass­es away, and when Char­lie pass­es away, what’s going to hap­pen with Berk­shire then? I mean, he’s doing every­thing he can to hand it over to some of his staff, but are peo­ple real­ly going to treat your staff the same way they’ve been treat­ing him? I think there’ll be an exit when it hap­pens.

Cameron  04:33

I saw this. I lived through this, in part, at Microsoft when Bill Gates stepped away from the com­pa­ny after the gov­ern­ment went after them — the antitrust stuff. And Bill ini­tial­ly stepped down as CEO and stepped down as pres­i­dent and then even­tu­al­ly left the board as well. But you know, it was it was very hard. Bill Gates had a cer­tain aura about him, and peo­ple lis­tened to Bill in a dif­fer­ent way than they lis­tened to Steve Ballmer, even. And it’s tak­en them a while, but I think they’re back on track now. I think the new guy has got a lot of respect and seems to be doing well. But yeah, it’s, the tran­si­tion of founder like that is dif­fi­cult. When Steve Jobs died, it must have been very dif­fi­cult at Apple, but Tim’s obvi­ous­ly done a tremen­dous job in most respects.

Tony  05:20

Yeah. And I think both those peo­ple recog­nise the fact that the com­pa­ny had to be set up to sur­vive after them. So, they do go through a peri­od of decline, but they do, if their com­pa­nies are good enough, they will bounce back and do even bet­ter.

Cameron  05:33

But, that aura of the Buf­fet, or the Gates, or the Jobs, Rupert Mur­doch, you know, these guys, you know, they car­ry… It’s like Good­will. We were talk­ing about this last week.

Tony  05:43

Yeah, right.

Cameron  05:44

Not-tan­gi­ble, intan­gi­ble, intan­gi­ble assets.

Tony  05:47

Intan­gi­ble, yeah. Well, it’s exact­ly right. Because, there’s a trust in those peo­ple that because they’ve done so much, seen so much, that no mat­ter what gets thrown at them, the com­pa­ny will come through, and they’ll come through. Takes a long time to build that up, that trust up.

Cameron  06:01

Yeah.

Tony  06:02

So, Hamish Dou­glas going is a big deal. Inter­est­ing­ly enough, it was kind of, a com­pa­ny called St. James’ Place which had a large stake in the Mag­el­lan funds, when it was pulled that was prob­a­bly the end. It was also in the same posi­tion with this book I was read­ing in the UK, “Built on Lies,” same thing. They had a big stake in the fund there, and when things start­ed to turn to shit, they pulled their mon­ey out which was the, you know, the death knell for the fund.

Cameron  06:31

It was Saint James’ Place, it was the same mob?

Tony  06:33

Same one, yeah.

Cameron  06:34

They’re not short­ing these organ­i­sa­tions, are they?

Tony  06:40

Yeah, well, pos­si­bly. I doubt it, bet­ting against them­selves.

Cameron  06:43

Sound like an old Ker­ry Pack­er play.

Tony  06:46

I don’t know about Ker­ry Pack­er. But yeah, I mean, it’s an inter­est­ing sce­nario, isn’t it? They could be, you know, slip­ping pho­tos to Hamish Dou­glass’s wife, start­ing the divorce because they short­ed the stock. But no, that’s not going on.

Cameron  06:59

Alleged­ly. You post­ed a link to our Face­book group the oth­er day about Rus­sia spi­ralling towards a $210 bil­lion default night­mare. That was the top­ic of big con­ver­sa­tion at the Bris­bane din­ner last week. Talk us through how you under­stand this.

Tony  07:17

Yeah. So, Rus­sia, like almost every oth­er coun­try in the world, has has debt flows. And, they’re in a bit of a jam at the moment because the debt that they’ve tak­en out, which is main­ly to invest­ment bankers in the US — and per­haps even the gov­ern­ment in the US, I’m not famil­iar with the exact bonds that they’ve been hold­ing. But, as a rule, or an oblig­a­tion asso­ci­at­ed with those bonds, they have to pay the debt when it’s due in US dol­lars. And of course, now with the sanc­tions are placed on Rus­sia, they can’t do that. So, they said “we’ll pay it in Rubles.” But that’s a breach of the bond, so they have thir­ty days to come up with US Dol­lars or they default. And, you know, a $210 bil­lion default is quite large even for Wall Street. Yeah, so I’m fol­low­ing the mon­ey here. I’m guess­ing that the big banks on Wall Street aren’t going to like that and they’re going to be putting some pres­sure to play some­where, per­haps on the US gov­ern­ment, to try and get things tied up with a neat bow by the mid­dle of April, so they can get their mon­ey back. So, that’s one dimen­sion of it. And that’s me draw­ing a long bow and I don’t like pre­dict­ing things, but there’s cer­tain­ly some pres­sure of mon­ey behind what is going on there. But the oth­er side that that real­ly, I think, was prob­a­bly the les­son for QAV lis­ten­ers was that the rat­ing agen­cies had raid­ed these bonds high­ly, you know, dou­ble A, dou­ble A plus, or even high­er, all the way through, you know, safe. Bet your hous­es, low mon­ey to Rus­sia, no prob­lems, they’ll pay it back guar­an­teed, right? And, you know, 140,000 troops mass on the bor­der with Ukraine. “No, no, they’re still rat­ed sol­id gold, not going to be a prob­lem.” And now they’re worth, well when this arti­cle was pub­lished, they were worth 20 cents on the dol­lar. I under­stand that no one can fore­see what has hap­pened with any degree of cer­tain­ty, but these guys should have been tak­ing risks into account with their rat­ings, right? They should have been say­ing “okay, it was triple A, but now there’s some­thing fun­ny going on with the Ukraine. Let’s down­grade them a bit.” But they nev­er did, right up until the first shots they were still say­ing that these were sol­id gold rat­ed debt instru­ments and they weren’t. And it was the same thing dur­ing the GFC. The rat­ings agen­cies, soon as one of them list­ed. So, they were all unlist­ed com­pa­nies in the past and they were known for being inde­pen­dent, objec­tive — which they had to be because they’re rat­ing debt secu­ri­ties, right? So, they had to be inde­pen­dent and objec­tive. As soon as they list­ed, and as soon as one of them list­ed, I think was Moody’s went first, but who knows? The oth­er ones had to list as well. And then they became behold­ent to the peo­ple that they were rat­ing. You’re, I don’t know I’ll just pick one, Citibank, and you’re putting out a bond issue and you bring up Moody’s and you say, “hey, we’re putting out this bond. What are you going to give us? A triple plus? Yeah, we’ll go across the road, see what Stan­dard and Poors will give us. And by the way, we own 5% of you guys so let’s get a bet­ter deal.” So, it became heav­i­ly cor­rupt­ed. And I even remem­ber, after the GFC, they did a big inves­ti­ga­tion into the caus­es and they named the rat­ing agen­cies as that the prob­lem. And I remem­ber one of their ex-employ­ees giv­ing tes­ti­mo­ny to say, “yeah, before we list­ed we used to, you know, some­one would come up with a big debt issuance. We’d get a piz­za, we’d stand around the board­room for half an hour, like, read­ing through all the small print, under­stand­ing, and we’d rate it. Now, some­one’s putting out a debt instru­ment because we’re list­ed and we have rela­tion­ships with them, I get a phone call from the sales clerk say­ing it needs to be a triple plus.” You know, it’s like, the sales­peo­ple were dri­ving the com­pa­ny because they had to keep the rev­enue top line grow­ing, which was good for their share­hold­ers, and it became a big con­vo­lut­ed snake eat­ing its tail type sce­nario. So, no, I don’t have much respect for the rat­ings agen­cies, and to be hon­est I don’t think peo­ple out there should. They’re con­flict­ed.

Cameron  11:09

And what did you call them in the Face­book post?

Tony  11:11

Oh, they’re flogs. Absolute flogs.

Cameron  11:14

And that is the title of this week’s episode: “Flogs, they’re a Bunch of Flogs.” Well, that leads me direct­ly into the next sto­ry I want­ed to talk about, which was Cory Doc­torow’s arti­cle about asset man­ag­er cap­i­tal­ism. Did you have a read of that?

Tony  11:32

I did. Yeah. I was sur­prised. I mean, Cory Doc­torow, well, my knowl­edge of Cory Doc­torow is that he’s a sci­ence fic­tion writer.

Cameron  11:38

He is, but he’s a lot more than that, yeah. I mean, he’s been one of the lead­ing tech­nol­o­gy activists for decades around fight­ing against DRM and fight­ing against Face­book, and tech­nol­o­gy stan­dards. He’s a non­fic­tion writer as much as he is a fic­tion writer.

