Transcript #515

QAV 515 Club

Cameron  00:02

Wel­come back to QAV, episode 515, TK. We’re record­ing this on Tues­day the 19th of April at half past three in the after­noon. How are you, TK?

Tony  00:14

Yeah, real­ly well thank you. Very good.

Cameron  00:17

That’s good. What’s news in Syd­ney? Have a good East­er long week­end?

Tony  00:22

East­er was bril­liant, yep. We’ve had peo­ple stay­ing with us and lots of events and social occa­sions. It’s been great. Alex came up, fan­tas­tic time. My sis­ter had her kids up. And it has­n’t been rain­ing! It’s been beau­ti­ful weath­er in Syd­ney.

Cameron  00:37

Oh, that’s good. Did the East­er Bun­ny bring you some­thing nice?

Tony  00:41

I think I might have got one egg, but does­n’t mat­ter. We had an East­er egg hunt on Sat­ur­day. That was, Alex loves East­er egg hunts so we’re still doing it.

Cameron  00:50

She’s 23 now?

Tony  00:51

Yeah. 22. But that was fun. And I for­got about putting the eggs out on East­er Sun­day, so she did­n’t get hers until lunchtime but that’s all right.

Cameron  01:00

Well, we spent East­er day in the emer­gency room because Fox spent the night throw­ing up all over him­self, all over his bed linens, about three or four times, and was still throw­ing up into the morn­ing. So, he end­ed up spend­ing sev­en hours in the ER, poor guy. They just think it was gas­tro, but they did a cou­ple of… we did a RAT test and then they did a PCR test and both came back neg­a­tive. But yeah, that was fun. And my big boys are in LA. They’ve been Face­Tim­ing me a cou­ple of times from LA. Final­ly got there. Hunter’s been try­ing to get there for like, well, since 2020 I think. He had a flight booked for, he was sup­posed to go in April 2020 the first time, but obvi­ous­ly that did­n’t hap­pen. So, that’s good. They’re off hav­ing their adven­tures.

Tony  01:46

Yeah, fan­tas­tic. How long is Hunter stay­ing for?

Cameron  01:49

They’re both stay­ing for a month.

Tony  01:51

Oh, okay.

Cameron  01:52

So, let’s get into the show. Big news… well, not big news, but that’s sort of been all over the news this week, is what’s going on with After­pay and the BNPL stocks. There’s been a lot of fun some of the tech jour­nal­ists are hav­ing, sor­ry, the finance jour­nal­ists, say­ing that Block is def­i­nite­ly in the Buy Now, Pay Lat­er space — they’re pay­ing lat­er for their Buy Now. This was, I think, in the Finan­cial Review the oth­er day, “the biggest acqui­si­tion in Aus­tralian his­to­ry isn’t look­ing so crash hot after Block paid $39 bil­lion for it. Loss­es at After­pay con­tin­ue to blow out as missed repay­ments accu­mu­late. In the last six months of 2021 After­pay lost $345 mil­lion, up 65% on the pre­vi­ous half. At the cur­rent rate, own­ing After­pay will end up cost­ing Block $1.5 bil­lion in 2022 alone. Gives a whole new mean­ing to the term Buy Now, Pay Lat­er, but After­pay’s not alone. As BNPL plat­forms expand into new mar­kets like the US they’re all spend­ing big. Throw in strug­gling cus­tomers who aren’t pay­ing for their pur­chas­es, After­pay’s bad debts are grow­ing at 70% and there’s a rea­son the shine has come off the sec­tor.” There was also an arti­cle in Morn­ingstar I read this morn­ing, said “loss­es increased by 336% owing par­tic­u­lar­ly to a jump in mar­ket­ing expens­es,” the move to the US I sus­pect “up 99% from 2020 to 2021.” Lat­er on in the Morn­ingstar arti­cle they say they’re quot­ing some guy called Mr Ler from, I don’t know where he’s from, Mr Ler. Maybe Hype­r­i­on? They seem to be quot­ing Hype­r­i­on who own a bit. Yes… oh no, Morn­ingstar equi­ty ana­lyst Sean Ler: “he remains opti­mistic about the future for BNPL stocks but he high­light­ed that mar­ket­ing costs are piv­otal, with numer­ous play­ers vying for the atten­tion of cus­tomers investors.” Talks about how Zip has played out. “Rate hikes could spell bad news for the BNPL sec­tor. As inter­est rates rise, it’s essen­tial that BNPL com­pa­nies gen­er­ate their own income from activ­i­ties such as mer­chant fees and cus­tomer late fees to off­set the grow­ing cost of bor­row­ing. Ler flagged that ris­ing rates may tempt investors away from growth stocks like Block and Zip and toward val­ue stocks so they may be able to reap cycli­cal ben­e­fits. It could also lead to a reduc­tion in investor fund­ing. He says a reduc­tion in investor fund­ing means these com­pa­nies may no longer have the cap­i­tal to simul­ta­ne­ous­ly give dis­counts, spend on mar­ket­ing cam­paigns, pay staff, or use their expen­sive shares to go on acqui­si­tion sprees. Instead, he expects com­pa­nies to begin cut­ting costs. Accord­ing to a report in the Aus­tralian, ‘Zip has slashed staff num­bers by approx­i­mate­ly 20% this quar­ter in a bid to cut oper­at­ing cost by rough­ly 8 mil­lion.’ Sez­zle has also slashed its North Amer­i­can work­force this year by 20%. Ler believes the loss­es report­ed by After­pay are only the tip of the ice­berg. He expects oth­er com­pa­nies in the sec­tor will fol­low suit unless they’re able to effec­tive­ly cut costs in order to ser­vice debt. Even if After­pay, the mar­ket leader, is mak­ing loss­es, this just tells you that oth­er play­ers will also be mak­ing loss­es he says.” You know, the thing that this made me think of is, you know, for three years we’ve been talk­ing about growth stocks and you kept say­ing, you know, “this looks like the dot­com cycle all over to me again,” and pre-GFC. It just point­ed out to me, rein­forced for me that these busi­ness­es that blow up and are run­ning on free mon­ey, as we’ve always said, there’s a lot of unknowns in their future; what hap­pens when inter­est rates rise, what hap­pens when Visa or Mas­ter­Card or Apple or some­body like that get into the BNPL sec­tor and they have some real com­pe­ti­tion with peo­ple with big mar­ket pen­e­tra­tion and deep pock­ets. You know, what hap­pens, what hap­pens, what hap­pens. Ver­sus more bor­ing busi­ness­es that are old fash­ioned and just gen­er­ate cash, then you kind of… it’s rel­a­tive­ly easy to fore­cast what their future holds for at least the next six-twelve months. Because, you know, okay, things do change in the iron ore space or in what­ev­er space we invest in, but they don’t tend to change dra­mat­i­cal­ly. Like, the iron ore price goes up and the iron ore price goes down, but it’s fair­ly con­sis­tent over time. Peo­ple keep build­ing stuff, you know, there’s no sort of dra­mat­ic inter­ven­tions in these spaces. So, any­way, what are your thoughts with­out any Schaden­freude? What are your thoughts on the whole BNPL space at the moment?

Tony  06:44

Yeah, well a cou­ple of things. I mean, the oth­er thing that I found inter­est­ing in the Fin Review dur­ing the week, too, was an analy­sis which said that — I can’t remem­ber which BNPL com­pa­ny it was — but they weren’t doing any cred­it check­ing. And in fact, per­haps it was all the BNPL com­pa­nies, I don’t think they run cred­it checks before they give peo­ple access to funds.

Cameron  07:02

That’s old fash­ion and bor­ing, cred­it checks, Tony, come on.

Tony  07:05

Right. So, you go out, you get your $2,000, you buy an iPhone, you walk away. You sign up with the next lot, get your 2000… it’s all moral haz­ard, right? There’s noth­ing puni­tive about not repay­ing your debt. They won’t let you bor­row from them again or get access to more BNPL funds, but they don’t send the debt col­lec­tors after you or have a link to the cred­it scor­ing bureau. any­thing like that. So, it’s becom­ing a bit of a scam.