Tony  11:58

Okay.

Cameron  11:59

But I’ve read, I mean, I’ve read a num­ber of his fic­tion books which I real­ly enjoyed. So, you read this arti­cle on — I sub­scribe to him on Medi­um, read this sto­ry the oth­er day — we’re liv­ing in an era of extreme­ly weird cap­i­tal­ism. “Amer­i­can cap­i­tal­ism is usu­al­ly described as a sys­tem in which top man­agers are reward­ed with stock options, which incen­tivizes them to max­imise returns to share­hold­ers who are so dis­persed that they strug­gle to con­trol com­pa­nies by vot­ing their stock.” But then he talks about how we’re now in the era of asset man­ag­er cap­i­tal­ism as a cor­po­rate gov­er­nance regime, which was a paper that came out from Max Planck Insti­tute, author by the name of Ben­jamin Braun. “What’s asset man­ag­er cap­i­tal­ism? It’s a mar­ket dom­i­nat­ed by the asset man­agers from three giant index funds, Black­Rock, Van­guard and State Street, along with a few oth­er giant funds that roll up pen­sion funds and oth­er funds, vast fam­i­ly for­tunes, man­aged funds, etc. These funds are giant. Between them, they own an aver­age of 22% of every S&P 500 com­pa­ny,” every S&P 500 com­pa­ny!

Tony  13:04

Wow.

Cameron  13:05

“They don’t just own a big stake in the whole sec­tor, like War­ren Buf­fett buy­ing a big chunk of all four air­lines, they own sig­nif­i­cant stakes in every indus­try; not just air­lines, but hotels, resorts, rental car agen­cies, etc. But even though they have a lot of pow­er, for many com­pa­nies an index man­ag­er is their largest share­hold­er, they are weak in one crit­i­cal respect: an index fund can’t walk away from their invest­ment. If you’re track­ing the S&P 500, you’ve got to own the piece of near­ly every S&P 500 com­pa­ny. This is super extra weird.” So, he goes on to talk about, for lis­ten­ers, you know, in the­o­ry, these big stake­hold­ers can use their share­hold­ing and their seat on the board to threat­en the com­pa­ny to do this or that, or change their prac­tices or what­ev­er. These guys can’t sell because they’re oblig­ed to own these mas­sive stakes in these com­pa­nies.

Tony  13:07

Yeah, because their index man­aged funds.

Cameron  14:06

Right. And also, they own a mas­sive stake in every­thing. So, like the entire econ­o­my is sit­ting with these guys who can’t real­ly be activists, they just hold it. And so, he talks about some of the issues with that, which I found real­ly enlight­en­ing and inter­est­ing. I know you’ve talked about some of these issues in the past too, about these index funds and hold­ing large stakes of all these busi­ness­es and some of the impli­ca­tions of that from an invest­ing per­spec­tive. What did you take away from Cory’s arti­cle?

Tony  14:36

Yeah, it’s very inter­est­ing. I mean, again, this is like a two-phase piece because the lead­ers of those three com­pa­nies, Black­Rock, etc., have come out and said they’re going to start apply­ing pres­sure from an ESG per­spec­tive on com­pa­nies — but they don’t. I mean, Rear Win­dow in the Fin Review every now and then has a go at them because they still vote with the com­pa­nies on when there’s, like, a share­hold­er activist’s vote about cli­mate change, for exam­ple. They’ll say that they’re pro for it, but when the vote comes down they just vote with man­age­ment. And because they’re index funds, they own shares in gas and coal and oil and all those things. And tobac­co — well, there’s no tobac­co in Aus­tralia, but there is in oth­er parts of the world — liquor, gam­bling, all those kinds of things, arma­ments man­u­fac­tur­ers. So, I mean, they’re just basi­cal­ly pas­sive cap­i­tal for com­pa­nies. And it’s inter­est­ing, that num­ber you said, 22%, last I saw it’s about 13% in Aus­tralia, and I’m not sure if that’s just the index por­tion of ETFs but it’s prob­a­bly the whole mar­ket, so some active peo­ple in there as well. But yeah, I mean, there’s a whole heap of issues here on the invest­ing side; there’s what hap­pens when some­body who owns 13–20% of the mar­ket sells, there’s going to be a big step down in the share price. Now, if it’s an index fund, it’s only going to hap­pen if it moves from the ASX 200 down­wards, for exam­ple, but that’s a big issue. But as you’re say­ing, from the cor­po­rate gov­er­nance side, these peo­ple are pas­sive, they vote with man­age­ment. It’s basi­cal­ly giv­ing top com­pa­nies a free kick, isn’t it, to enact what­ev­er poli­cies they want to. Because if you want to vote against man­age­ment, you’ve got to not only have a major­i­ty, but the major­i­ty has just been increased by 20%, you’ve got to basi­cal­ly get a major­i­ty. If they’re 20% is vot­ing with man­age­ment, you’ve got to get a lot of votes to over­turn some­thing that man­age­ment wants to do if you dis­agree with it.

Cameron  16:23

And accord­ing to Cory, look­ing at these com­pa­nies in the US, as you said, they’re very pas­sive. He says, “between 2008 to 2017, four thou­sand share­hold­er pro­pos­als were tracked by the Rus­sell 3000 Index. None of them came from a big-three asset man­ag­er.”

Tony  16:42

Yeah.

Cameron  16:42

So, they’re not try­ing to change these com­pa­nies at all.

Tony  16:46

And they would argue they work behind the scenes. So, they pick up the phone and say, “lis­ten, I own 20% of you, you’re doing this.” There’s prob­a­bly a lot of that going on, too. So, I think it’s a two-way street in this cir­cum­stance. But I haven’t heard much evi­dence of that going on. I haven’t heard of any evi­dence of Black Rock, etc., influ­enc­ing a com­pa­ny’s strat­e­gy to suit Black Rocks needs at all. Heav­en help us if it ever does come to tran­spire that a gov­ern­ment wants to turn against those big insti­tu­tions. I mean, it’s going to be a, they’re going to be fight­ing a lot of mus­cle when they’re that big, and have that much influ­ence. I mean, every com­pa­ny CEO is going to be opposed to it, to what­ev­er change the gov­ern­ment… I think if a gov­ern­ment comes in and says, “well, we’re now going to bring in a 20% car­bon tax.” And Black­rock says, “oh, no, you’re not.” You’ve basi­cal­ly got every cor­po­ra­tion in Aus­tralia, in the US and UK, prob­a­bly, in Europe, fight­ing against that.

Cameron  17:42

Which they prob­a­bly would be, any­way. But, still, unless they’re a green ener­gy com­pa­ny or some­body who stands to ben­e­fit.

Tony  17:49

Yeah, but this was­n’t, I mean, the point I’ve made in the past is this was­n’t there when I first start­ed invest­ing, right? Sure, there were man­aged funds; the peo­ple who came before Mag­el­lan, you know, you’re Plat­inum’s, those kinds of peo­ple — Bankers Trust — they had large funds, but they were nowhere near as large as what they cur­rent­ly are. And with the rise of index funds, they did­n’t have the same rules. So, if Bankers Trust did­n’t like what the com­pa­ny was doing, they’d sell the shares. Now, Black­rock can’t do that if it’s mar­ket­ing itself as an index fund to its cus­tomers, they’ve got to hold the shares. So, it’s a very dif­fer­ent game. Apart from the fact it pro­motes the sta­tus quo, so it’s going to be hard to see change from an ESG side of things, cor­po­rate gov­er­nance side of things, I think it’s going to also play out in any sort of mar­ket route where you see com­pa­nies start to drop out of the index. They’re going to fall even heav­ier because of that.

Cameron  18:40

Because all these big asset man­agers are going to have to sell their steaks, and it’s just going to be a dump.

Tony  18:45

Cor­rect.

Cameron  18:46

All right. Well, any­way, I found that inter­est­ing when it crossed my path this week. Cop­per is a buy again, Tony, it was a sell for about five min­utes.

Tony  18:55

Yeah, it was­n’t long was it?

Cameron  18:57

And it stuck its nose up again.

Tony  18:59

It is skirt­ing it’s sell line. But yeah, it is still going up, and it’s turned up again this week.

Cameron  19:03

So, to every­body who sold their cop­per stocks last week when we said cop­per was a sell…

Tony  19:09

You can buy them back.

Cameron  19:11

Yeah, you can buy them back.

Tony  19:12

And look, this has been an unusu­al mar­ket, not just for cop­per. But you know, I’m going to do a pulled pork on Mac­quar­ie group soon, and that was a stock I held and sold. It’s now back on the buy list about a month lat­er. So, it’s a bit of an unusu­al mar­ket at the moment. It’s been dip­ping, it’s been com­ing back, it’s been going side­ways. There’s a lot going on out­side of the mar­ket which is affect­ing it, and I think, you know, when things start to clear up a bit the mar­ket will start to get a bit firmer. But at the moment it’s shift­ing sand.