Cameron  07:34

And if I was a mob boss, if I was Tony Sopra­no — or, it’s a Christo­pher Molti­san­ti play real­ly — I’d be get­ting some of my under­lings to get a cou­ple of hun­dred peo­ple to sign up, by some iPhones, what­ev­er, col­lapse it, give it to me. After­pay can chase them off… I don’t know.

Tony  07:58

Well, that’s right. I guess the gen­er­al point I want to make is that there’s only ever three sources of fund­ing for a com­pa­ny, right; it’s either debt, so the banks are loan­ing the mon­ey; its prof­its, so they’re mak­ing mon­ey, as you spoke about before with the iron ore com­pa­nies; or its share­hold­ers. And for these BNPL plays, it’s always been share­hold­ers. I don’t think the bank’s lend­ing them mon­ey any­more. The banks are quite savvy about risk man­age­ment and get­ting their mon­ey back when they loan a accom­pa­ny some funds. So, I mean, Roger Mont­gomery taught me this ten-twen­ty years ago; if they asked for fund­ing and they’re not mak­ing mon­ey, they’re gonna keep ask­ing for fund­ing. And all you’re gonna do is pay them and nev­er get paid back your­self.

Cameron  08:39

And we know that it paid off, or played out, for the Ama­zons and eBays and a hand­ful of start­up busi­ness­es that took twen­ty years, but they even­tu­al­ly got there and start­ed show­ing some prof­it. But again, how do you know which one is going to be stand­ing twen­ty years from now out of all these? It’s just a real­ly hard game to play.

Tony  09:00

Yeah, and like, you’ve just list­ed two com­pa­nies out of the two thou­sand that were on the NASDAQ in the dot­com boom, right? So, those odds aren’t great. And with hind­sight we can say, “oh, yeah, but Ama­zon was always great,” but it got down to ten bucks a share after the dot­com bust, so it was­n’t seen as great back then.

Cameron  09:21

Yeah, and I remem­ber when Barnes and Noble launched their web­site in com­pe­ti­tion with Ama­zon — and there were oth­er com­peti­tors — and no one real­ly knew how it was going to play out, who was going to win in the end, who was­n’t. But any­way, good luck to peo­ple that did well out of the BNPL stocks and the oth­er growth stocks, but…

Tony  09:39

Yeah, if they played the greater fool and sold their stocks to some­body else, good on them. That’s a legit­i­mate strat­e­gy if you’re good at it and know the indus­try and know the plays and all that. But, I think what we should do is ring up Jack Dorsey and say, “hey, we’ve got a bridge for you to buy, Jack.” If he’s gonna shell mon­ey out for some­thing like After­pay, we’ll sell him the Opera House.

Cameron  10:00

Well, maybe Elon Musk can come and buy that as well after he buys Twit­ter, he can come and buy Block. He’s got a spare $40 bil­lion lying around or what­ev­er it’s worth is.

Tony  10:11

What’s he doing? What — is he try­ing to give Trump a plat­form again? Is that his endgame?

Cameron  10:18

Hmm, could be. I mean, who knows what Elon is ever up to. But yeah, you can’t take your eyes off me. He’s enter­tain­ing and he likes shak­ing stuff up, that’s for sure.

Tony  10:29

Yeah, a great pro­mot­er.

Cameron  10:31

And I saw War­ren Buf­fett in this new inter­view that I watched over the week­end… he says, you know, Elon is a great busi­ness­man. I know Elon’s had some less than nice words about War­ren over the years, but War­ren said, “oh, yeah, he’s great. He’s the best busi­ness­man in Amer­i­ca,” I think he said Elon is, so…

Tony  10:52

I haven’t heard that one, okay.

Cameron  10:54

You did­n’t watch the new Char­lie Rose inter­view?

Tony  10:56

No. Is Tes­la actu­al­ly mak­ing mon­ey? I haven’t noticed it… I mean, it seems like once one part of the busi­ness makes mon­ey, it pumps it back into space, or bat­ter­ies, or solar, or drilling com­pa­nies or what­ev­er, it nev­er seems to make a prof­it.

Cameron  11:11

I don’t know if they’re… they’re sep­a­rate busi­ness­es. I think they’re all sep­a­rate com­pa­nies, SpaceX, etc., etc. So, I don’t think Tes­la’s mov­ing mon­ey around between them, I think they’re sis­ter com­pa­nies that Elon owns.

Tony  11:26

Okay. I think there are some cross hold­ings, like Tes­la bat­tery might be owned at least half by Tes­la.

Cameron  11:31

Oh, well, the bat­tery… I don’t think SpaceX or the flame throw­ers or the tun­nel dig­gers are all the same busi­ness. I don’t know, I don’t fol­low that kind of stuff.

Tony  11:42

What’s War­ren been smok­ing? I mean, Elon Musk is a fan­tas­tic engi­neer and a fan­tas­tic entre­pre­neur. I’m not sure about being the great busi­ness­man, though.

Cameron  11:51

Okay, maybe he did­n’t say that.

Tony  11:53

No, I believe you. Speak­ing of War­ren, he’s been on the acqui­si­tion trail again. He’s opened his wal­let. I saw that, dur­ing the week, he spent $22 bil­lion in the last quar­ter buy­ing US com­pa­nies and stocks again which he has­n’t been doing for a long time. So, that’s a bit of a vote of con­fi­dence that the US mar­kets becom­ing fair­ly priced again. He already had a stake in Occi­den­tal Petro­le­um, and he bought more of that. So, that’s always great when War­ren buys an oil com­pa­ny after we’ve been buy­ing them for the last six-months. That’s fan­tas­tic. Good to get approval there. He bought Alleghany Insur­ance, which is kind of com­pli­men­ta­ry to the insur­ance busi­ness­es in Berk­shire Hath­away. And he bought, I think, 10 or 11% of Hewlett Packard as well. So, he’s spend­ing again.

Cameron  12:37

Yeah, well, I think he’s always been want­i­ng to spend, has­n’t he? He’s just has­n’t been able to find any­thing to buy. That was a great inter­view with Char­lie Rose. By the way, Char­lie Rose is still work­ing. Who knew that? I thought he got Me-Too’d out of exis­tence a year or two ago, but I guess his statute of lim­i­ta­tions is up on that. It was a good inter­view, but War­ren; 91 or what­ev­er he is, like, just, fun­ny, eru­dite as always. Says he still tap dances to work every day. He tap dances to work every day at 91. And he said its the peo­ple; he said he’s, you know, he could­n’t imag­ine any­one bet­ter to work with than Char­lie, or his staff that have been with him for like, fifty-six­ty years. I think he said his assis­tant start­ed at Berk­shire when she was 17 and she’s still there. She’s like, 67 or some­thing. Yeah. It’s love­ly to just hear War­ren talk about how much he loves doing what he does.

Tony  13:44

Exact­ly. I mean, yeah, it’s very reward­ing. I mean, I can speak to the same expe­ri­ence. Like, when you’re invest­ing over the long term it changes your life and a lot of the trou­bles in life go away. And you do get up look­ing for­ward to things, for sure. But it’s also, it’s very telling of how good a boss War­ren is that his core staff has spent their whole lives work­ing for him and no one’s left, or not many peo­ple have left. They love work­ing for him, they come in every day, they do what­ev­er they can for him. I think that’s a great tip for War­ren.

Cameron  14:16

It’s the com­pa­ny cul­ture, is you die with your boots on at Berk­shire. Isn’t that right? They’re all lif­ers. It’s great. In the news today, Tony, in the Hin­dus­tan Times — now one of my favourite reads — I read an arti­cle: “US nat­ur­al gas prices at thir­teen year high as Ukraine war cre­ates glob­al sup­ply crunch.” Thir­teen year high, that’s a pret­ty big high.