Cameron  19:43

You think things are going to return to nor­mal, Tony?

Tony  19:47

Well, who knows? I hope so. And nor­mal for the mar­ket isn’t so much that there’s a lot going on in the world, it’s how pre­dictable is what’s going on. And so, the mar­kets get­ting com­fort­able with the fact that pow­ers in the US are say­ing that inter­est rates will rise and there’ll be five or six rate ris­es this year, the mar­ket in Aus­tralia is kind of pre­dict­ing there’ll be rate ris­es here. So, it’s not so much that the inter­est rates are ris­ing, it’s the mar­ket get­ting to grips with being able to pre­dict what’s going to hap­pen. Even­tu­al­ly, some­thing will clar­i­fy in Europe and the war in Ukraine will end or ramp up or what­ev­er, and the mar­ket will get com­fort­able with that. And with COVID, and all those kinds of things — prob­a­bly already is com­fort­able with COVID, I think that’s prob­a­bly a mis­take. But any­way, it’s the fact that there’s a lot going on and it’s dif­fi­cult to pre­dict that’s the prob­lem with the mar­ket. There’re always things going on. I mean, the stock mar­ket went through the Cold War, went through all of the Viet­nam War, Kore­an War, blah, blah, blah. They con­tin­ued to trade, it’s just how pre­dictable can they be in putting their mon­ey into the mar­ket and get­ting it back with inter­est in the future.

Cameron  20:47

So it’s pre­dictabil­i­ty that mat­ters?

Tony  20:49

Yeah, cer­tain­ty. But yeah, I was just think­ing — Jen­ny and I were talk­ing about this last night; it’s just, we’re hand­ing over a crap world to our kids. I mean, with COVID, and with dif­fi­cul­ties in buy­ing hous­es and inter­est rates ris­ing, and what­ev­er’s going to hap­pen in Europe or Chi­na, all those kinds of things. I mean, we grew up with those kinds of back­drops, but they were dif­fer­ent, you know. The Cold War was dif­fer­ent and the Viet­nam War was dif­fer­ent. But yeah, it’s just, we had a good run there I feel for at least a decade if not more, where there was a lot going on, but does­n’t seem to almost as big as exis­ten­tial as it is now.

Cameron  21:26

Yeah, I’ll talk about it in after hours, but I, last week, I’ve been read­ing John Mearsheimer’s book, The Tragedy of Great Pow­er Pol­i­tics that he wrote in 2001, before 9/11, before the Iraq inva­sion, the Afghanistan inva­sion, that kind of stuff, but ten years after the end of the Sovi­et Union. And, you know, this is the book where he expound­ed upon the the­o­ry of offen­sive real­ism, as he calls it. You know, he starts the book by say­ing, “you know, there’s a lot of peo­ple say­ing this is a new era, the End of His­to­ry as Fukuya­ma says, the end of the Cold War and the Sovi­et Union and Bill Clin­ton had been say­ing it’s going to be this nice future where every­one gets along and coop­er­ates and rain­bows and flow­ers and Kum­baya and uni­corns, and all this kind of stuff.” And he was say­ing, “yeah, I don’t buy it.” This is why it’s a real­ist view of how the great pow­ers oper­ate. And the offen­sive part is because offence is the best form of defence. So, he said, like, bot­tom line is the states and the great pow­ers don’t trust each oth­er. And for good rea­son, they’re always lying to each oth­er and their view of the world is only the strongest sur­vive. And so they will always be try­ing to take from each oth­er and try­ing to get on top. He quotes Immanuel Kant, basi­cal­ly say­ing the best form of achiev­ing per­pet­u­al peace in the eyes of most kings or nations is com­plete hege­mo­ny. That’s the only way you can have per­pet­u­al peace, is if you con­trol every­thing. And he’s say­ing, yeah, that’s basi­cal­ly how these guys, how, you know, states think. They have to, because if you close your eyes, you’re wor­ried that the oth­er guy’s gonna sneak up behind you and hit you over the head with a mal­let.

Tony  23:14

That’s cer­tain­ly the auto­crat­ic view isn’t it, Putin con­trol­ling the media and Xi Jin­ping con­trol­ling the media and all that, it’s hege­mo­ny.

Cameron  23:22

But it’s the same here. I mean, the blan­ket, one-sided nar­ra­tive that we’re get­ting in the West is real­ly no dif­fer­ent in for as far as I can tell. It’s the same blan­ket nar­ra­tive

Tony  23:35

Yeah, we’re the good guys, they’re the bad guys, yeah.  And we’ve talked about it before, it’s that red/blue thing in your brain that’s been there since this start of evo­lu­tion: our tribe good, tribe over there bad.

Cameron  23:46

And peo­ple like us are going “well, you know what, we’ve done some bad shit and those oth­er guys, they have their good points.” We’d be pushed into the lava pit, you know, very quick­ly.

Tony  24:01

“A lit­tle to the left,” yeah.

Cameron  24:04

But I have a pod­cast!

Tony  24:08

Prob­a­bly the only bit of insight­ful jour­nal­ism I read this week, I for­get where I read it, but some­one point­ed out that Angela Merkel is gone, and Rus­sia, the rela­tion­ship with Rus­sia changed almost imme­di­ate­ly after she left — or the rela­tion­ship between the West and Rus­sia changed. And, you know, the new guy who’s in Ger­many has start­ed build­ing up his mil­i­tary again, he’s on the offen­sive with Putin, where­as Merkel just kept man­ag­ing Putin. She’d throw him a bit of trade, then she’d put some sanc­tions on him when he invad­ed Crimea, then she’d trade with him. So, she was, you know, danc­ing with him, which seemed to work because she was open, you know, open to dis­cus­sion and trans­act­ing. Where­as, the new guys just “nup, walls are up. I’m going to start build­ing my mil­i­tary again. I don’t care what Putin thinks.”

Cameron  24:54

More of a hard­lin­er. Any­way, back to invest­ing. GRR, Tony, now a star stock.

Tony  24:59

Yeah, just again, this is one of the things I’ve spo­ken about which I enjoy, is when we find some­thing on our buy list and then Stock Doc­tor a bit lat­er gives it a top rank­ing, a star stock rank­ing, and GRR was one of those this week. So, that’s good. It means that its score goes up in our buy list as well.

Cameron  25:16

MQG is back on the buy list, as you men­tioned, and BSL and COG.

Tony  25:23

BlueScope Steel. Yeah, I mean, I think things are set­tling down after the report­ing sea­son now. We’re start­ing to get a lot of the fig­ures are in Stock Doc­tor now, there’s still a cou­ple miss­ing, but a lot are in. And this is an exam­ple of what I was say­ing before, Mac­quar­ie, BlueScope and COG have all been on the buy list in the past, even in the recent past. They’ve gone off, they’ve dipped down in the first quar­ter of this year, because every­thing that’s going on in the world, and now they’re start­ing to come back up. Which is, you know, it hap­pens. It’s kind of a sign of a volatile mar­ket. But yeah, I mean, I sold out of Mac­quar­ie group a lit­tle while ago, and now it’s back on the buy list and it’s a big stock, I’ll prob­a­bly buy back into it at some stage going for­ward.

Tony  25:59

Yeah, I had it and sold it too. You’ve got some inter­est­ing thoughts about petrol and EVs, Tony.

Tony  26:05

Yeah. So, what struck me was, I mean, there’s been a lot of arti­cles com­par­ing our cur­rent eco­nom­ic envi­ron­ment back to the 70s when there was a last big petrol shock and the price of gaso­line went up a lot because of OPEC. I was in my ear­ly teens, then. And I remem­ber at the time that sud­den­ly there was this this whole flood of new Japan­ese cars in the neigh­bour­hood. We went from peo­ple dri­ving me Monaros and Valiant Charges, which were big V8 gas guz­zling cars, to bats and 180Bs and 120Ys, and well, my first car was a Ford Escort, a lit­tle four-cylin­der thing. So, the fact that petrol went from being rea­son­ably freely avail­able and rea­son­ably cheap to being expen­sive, meant the whole car mar­ket shift­ed to meet that change. And I think it’s prob­a­bly, again, not want­i­ng to pre­dict any­thing, but I think with oil being priced so high­ly –which I think is prob­a­bly going to be a longer-term thing more so than what peo­ple think, I know peo­ple are say­ing it’s because of Ukraine and the sanc­tions on Rus­sia, and that’s tak­en 6 or 7% out of the mar­ket, and those things are all true. But there’s also a fair bit of analy­sis around there now say­ing that because of pres­sure on banks not to loan to oil com­pa­nies, because of oil com­pa­nies them­selves not get­ting access to cap­i­tal, there’s a lot less explo­ration going on in the oil indus­try. So, typ­i­cal­ly, what hap­pens with any of these resources is as soon as the price ris­es, the mar­ket gets sat­u­rat­ed with new entrants and they soak up that price rise. And it’s hap­pen­ing a lit­tle bit, hap­pens with the oil shale pro­duc­ers in the US in par­tic­u­lar, but you know, there’s a fair bit of analy­sis say­ing the price is going to stay high going for­ward, because peo­ple are view­ing it as an area they don’t want to invest in which con­strains your abil­i­ty to find new fields. So, any­way, so I think this is prob­a­bly around the time when elec­tric vehi­cles might get a big push into the mar­ket from the big car man­u­fac­tur­ers, and prob­a­bly gain a fair bit more trac­tion than they have, because petrol is expen­sive.