Tony  14:40

Yeah, well, we spoke about this before. About, you know, it’s kind of sad that we’re prof­it­ing off the Ukraine war, but it is boost­ing our ener­gy stocks. It’s the same with the oil price, its back up well over $100 a bar­rel now as well. So, that’s going to hold for a while. You know, I’ll put my hand up and say I was wrong. I thought when Rus­sia default­ed on its bonds about five days ago that that would be a real mile­stone in try­ing to resolve things, or it would try to be resolved before they default­ed. But, they’ve sailed through that and the war goes on. So, that’s a shame.

Cameron  15:10

They default­ed?

Tony  15:11

I think so. I did­n’t read the arti­cle, I skimmed through the paper and saw a head­line say­ing they were default­ing.

Cameron  15:17

So, I mean, who does that hurt, real­ly? That hurts their investors, right?

Tony  15:20

Yeah, it hurts Wall Street, who­ev­er was buy­ing their bonds. Because their bonds have been marked, will be marked right down. Last I saw they were down to 20 cents on the dol­lar before the default, so they’re prob­a­bly even low­er now.

Cameron  15:30

But I think it was the for­eign min­is­ter — some­body high up in Rus­sia quot­ed in the media — and it was, like, about a month ago, say­ing, “we don’t care about your sanc­tions.” You know, “we’re ready for it. We put mea­sures into place a long time ago, sanc­tions mean noth­ing. We’re just gonna blast through your sanc­tions, it won’t mat­ter.”

Tony  15:51

Well, there’s one school of thought which says sanc­tions don’t work, but they do tend to take some time when they do work. And the clas­sic case against say­ing sanc­tions don’t work was South Africa and the sanc­tions against them which end­ed Apartheid — or helped to end Apartheid — but they took a long time to do it. I nev­er thought sanc­tions would end the war in Ukraine, but it obvi­ous­ly is hav­ing a neg­a­tive impact on the Russ­ian econ­o­my.

Cameron  16:13

Any­way, stocks of the week: DUR and PRU. DUR is an inter­est­ing one. I had to ask you about the chart for this, because it only float­ed a lit­tle while ago and it’s been com­ing down ever since. But, I’m still not exact­ly sure when to call some­thing a falling knife ver­sus some­thing that’s, you know, it’s turned up a lot since we declared it stock of the week yes­ter­day. Oh, it went ex-div on the 12th of April, too, paid 10th of May. But yeah, like, when you look at this chart, DUR chart — Duratec by the way, for peo­ple play­ing at home — float­ed Novem­ber 2020. Looks like it list­ed at about 57 cents, shot up to 59, and it’s cur­rent­ly trad­ing at 40. Came all the way down to 31 late last year, but it’s back up to 40. What’s your def­i­n­i­tion of a falling knife these days, TK?

Tony  17:09

Oh look, it still has­n’t changed. I don’t know if I have a sci­en­tif­ic def­i­n­i­tion, but when I look at Duratec I can clear­ly see a buy line that’s been crossed and now that the stocks turned upwards again we can put a sell line in. So, I’ve got a buy and a sell line, and it’s above the buy line so I think it’s a turn­around sto­ry rather than being a falling knife.

Cameron  17:26

So, if it’s above the buy line, that’s what you’re look­ing for?

Tony  17:29

Well, it depends, Cam, that’s why it’s a bit dif­fi­cult. So, remem­ber­ing back to stocks like Adairs, ADH, they had a very old buy line; they were still above but they were drop­ping. So, yeah, I haven’t writ­ten into the Bible yet, but I still like the idea of if it’s the most recent buy line rather than the one that was set fol­low­ing the most recent sell line — so, in oth­er words, if H1 and H2 are at the right hand side of the graph and it’s crossed those, then I think the falling knife has got a very good chance of end­ing and we’re into a turn­around sto­ry. Which is what the shape of this graph looks like, it’s the clas­sic hock­ey stick shape where it’s been going down and now it’s turned up.

Cameron  18:11

It’s had a cou­ple of attempts of turn­ing up, though. Like, from May ’21 it went up and then it came back down, and then in Novem­ber ’21 it went up and then it came back down. So, you know, my wor­ry is that, okay, it’s going back up but it might come back down. But, you think if it’s cross­ing a buy line then it’s prob­a­bly safe.