Cameron  28:09

So buy Tes­la, is that what you’re say­ing, Tony?

Tony  28:12

I would nev­er rec­om­mend Tes­la. They’re great cars, but remem­ber that there’s a dif­fer­ence between the prod­uct and the com­pa­ny, or the prod­uct and the invest­ment. No, my per­son­al view for what it’s worth, and it’s not worth much when it comes to the car indus­try, is that just like now the, you know, the Fords, the VWs, the Volvo’s, the Nis­sans, the Toy­ota’s of the world are still going to dom­i­nate the EV mar­ket. Tes­la will have a place prob­a­bly at the pre­mi­um end, it will prob­a­bly com­pete against the BMW and Mer­cedes Ben­z’s as I would expect, rather than the mass mar­ket.

Tony  28:44

So, from an invest­ing per­spec­tive, how does this come into play?

Tony  28:48

Well, it does­n’t from an invest­ing per­spec­tive. We don’t have any car man­u­fac­tur­ers in Aus­tralia, so we can’t real­ly invest. Over­seas, I mean, who knows? I don’t like invest­ing in the­mat­ics, I just think it’s going to be a change we’ll see in soci­ety.

Cameron  29:01

We do have some guys here that make charg­ers for elec­tric cars, though, there’s a mob out of Bris­bane that’s been get­ting some media play recent­ly. Can’t remem­ber their name.

Tony  29:10

Tri­tium?

Cameron  29:10

Tri­tium. Yeah, that’s it.

Tony  29:12

Well, again, poten­tial­ly, but they would­n’t be a QAV stock. I mean, they’re a start­up. They won’t be pro­duc­ing any sort of pos­i­tive cash flow any­time soon, I don’t think.

Cameron  29:19

So, no real impli­ca­tions for us but just inter­est­ing by the by.

Tony  29:24

Yeah.

Cameron  29:24

Tony’s pre­dic­tion cor­ner.

Tony  29:28

Aster­ix, not a pre­dic­tion.

Cameron  29:31

“We don’t pre­dict,” yeah. Talk to me about KRM.

Tony  29:34

I promised to do a pulled pork on KRM last week, could­n’t do it. This week, can’t do it still. The fig­ures still aren’t in Stock Doc­tor for its lat­est results. So, I’ll try again next week. I will do it, I know some­one’s request­ed it so I’m not try­ing to duck it. You might actu­al­ly con­tact Stock Doc­tor and see if we can get the fig­ures loaded. Hap­py to do a pulled pork on the cur­rent fig­ures, but they’ll prob­a­bly be out of date as soon as we do some­thing, right. I’m inclined to wait a bit.

Cameron  29:58

So, you’re going to do Mac­quar­ie instead.

Tony  30:00

Yeah, so if I can do that now. Mac­quar­ie, peo­ple will be famil­iar with it. It’s a large-cap, I’ll call it a bank stock. It’s far big­ger than a bank stock. It start­ed out as a bank, though, orig­i­nal­ly was called Mac­quar­ie Bank when it first start­ed which is how I remem­ber it. Got into stock broking, and I remem­ber at the time that I was first get­ting into invest­ing, the retail bro­ker­age reports for a Mac­quar­ie were prob­a­bly the best in the mar­ket, they were always real­ly good. And it became more of an invest­ment bank over time, grew with that. And now, it’s prob­a­bly more of an infra­struc­ture type fund. So, it has four busi­ness­es with­in its group. The Mac­quar­ie asset man­age­ment, which I think would be about the biggest now, it prob­a­bly is, is large­ly an infra­struc­ture investor. And, so, that means that they’re big in toll roads, espe­cial­ly over­seas; agri­cul­ture, so farms; what’s known in the indus­try as alter­na­tive assets, so, things you can’t buy gen­er­al­ly list­ed on the mar­ket, like, I don’t know, wind farms or pri­vate equi­ty buy­out firms, that kind of thing; issu­ing debt, pri­vate debt issuance to fund com­pa­ny expan­sion or what­ev­er. That’s prob­a­bly the biggest part of Mac­quar­ie Bank now, and it reminds me a lit­tle bit more of Berk­shire Hath­away than it does of a nor­mal bank. So, if you for­get the list­ed invest­ment side of Berk­shire Hath­away, War­ren’s been try­ing for a long time to buy into infra­struc­ture like assets that have high bar­ri­ers to entry and pre­dictable cash flows, and often­times gov­ern­ment reg­u­lat­ed cash flow. So, a big part of Berk­shire Hath­away now is their rail busi­ness, Burling­ton Nation­al Rail, and com­pa­nies like it, and also their pow­er busi­ness. So, they’re two big parts of Berk­shire Hath­away, and I think Buf­fet­t’s attract­ed to those because they require lots of cap­i­tal, so he can invest the mon­ey that he has, the cash that he has, but they’re also in it for the long term. You can pre­dict out and say that, “I expect that the rail­ways will gen­er­ate five or 6% growth year on year, will always be prof­itable, will always oper­ate even in times of down­turn because they move freight around inter­nal­ly in Amer­i­ca,” all those kinds of things. Same with the pow­er com­pa­ny. They’re large­ly blue-chip long-term invest­ments. And I think Mac­quar­ie’s sort of get­ting into that mar­ket now, it likes to invest in infra­struc­ture assets, often, or prob­a­bly always, unlist­ed. It likes to throw cap­i­tal at it, because it has lots of cap­i­tal, it likes the fact that they’re almost like an annu­ity type of invest­ment. So, when they buy a toll road, they know that they’re going to get tolls for the next twen­ty years. They know that they’re going to be tied to infla­tion, all those kinds of things. So, that’s now a large part of what Mac­quar­ie group is, prob­a­bly the pre­dom­i­nant part. But it also has some oth­er side, it has the bank­ing and finan­cial ser­vices side. So, it does oper­ate a retail bank, does hold a bank­ing licence in Aus­tralia, it does pro­vide-lends mon­ey to peo­ple and to com­pa­nies just like a nor­mal bank does. It also has Mac­quar­ie com­modi­ties and glob­al mar­kets, which is anoth­er divi­sion which pro­vides peo­ple with the abil­i­ty to invest over­seas, trans­act over­seas and trade in com­modi­ties, so it oper­ates a com­modi­ties exchange. And then Mac Cap­i­tal, which was, I guess, the tra­di­tion­al invest­ment bank­ing side of things. So, if you want­ed to IPO stock, it would help you do that, for exam­ple, that kind of stuff. So, that’s pret­ty much what Mac­quar­ie group is. The rea­son for going through that in a detailed way is just to point out to peo­ple that Mac­quar­ie is much more like a large super fund or Berk­shire Hath­away then per­haps the sort of view that peo­ple have in their mind, and the oth­er side of the Mac­quar­ie which is invest­ment bank­ing and retail bank­ing. They’re still there, but not as dom­i­nant. Any­way, to go through the num­bers, it’s a large, very large-cap stock, its ADT is $155 mil­lion. So it’s, it’s huge. It’s, I’m doing this analy­sis based on a share price of $195. That’s rebound­ed over the last cou­ple of months, it got down to being a sell some­where around in the sort of 188 type region, I think from mem­o­ry, but it’s rebound­ed from there. Even at this cur­rent price, it’s 87% of the con­sen­sus tar­get, so it’s still seen by the mar­ket as hav­ing some upside from here. It gets a point on our buy list for that. Stock Doc­tor rate it as both a star growth stock and an income stock, so we’d give it one and a half points for that. But I just also want to high­light one more thing, I did notice when I was doing some research that Mac­quar­ie Group have down­grad­ed their div­i­dend guid­ance going for­ward. So, I think from mem­o­ry they were telling peo­ple that they would pay out between 60 and 80% of their prof­its as div­i­dends, and they’ve dropped that now to between 50 and 70%. So, it does­n’t seem like a lot, but what that tells me is they’re going to focus on invest­ing for growth rather than pay­ing out div­i­dends. Whether or not that means it still retains it star income stock, it’s up for Stock Doc­tor I guess. But, the yields cur­rent­ly just over 3%, 3.12%, so we don’t score it on the QAV buy list as suit­ing our div­i­dend needs. But it’s not a bad yield, but it’s below our expect­ed return. The finan­cial health is strong and steady as you’d expect for a Star growth stock. It’s Pr/OpCaf is low, which is why it appears on our buy list. It’s just over 2.8 times, 2.85 times, oper­at­ing cash flow to price, but it has a PE of 20. So, again, it’s one of these stocks that throws off a lot of cash, but then the cash gets used up by the time it hits the bot­tom line. Its price is greater than our IV1 and IV2, so it does­n’t score for those. And sim­i­lar­ly, the price is above, well above book val­ue and book val­ue plus 30%, so it does­n’t score for those. It does have fore­cast growth of 18%, though, which is good, in earn­ings per share, that’s from the ana­lysts. But because the PE was 20, growth over PE does­n’t hit our hur­dle of 1.5. It’s 0.88 instead, so we don’t score it for that. Even though man­age­ment do have a rea­son­able share­hold­ing, I mean, it’s such a big stock the we don’t score it for the board hold­ing enough stock. And it cer­tain­ly no longer has a founder-direc­tor. This is one of the com­pa­nies that did have a founder-direc­tor back in its hey­day, but those peo­ple have retired and left the com­pa­ny now. In terms of the man­u­al­ly entered data, it does­n’t have a record low PE for the last three years. It does have a new three-point upturn even though it was on the buy list and went off, it’s now come back so it scores for that. It does­n’t have con­sis­tent­ly increas­ing equi­ty, so it does­n’t score for that. So over­all, the qual­i­ty scores kind of on the low side, it’s 54%, but the QAV score is 0.19, so def­i­nite­ly be dri­ven by that high oper­at­ing cash flow that’s com­ing in.

Cameron  36:31

0.19, that’s pret­ty good for a mas­sive cap like this. So, good oppor­tu­ni­ty for peo­ple to take a look at that if they’re look­ing for large-cap stocks. Alright, time for Q&A?

Tony  36:46

We missed one thing.

Cameron  36:47

Yeah?

Tony  36:48

Our Navexa port­fo­lio. I’ll just briefly give an update on that. So, our port­fo­lio is up for the week, 1.2%. Year today, it’s up 5.29 ver­sus the mar­ket that we track, STW, it’s only at 1.3%. So, big out-per­for­mance this year. And all time, it’s been a good week for us, up 28% now ver­sus the mar­ket, which is up 11%. So, we’re out­per­form­ing that quite well.

Cameron  37:15

Yeah, but that’s their per annum cal­cu­la­tion thing. I looked at it this morn­ing, and it said our total cap­i­tal is like over 30,000. We start­ed with 20,000, so we’re actu­al­ly up 50%. But the way that they report it is some sort of weird per annum cal­cu­la­tion.

Tony  37:33

Yeah, look, and I agree. So, look­ing for­ward to when they have the sim­ple CAGR cal­cu­la­tion in. I call out those num­bers with that caveat, I don’t think they’re the right num­bers, but the rel­a­tiv­i­ties I think are going to be the right ones because both the mar­ket and us are being cal­cu­lat­ed in the same way. No, we’ve grown our port­fo­lio in a lit­tle over, or get­ting up to three years. I think it’s about two- and three-quar­ter years now, is up 50%. So, in fact, it’s less than that, because we did­n’t start until Sep­tem­ber. So, it’s two and a half years rough­ly, which is going to be around about 21–22% in terms of how we do a CAGR cal­cu­la­tion per annum., yeah.

Cameron  38:09

Doing good.

Tony  38:10

Yeah, but still out­per­form­ing the mar­ket by a wide mar­gin.

Cameron  38:15

All right. Trent asks, “I’ve built a posi­tion of eight or nine QAV shares fair­ly slow­ly over the past year or so. I am now in a posi­tion finan­cial­ly to fill up to the QAV rec­om­mend­ed amount of shares; 15 to 20 com­pa­nies. Do I do that tomor­row with the high­est on the list or do I take my time?”

Tony  38:36

Well, Trent, there’s a lot of ques­tions I want to ask you about this, but I’m going to assume them. So, if it was me, so I’m assum­ing that you’ve got eight or nine QAV shares and you have some cash. So, my advice is, yeah, just go ahead and buy with the cash. And this is not, I’ve got to be care­ful here. I’m not giv­ing spe­cif­ic advice to Trent. If I was in a sit­u­a­tion where I was start­ing a new port­fo­lio, I already had eight or nine stocks and I had the rest in cash, then I would­n’t, I would­n’t hes­i­tate to go out and buy the oth­er sev­en to ten stocks as soon as pos­si­ble. I don’t like sit­ting in cash. If you sit in cash for too long and the mar­ket has a big jump, you’ve missed out on it. But I don’t know Tren­t’s cir­cum­stances. He may, what he might be say­ing as well is that he has oth­er stocks, should he sell those and buy the QAV ones? And again, I tend not to. I would three-point trend line sell the oth­er ones when they fall due, or rule 1 them, and then buy QAV stocks as replace­ments. Sim­ply because if they’re going up, why sell them?

Cameron  39:35

So, accord­ing to QAV the­o­ry you would, you know, if you had cash, you would invest that cash. So, we don’t know Tren­t’s cir­cum­stances, see a finan­cial plan­ner before you make any invest­ing deci­sions Trent, but accord­ing to the Bible you want to be ful­ly invest­ed at all times.

Tony  39:53

Cor­rect.

Cameron  39:54

Thank you, Tony. Thank you, Trent. Alli­son asks, “hi Cam. When Tony gets a sell sig­nal, pre­sum­ing he gets intra­day noti­fi­ca­tions, does he gen­er­al­ly act on it imme­di­ate­ly or watch it until the next day? And an adjunct ques­tion, has Tony found that there’s a bet­ter time of day to buy or sell?” For the first ques­tion I said to Alli­son, I think Tony’s play­ing golf in the mid­dle of the day, so he’s not get­ting intra­day noti­fi­ca­tions. He’s only going to see it when he sobers up at nine o’clock at night, after the 19th hole, few Negro­nis.

Tony  40:30

Hang on, you don’t sober up at nine o’clock at night.

Cameron  40:32

Nine o’clock in the morn­ing? Yeah, the next morn­ing when he sobers up and reads his emails, he goes, “oh, I guess I should sell.”

Tony  40:41

Well, fun­ny sto­ry, even fun­nier than that. Stock Doc­tor sent me an email a cou­ple of years ago and said “can you shut down some of these alerts, you’ve got too many. It’s actu­al­ly slow­ing down our com­put­ers.”

Cameron  40:53

For real?

Tony  40:53

Yeah, well, I did have a long list because I was­n’t delet­ing them after I was inter­est­ed in some­thing. But also too, they were all set to intra­day which means that Stock Doc­tor was always crunch­ing in the back­ground test­ing at, like, what­ev­er time, like every five min­utes or every minute even, as it crossed, and it was it was run­ning up CPU time for them. So, I actu­al­ly, just to be nice, I only get my emails now on a dai­ly basis. I haven’t clicked the intra­day noti­fi­ca­tions just to appease them.

Cameron  41:20

You crashed Stock Doc­tor, that’s great.

Tony  41:26

So, no, I just get an email at the end of the day which means I do have to wait until the next day to decide what to do. You know, the rule is if it cross­es sell it. There have been occa­sions where I might wait a lit­tle bit, like if it’s just crossed the buy line but it’s been sort of going up and just touch­ing it a num­ber of times. So, I might just see whether it reverts quick­ly. But gen­er­al­ly, I’ll sell it straight­away. In terms of the sec­ond ques­tion, when do I, is there a good time of day to buy or sell? Inter­est­ing ques­tion. I’ve been told that the pros trade in the first fif­teen min­utes and in the last fif­teen min­utes of a day. And by pros, I don’t know if that means day traders or invest­ment funds or what­ev­er. I don’t do that. I typ­i­cal­ly wait at least an hour from when the mar­ket opens so I can see what direc­tion it’s going in. Because you know, if I did get a notice that Sand­fire Resources was a sell, but it just crossed, I’d prob­a­bly wait for the first hour to see if it came back or whether it con­tin­ued down a bit. Gen­er­al­ly, you won’t get a big fluc­tu­a­tion in that first hour but you’ll get a real clue for where the mar­kets going for that day. So, I typ­i­cal­ly trade sort of mid-morn­ing, but that’s not a hard and fast rule, it’s more just me wait­ing to see which way the mar­kets gone after the first hour and whether that’s changed my inten­tion. But oth­er­wise, I will trade any­time dur­ing the day at all. I don’t find a good time or a bad time to trade after that.