Tony  18:32

A recent buy line, yeah. Well, I don’t know how safe, I’m not giv­ing any guar­an­tees, but I think its time to buy with a rea­son­able chance of it going up fur­ther, yeah.

Cameron  18:41

So, I think that was our micro-cap stock, and PRU — good old PRU — is our large-cap stock of the week. This is a crazy chart.

Tony  18:53

It’s a great one, isn’t it.

Cameron  18:54

It’s just been going from strength to strength for a good four years, real­ly.

Tony  19:01

Well, I bought PRU prob­a­bly about four years ago, maybe three years ago, at 50 cents. So, it’s been a home­run for me, a full dag­ger.

Cameron  19:09

You haven’t had to sell it in that time?

Tony  19:12

I might have, like, I actu­al­ly hon­est­ly can’t remem­ber. I may have sold it and bought it back, but I’ve cer­tain­ly been — except for maybe a small peri­od — a long term hold­er of it.

Cameron  19:20

Yeah, it looks like it’s had a cou­ple of sig­nif­i­cant drops: like, in July ’20 it had a bit of a drop there down to March of ’21. But, I don’t think it would have ever crossed a sell line, because the sell line is real­ly low.

Tony  19:34

Yeah, that’s why I think I’ve had it the whole time.

Cameron  19:37

I think the sell price is prob­a­bly about 48 cents look­ing at my chart here, and the price is cur­rent­ly over two bucks. So, that’s a cork­er. Well done on that one. So, I think I hold it too, but you’ve had a lot longer than me.

Tony  19:50

Yeah, it’s been a beau­ty. I’ll do a pulled pork on that, too, when­ev­er you’re ready for it.

Cameron  19:54

Okay, well before we do that, just a port­fo­lio update. We’ve been talk­ing for the last week about whether or not to sell SFC, Schaf­fer, which we bought in the port­fo­lio back in August 2019 at $14.50. So, that’s, what’s that? One and a half years… two and a half years, two and a half years ago we bought it and its prob­a­bly the longest stock we’ve held in our port­fo­lio.

Tony  20:22

Yeah, could be.

Cameron  20:23

It’s now trad­ing at $20.80 and we sold it today because it has crossed a sell line, which is kind of insane. Again, you look at the chart for this and it’s had a cork­er run for the last five years. Five years ago, it was $5.29, it’s now over $20. You know, rules is rules.

Tony  20:44

Yeah, and if you look at the last six months on that chart, it’s been going side­ways. So, that’s why the sell line has come about, I think.

Cameron  20:52

Yeah. Right. Now, I did send you an email about what to replace it with, you haven’t answered yet. We’ve got ZGL and ASG, I think are the options. ZGL has got a very low aver­age dai­ly trade, but I don’t think that real­ly mat­ters for our dum­my port­fo­lio, does it?

Tony  21:09

Yeah, it does. So, the dum­my port­fo­lio is about $32,000 now, I think, so we want to buy some­thing with an ADT of one-twen­ti­eth of that times five, so 20% of the ADT. And what’s the math on that? I can work it out quick­ly.

Cameron  21:25

Do we though? ‘Cause we’re not sell­ing it, because we’re not buy­ing it? Are we real­ly behold­en to those restric­tions?

Tony  21:34

It’s not going to be a dum­my port­fo­lio if we fudge the rules. So far to date, we’ve always applied our own ADT rules, but we’ve been able to buy small stocks because the port­fo­lio’s got a small total val­ue.

Cameron  21:45

Well, the amount of mon­ey that we got from sell­ing SFC, I think, was about $1,500. So, we need an ADT of five times 1,500?

Tony  22:00

Well, no. So, the port­fo­lio is 32,000 at the moment. If I divide that by twen­ty, 1600. So, that’s pret­ty much what we sold SFC for, and times that by five: 8,000 ADT.

Cameron  22:13

Well, ZGL. Now, hold on, I’m just hav­ing a look at its ADT. It’s $566. So, yeah, that’s prob­a­bly too small. ASG, Auto Sports.

Tony  22:26

No, that’ll be fine.