Cameron  42:46

Alright, thank you. Max asks, “hi Tony. I like the idea of 3PTL com­mod­i­ty sells, but I think it’s crazy to be sell­ing cop­per and gold stocks at the moment. Cop­per is a sell with gold super close, yet both are at near all-time highs. Even with a fur­ther 10% reduc­tion in the cur­rent com­mod­i­ty price, the min­ers will still be mak­ing some seri­ous prof­its. Am I miss­ing some­thing? Do you take high infla­tion into account? I sup­pose my point is if com­modi­ties trade side­ways whilst at seri­ous­ly high lev­els, I don’t think we should sell them when they even­tu­al­ly cross the sell line. They will still be super prof­itable at these lev­els.”

Tony  43:28

Yeah, look I can’t fault Max on his log­ic. How­ev­er, I do know that the three-point trend­line is a good judge of sen­ti­ment. I tend to agree with Max, I some­times try and make a case for keep­ing some­thing for as long as pos­si­ble like gold stocks because there is so much going on in the world, and gold is a safe haven. But no, I will trade based on the three-point trend­lines. If the gold price is high, just pick­ing on gold here, and it’s going side­ways, then I don’t know if it’s going to go up or go down. So, per­haps it is a good time to sell. You’ve sold at a high if it’s trend­ing side­ways for a bit and it’s crossed our sell line. So, that’s the first point I’ll make. So, we take a prof­it at the right time. Some of the oth­er ques­tions that Max has asked, do I take infla­tion into account? No, I don’t. I do take the exchange rate into account, so we talked about that on a pri­or show that I think gold breached the US dol­lar sell line and I went look­ing for the Aus­tralian dol­lar sell line because the Aus­tralian dol­lar was drop­ping, and the gold price in Aus­tralian dol­lars was still fine so I did hold because of that. Which is, you know, pos­si­bly me being in the Max camp and try­ing to hold gold for as long as pos­si­ble, but also there’s a fair bit of log­ic behind look­ing at the effect of exchange rates on the gold price. And then the last ques­tion he asked is, even though gold’s trad­ing side­ways, aren’t the min­ers super prof­itable? Well, they are, but if the under­ly­ing com­mod­i­ty’s trad­ing side­ways they’re not get­ting growth and their share price is prob­a­bly just as much dri­ven by prof­it as it is by growth. So, and we’ve seen that with some of the gold stocks, they’ve been going side­ways as well, and they often, well, they do track the gold price even if it’s not in lock­step. But broad­ly speak­ing, they do track the com­mod­i­ty prices. So no, I will use the com­mod­i­ty three-point trend line sells reli­gious­ly with these things.

Cameron  45:13

Yeah, I mean, I get Max’s log­ic and it makes sense. But we have the sen­ti­ment checks there to, sort of, over­ride our abil­i­ty to log­ic our­selves into a cor­ner, right?

Tony  45:26

Yeah. And to pre­dict which way a com­mod­i­ty is going to go. I mean, I don’t know Max’s back­ground, but I, you know, I’ve been doing this for thir­ty years and I can usu­al­ly make a case for a com­mod­i­ty going up or down on the same day at the same time. So, I’d rather let the mar­ket tell me what’s going to hap­pen with gold rather than me try and guess it or pre­dict it.

Cameron  45:44

Like a good econ­o­mist, you can make a case for any­thing.

Tony  45:46

That’s right. I should put out a shin­gle and sell both sides of the argu­ment to the gov­ern­ment.

Cameron  45:54

What’s that old sto­ry, I think it was, there was a Roo­sevelt or a Tru­man sto­ry. Asked some econ­o­mist, Keynes or some­body, what was going to hap­pen. And he said, “well, on one hand, Mr Pres­i­dent, it could go up. On the oth­er hand, Mr Pres­i­dent, it could go down” and he said, “what we need is a good one hand­ed econ­o­mist.”

Tony  46:16

Oh, that’s good.

Cameron  46:17

Yeah. But get­ting back to Max’s ques­tion, like my under­stand­ing of sen­ti­ment in gen­er­al, not just with the com­modi­ties, but when we’re look­ing at a stock, is a stock can be at the top of our buy list, check all the box­es, have a great QAV score, a great qual­i­ty score, real­ly great num­bers. But if the sen­ti­ments going back­wards, you’re like, “I’m out.” Like, “I’m not going to fight the sen­ti­ment. I’m not going to fight pub­lic opin­ion on this” right?

Tony  46:47

Yeah, I mean, like, this is not about me being right or any­one using the buy list being right. It’s about what the mar­ket thinks is right. It’s that old-again, hark­ing back to an old sto­ry, I’m not try­ing to rate the beau­ty of the girls in the pageant. I’m try­ing to guess what the judges are gonna rate as beau­ti­ful of the beau­ty girls in the pageant.

Cameron  47:05

I thought you were just going to sleep with them all. That was­n’t the punch­line to that sto­ry? No. Okay.

Tony  47:11

No. So, it’s the same sort of thing. Here’s our list of can­di­dates, but if the mar­ket does­n’t like it, then what’s the point? We’re try­ing to make mon­ey, not be right.

Cameron  47:21

Yeah. And obvi­ous­ly, we don’t lis­ten to the mar­ket most of the time. We don’t care what’s being hyped up, we don’t care what mood the mar­kets in. We’re mak­ing our own deci­sions based on fun­da­men­tals. But that’s one of the things I have always liked and admired about QAV. You’re like, “well, yes, I’m try­ing to be smarter than the mar­ket. But, I’m not going to try and walk upstream in a blaz­ing tsuna­mi push­ing me down­stream,” right? There’s a cer­tain point where you just go, okay, well, the mar­kets obvi­ous­ly wrong, but it’s still the mar­ket.

Tony  47:53

Yeah. I mean, that’s one of the fun­da­men­tal tenets of our invest­ing and being con­trar­i­an is we know the mar­ket gets it wrong. Oth­er­wise, they would all be buy­ing the stocks we do. But, and that’s the nice side of it, we get to make prof­it out of that. But where we have a dif­fer­ent point of view on when the mar­kets going down, then you can’t fight it. There’s no point find­ing it.

Cameron  48:12

If there’s a crowd of a mil­lion peo­ple run­ning towards you because they think the world’s end­ing and you know it’s not end­ing, you can try and push your way through the crowd of a mil­lion peo­ple but you’re prob­a­bly going to end up being tram­pled to death. You’ll be right, but you’ll be dead.

Tony  48:26

No, exact­ly. So, what you do is you stand off to the side and you buy some­thing else. And when they come run­ning back and want to but it off you, you say “oh, yeah, thanks. Great.”

Cameron  48:35

You buy bot­tles of water for 10 cents and sell them for five bucks when they’re tired and hot run­ning back the oth­er way.

Tony  48:41

Exact­ly.

Cameron  48:43

Dave from Newy: “hi Cam. Hope you’re well,” thank you, Dave. Yes, I am. “Ques­tions if I may.” You may. “Num­ber one re: IMA, Image Resources. I know this was prob­a­bly a three-point sell at some point, but for those that held on, is Tony able to com­ment on the cur­rent cor­po­rate action under­way? My ques­tion is, if Tony was a hold­er, would he con­sid­er this a bad news sell? My sum­ma­ry of the sit­u­a­tion: the Chi­nese minor­i­ty share­hold­er, Mur­ray Zir­con, is look­ing to replace the major­i­ty of the board with their own rep­re­sen­ta­tives. Share­hold­ers have been asked to vote on this at an extra­or­di­nary gen­er­al meet­ing. IMA, some media reports and oth­er sources, e.g. Hot­cop­per, are say­ing that this is a takeover by stealth. Once MZ take con­trol of the board they may not act in the best inter­ests of share­hold­ers. Vol­umes are through the roof in the last week or so and the share price is butting up against five-year highs. Pre­sum­ably, some­body is buy­ing votes. I know it is coun­ter­in­tu­itive to sug­gest a takeover is bad news, but giv­en the method MZ is employ­ing, would Tony con­sid­er the down­side risk too high and take advan­tage of the bid on offer? There is anoth­er upcom­ing two cent — ful­ly-franked this time — div­i­dend in the mix to con­sid­er, too.”

Tony  49:59

Yeah, good ques­tion. It’s a good out­line of the sit­u­a­tion. IMA, first of all, con­grat­u­la­tions Dave. The stock has just rock­et­ed in the last lit­tle while, it’s doing very well. But IMA reminds me of a sit­u­a­tion that’s occurred at Myer and occurred at Boral, the two sort of high pro­file cas­es I can think of, where some­one’s come in, they’ve bought a rea­son­able stake, I think in all cas­es it’s around sort of 20%ish. And then they try and agi­tate for board change as a way of con­trol­ling the com­pa­ny, and then bend­ing the com­pa­ny’s poli­cies to suit them with­out ever hav­ing to launch a takeover or pay a pre­mi­um. So, it’s a kind of tried and true way of tak­ing over a com­pa­ny, as Dave says, by stealth, or to avoid pay­ing a hefty pre­mi­um to buy the shares on mar­ket. So, no, I don’t see it as bad news. I mean, it can have dis­tract­ing con­se­quences for man­age­ment, which may affect the com­pa­ny’s per­for­mance and share price, but it is kind of a nor­mal argy bar­gy of list­ed cor­po­rate life. So, I’m not going to call it bad news and sell it. One thing I will say to Dave, I think the Spe­cial Gen­er­al Meet­ing which has been called about these board posi­tions that Mur­ray Zir­con want to replace, is hap­pen­ing 24th, so Thurs­day, so, if you hear this in time, you might want to vote. Or, if you haven’t vot­ed already, get on quick­ly and vote the way that you think is appro­pri­ate. And there’s been plen­ty of pub­li­ca­tions from the com­pa­ny about the way that they think is appro­pri­ate. But no, I would­n’t sell on bad news, I’d still apply all the sim­i­lar ways of trad­ing we’ve spo­ken about. It’ll become a three-point sell even­tu­al­ly. And good luck to you. It’s tak­en off recent­ly.

Cameron  51:39

Okay, sec­ond ques­tion from Dave. “I loved Tony’s deep dive into the bal­ance sheet last week, intan­gi­bles, good­will, etc., which got me think­ing. Sim­i­lar to the week­ly pulled pork, could Tony pull apart an item on the finan­cial state­ments of the lis­ten­ers choos­ing each week? I’d be keen to under­stand ‘right of use assets’ in non-cur­rent assets, for exam­ple. Stock Doc­tor seems to roll it into prop­er­ty, plant and equip­ment, I can and do Google stuff,” con­grat­u­la­tions, Dave, “and read books, etc., but it’s good to hear Tony talk through it in lay­man’s terms. Don’t mean for him to take time to research it. If he knows about it, talk about it. Oth­er­wise, feel free to tell me to do my own work. Thanks, and keep keep­ing up the good stuff. Dave from Newy.”

Tony  52:23

Thanks, Dave. Yeah, I’m hap­py to do it if you want to send in ques­tions. I’m not an accoun­tant, though, so I’m sure one of our accoun­tant lis­ten­ers will point out where I’m wrong. But hap­py for that to hap­pen as well. In terms of right of use assets, in a nut­shell. This goes back to how you treat prop­er­ty and plant and equip­ment and fit outs and things like that on the bal­ance sheet. And prob­a­bly goes back‑I mean, when I was work­ing, there was a big move to, like, for exam­ple, when I was work­ing at Shell, there was a big move to sell prop­er­ty assets. Ana­lysts would say “that was a lazy bal­ance sheet” if you have lots of prop­er­ty just sit­ting there, because you were get­ting returns, but they were prop­er­ty returns. So, there weren’t going to be mar­ket beat­ing returns on the assets. And so the idea was you sold those assets, you took the mon­ey in and you rein­vest­ed it some­where else in the com­pa­ny to get a bet­ter return. And it also helped return on equi­ty, which was the met­ric that they were all focus­ing on at the time because you had less assets, your equi­ty was low­er, and so even if you’re just get­ting the same return, the same prof­it, ROE we went up. So, it’s always been a bit of a bal­ance sheet manip­u­la­tion exer­cise between how much assets you hold that you’ve paid for ver­sus how much you lease. And this right of use seems to have come in, in my opin­ion, to help clar­i­fy how leas­es are to be treat­ed on the bal­ance sheet, prob­a­bly because of this move to sell and lease­back, and then I guess some of the ana­lysts were cry­ing foul and say­ing, “well hang on, all you’ve done is trans­fer a prop­er­ty port­fo­lio into a lease port­fo­lio, and isn’t that the same com­pa­ny?” So, accoun­tants have tried to, I guess, take into account the dif­fer­ent ways that leas­es can be account­ed for in the bal­ance sheet. Now, my sim­ple lay­man’s terms, it does­n’t belong on the bal­ance sheet. It’s a lease, it’s a rent. It’s like any oth­er oblig­a­tion or expense the com­pa­ny has like pay­roll or cap­i­tal pur­chas­es. It’s a cost of doing busi­ness and it should be in the P&L, which it is, but for some rea­son peo­ple want it on the bal­ance sheet. So, in a nut­shell, what it is, is that from an asset point of view, let’s take a sim­ple exam­ple: you’re a cof­fee shop, you’ve leased the cof­fee shop from some­one but you’ve done the fit out and so you put your own machines in and you put your own tables in, cash reg­is­ter sys­tems, etc. Those things are your assets and they go onto the bal­ance sheet as assets. If you had any sort of good deal on the lease, like maybe you did­n’t have to pay for the first six months, you can actu­al­ly put that on the bal­ance sheet as a dis­count, mon­e­tize that dis­count, put it on the bal­ance sheet as an asset, I think. And, on the flip side, you run a dis­count­ed cash flow for the life of the lease, work out what the oblig­a­tion is from a dis­count point of view and that goes on as a lia­bil­i­ty. Per­son­al­ly, I don’t buy it. I think it’s account­ing hokum, but that’s what hap­pens. And it, I guess, on the plus side, it does allow you to take into account, you know, write-downs or impair­ments. So, if you break the lease and get out of it, you’ll have an extra cost and they’ll put that as a lia­bil­i­ty on the bal­ance sheet. And, you know, there’s some sense to that, but again, it’s an expense, it should just go through the P&L. So, that’s my under­stand­ing of right of use assets, Dave, I’m not a fan of them, but they do exist and I prob­a­bly got all the rules wrong. But, that’s prob­a­bly because it’s a fair­ly arcane piece of account­ing that says that these things are assets and lia­bil­i­ties when they’re not, their an expense, for God’s sake. Well, maybe the fit out isn’t. That’s the thing, I mean, some of these things make sense. The fit out goes on as an asset, I don’t see that as being the dou­ble entry book­keep­ing, quid pro quo for hav­ing a dis­count­ed cash flow of the lease on the bal­ance sheet. That does­n’t make sense. But from time to time, it does make sense to put impair­ments or write downs or your own plant and equip­ment onto a bal­ance sheet. I just don’t think it makes sense to have a dis­count­ed cash flow for the lease there as well.

Cameron  56:11

I just want to know what the hell Dav­e’s doing read­ing down that far in the prof­it and loss on the bal­ance sheet state­ment. Dave, come on, man. Like, I know, New­cas­tle is not the most excit­ing place in the world, but come on. Sure­ly there’s some­thing bet­ter to be doing then get­ting down into the weeds of these things. Thank you, Dave. Thank you, Tony. Andrew asks, “to what extent should we take indus­try sec­tor into account? My QAV port­fo­lio cur­rent­ly is 54% mate­ri­als, 19% ener­gy, with the oth­er 27% split across five indus­try sec­tors. Last week was a tough one for mate­ri­als which was reflect­ed in the week’s per­for­mance. When buy­ing, rather than sim­ply tak­ing the next share on the buy list, should I take the next one that pro­vides a rea­son­able bal­ance across indus­tries? Also, would TK rec­om­mend that I active­ly rebal­ance my port­fo­lio, sell­ing the mate­r­i­al stocks I have with the low­est cur­rent QAV score and replace them with bal­anc­ing stocks from oth­er indus­try sec­tors? Or should I sec­tor rebal­ance only when they become QAV rule sales? Or should indus­try not be a con­sid­er­a­tion and I should go back to sleep? Cheers, AF.” I was gonna say this Andrew must be new, but it’s Andrew Flit­man, so he’s not new.

Tony  57:26

Andrew Flit­man. Nah, good ques­tion, Andrew. Thank you. And thank you for all your work in sup­port­ing our, our spread­sheets. But yeah, I kind of zoned out there. The last sen­tence was the impor­tant one, just don’t con­sid­er it and go back to sleep. This kind of plays into that chest­nut of the diver­si­fi­ca­tion, or as I call it, de-worse-ifi­ca­tion. I don’t see any point in hav­ing a bal­anced port­fo­lio by indus­try sec­tor. I get that, as Andrew said, there’s times when if we’re over­weight in a sec­tor and it goes down it hurts our port­fo­lio. But that can hap­pen. But we’re in that sec­tor for a rea­son, it’s because it just hap­pened to be over-rep­re­sent­ed on our buy list, and so I’ve got no prob­lems with that. And it’s been the case, I often find that the buy list is skewed towards a sec­tor. In the past it’s been the air­line sec­tor when I owned Qan­tas and Air New Zealand, even some of the air­ports. It’s been the gold sec­tor. We gen­er­al­ly only find out in hind­sight that we’re over­weight in the sec­tor, but it just creeps up on us. I still go around buy­ing and sell­ing the same way I nor­mal­ly do, and then, you know, after six months ago, I go “oh, that’s a lot of gold stocks, I’ve got.” I did­n’t intend it to hap­pen that way, I did­n’t set out to buy gold, but it’s served me well. We’re in a sec­tor which is under­val­ued and every dog has its day and that will right itself, and we’ll get regres­sion to the mean. And we’ll do well. If that’s your strat­e­gy, why would you want to say “let’s lim­it our strat­e­gy to only get­ting a quar­ter of our port­fo­lio at the max exposed to the sec­tor that we think is going to take off.” I just find that coun­ter­in­tu­itive. And the more times we do that, the more like the index we get because we’re bal­anc­ing our port­fo­lio to look more like the mar­ket more broad­ly. And again, that’s not how I think we should invest.

Cameron  59:04

But would­n’t the counter argu­ment, Tony, to that be that all of the stocks on our buy list we’ve deemed to be under­val­ued, that’s why they’re on the buy list. So, regard­less of where in the buy list you’re buy­ing, you’re buy­ing under­val­ued com­pa­nies. And I know that you did do an exper­i­ment a lit­tle while ago where you were rebal­anc­ing to buy stuff at the bot­tom and etc., etc.

Tony  59:29

Sell at the bot­tom.

Cameron  59:30

Oh, sell at the bot­tom. Yeah.

Tony  59:31

I did a rebal­anc­ing exer­cise where I sold when the QAV score got to 0.05.

Cameron  59:36

But, so, if Andrew did what he’s talk­ing about and still bought com­pa­nies from up and down the buy list, but just tried to get a bal­ance of indus­try sec­tors, he’s still buy­ing under­val­ued com­pa­nies but your expec­ta­tion would be that it would­n’t per­form as well if you bought from the top of the list, because the scores with the high­est QAV scores in the­o­ry should do bet­ter.

Tony  1:00:02

Yeah, that’s pret­ty much my argu­ment. And I see what you’re say­ing, if there’s a hun­dred com­pa­nies on the buy list you should be able to buy from the buy list and bal­ance that by sec­tor. I mean, if Andrew wants to tri­al that and let us know how it goes, great. But yeah, I think buy­ing from the from the top should give you the best upside.

Cameron  1:00:19

And yes, when that indus­try turns south you’re going to take a bit of a hit. But, the the­o­ry being when it’s going up you’re gonna get your gains. You’ll lose a bit when it comes down, but you’ll get all the gains.

Tony  1:00:31

Yeah, so I real­ly don’t think of things in the sec­tor it comes from, I think of things in terms of the stocks. So, it’s no sur­prise to me that from time to time we’ll see lots of stocks from a par­tic­u­lar sec­tor on the buy list and near the top, that sec­tor is out of favour, so why should­n’t we buy it? Why should we try and lim­it our­selves to that oppor­tu­ni­ty, just so we can bal­ance our port­fo­lio by sec­tor?

Cameron  1:00:53

As I said on Face­book, rebal­anc­ing is for ama­teurs. If you don’t know what you’re doing, sure, rebal­anc­ing makes sense, I guess. But if you have a strat­e­gy that is telling you which stocks rep­re­sent the best oppor­tu­ni­ty because they’re the most under­val­ued and also the high­est qual­i­ty and are per­form­ing well, gen­er­at­ing cash, then you do what the strat­e­gy tells you, which is buy those com­pa­nies, you don’t try and sec­ond guess what the strat­e­gy is telling you.

Tony  1:01:24

I don’t mind if Andrew wants to tri­al the equal­ly bal­anced by sec­tor port­fo­lio from the buy list, I under­stand that’s a valid ques­tion. But my gut feel says you’re bet­ter off buy­ing from the top down, regard­less of sec­tor.

Cameron  1:01:36

Yeah. We know that you don’t care what peo­ple do, Tony, you tell us that every week: “yeah, go off and exper­i­ment. Good luck.”

Tony  1:01:44

I wish they would, because we’ve been doing this for two and a half years, now, and no one’s come back and said “Eure­ka!”

Cameron  1:01:49

“I found it. I fig­ured it out.” Yeah. Usu­al­ly they come back and go, “I tried that, did­n’t work out so well.” No, but you know, we do hope that some­body goes and exper­i­ments and has a huge suc­cess and comes back and tells us about it. It’s like Burke and Will’s; “lis­ten, you go off in that direc­tion. Good luck. Hope you come back and tell us you dis­cov­ered a pot of gold under the rain­bow. That’d be great.”

Tony  1:02:15

Yeah. Well, maybe they have dis­cov­ered it and they just keep it qui­et. “We’re not gonna share it.”

Cameron  1:02:20

Yeah, maybe. “We’re gonna sit here in our air con­di­tion­ing, but you go off and walk across this coun­try. Ral­ly, we want you to do that.” Drink­ing Negro­nis. Thank you, Andrew Flit­man. Last ques­tion, Chris: “hi Cam. Had a ques­tion, if not too late.” No, it’s not, Chris. “I bought MAD at IPO. It has per­formed very well, but I have no idea what the sell line should be and was hop­ing for some insights.

Tony  1:02:47

No, so MADs doing real­ly well. I think what’s behind Chris’s ques­tion is it’s done real­ly well since it IPO’d, and, you know, I think the cur­rent price is $3 some­thing, $3.04. But, the sell lines at 95 cents using the Bret­te­la­tor. So, I think what Chris is say­ing, as a lot of peo­ple have said before, Chris, when we have a big gap between the cur­rent price and the sell line, what do we do? We just sit back and enjoy it, real­ly. I under­stand that Chris is wor­ried that the shares might retrace, and they might. So, in that case, look, there’s only a year or so of list­ed life for this com­pa­ny. I mean, I would­n’t be averse to using a twelve-month graph if that gives Chris some com­fort, and it cer­tain­ly would raise the sell line high­er up. It’s still not near the sell line at the moment, but it would make the sell line clos­er to the share price. So, Chris might want to do that. I can see the sense in that, it’s only been list­ed for a year but we’re using a five-year graph. But yeah, that’s, I would typ­i­cal­ly use the five-year graph. I think give it some time and see if it starts to come down again, and if it does, maybe you want to look at a one-year graph and use that just to pro­tect your upside. But yeah, that’s a great prob­lem to have, Chris, well done.

Cameron  1:04:01

So, the sell line using a five-year graph just eye­balling it here would come in at around about a buck.

Tony  1:04:07

I had 95 cents from the Bret­te­la­tor.

Cameron  1:04:09

And he said it’s up around three bucks. Down a bit today, $2.92. But still, if he got in at the float which is around about $1, I think, he’s had a nice win. Con­grat­u­la­tions. Part two of Chris’s ques­tion: “also in last week’s pod­cast, there was a com­ment on how much a list­ed com­pa­ny can raise with­out share­hold­er approval. A com­pa­ny can raise up to 15%, how­ev­er small-cap com­pa­nies mar­ket capped at less than 300 mil and not in the S&P ASX 300 can seek share­hold­er approval at their AGM to get an addi­tion­al 10% capac­i­ty.”

Tony  1:04:41

Thanks, Chris. That sounds like the rules. Yeah, I knew that they had the abil­i­ty to, I did­n’t know what the num­bers were. But yeah, I guess it’s to give them flex­i­bil­i­ty, espe­cial­ly the small-caps to raise mon­ey quick­ly. But it does, well, in the case that we dis­cussed last week there was a com­pa­ny that looks like it’s raised mon­ey, but only from Instow share­hold­ers and has­n’t giv­en the retail share­hold­ers a fair go. These rules look like they can be rort­ed at the expense of retail share­hold­ers.

Cameron  1:05:07

All right. Well, that’s the show.

Cameron  1:15:12

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.