Cameron  22:29

Okay. So, we’re going to replace SFC with ASG, and we bid SFC a fond farewell for now because it’s done very well for us over the last two and a half years.

Tony  22:44

And paid some good div­i­dends from mem­o­ry, as well.

Cameron  22:46

Yeah, I think so. Very good. But there you go. You know, peo­ple often ask about tak­ing prof­its from stocks that do real­ly well, and I guess this is a good exam­ple of how we do that. We are tak­ing prof­its here, but only because it’s crossed the sell line.

Tony  23:08

Yeah, I guess a quick word about the sell line for SFC, because we went back and for­wards on it at the end of last week. And, the Bret­te­la­tor I think is doing the right thing. It’s using the L1 low point as 30th of April, 2020, and then draw­ing a sell line from there. When you first raised it with me I went back and had a look and thought the L1 might be back in July 17. But, the way that the Bret­te­la­tor is cod­ed, and it was cod­ed by Brett and myself after a lot of dis­cus­sions and a bit of research into dif­fer­ent types of exam­ples, we decid­ed that the troughs and the peaks should actu­al­ly be troughs and peaks and not just a low point on the graph. And so, back in July 17 for SFC there’s no trough there even though the graph is low­er. The first sort of trough that we’re going to use for our sell line is April 2020.

Cameron  24:02

And the def­i­n­i­tion of a trough or a peak for new peo­ple is that the price either side of the trough is high­er than the trough price. The reverse is true with a peak, the prices either side of it have to be low­er for it to be a peak.

Tony  24:17

I reflect­ed on that when you raised it, and I asked Brett what the code was say­ing and he point­ed it out. And I think it’s prob­a­bly one of the ben­e­fits of the Bret­te­la­tor is these things are cod­ed and writ­ten down in prob­a­bly, and by the very nature of hav­ing to code it, prob­a­bly in more detail than, say, the Bible men­tions these things as well. So, that’s a ben­e­fit, I think, to have. Like, once you work out what it’s going to be, you can just code it and walk away and not have to rein­vent the wheel every time a new exam­ple comes up, nec­es­sar­i­ly.

Cameron  24:47

Yeah. It’s like hav­ing a good busi­ness plan. It’s the thing that you go back to. It’s writ­ten down, its set in con­crete. It can be changed, but…

Tony  24:57

Yeah. We can decide to change it but, you know, it’s good to see what we decid­ed on after we did some research last time.

Cameron  25:02

Yeah, and you only want to change it if, you know, there’s suf­fi­cient rea­son to change it. It has to be done care­ful­ly and sys­tem­at­i­cal­ly, you have rules that you’re going to apply. Just on our port­fo­lio over and above that change with get­ting rid of SFC, for the finan­cial year to date we’re a cou­ple of points above the SPDR 200 accord­ing to Navexa. It’s run­ning at about 9%, we’re at about 10.5% for the finan­cial year. And again, you know, my the­o­ry on this is that we had a Cork­er finan­cial year, pre­vi­ous finan­cial year. I think we did about… the ASX 200 had a good year, it was up at like 23% for the finan­cial year, but we did about 45 or 46, accord­ing to Navexa. So, we were way ahead but then we start­ed — and a lot of those were in iron ore stocks — and then we start­ed this finan­cial year and in August, late July, and through August, we sold our iron ore stocks as the iron ore price came down. So, we start­ed from a high base, every­thing dropped, and we’ve been rebuild­ing since we had to dump all of our iron ore stocks. But still, we’re above. And of course, since incep­tion, which is about two and a half years, I think we’re about three times the ASX 200. So, all in all, it’s going well. In the last sev­en days, look­ing at the chart per­for­mance, FEX is up 17.5% in the last sev­en days. GRR is up about 10% and CCV is up about 9% in the last sev­en days. So, they’ve been the big win­ners in the last sev­en days. One oth­er thing I want­ed to talk about, the week­ly Zoom calls that I’ve been doing; first week, we had about twen­ty peo­ple turn up which was great. Sec­ond week, we had about five. Third week — last week — we had one and that was your broth­er in law Wal, and he said “I did­n’t have any ques­tions. I was just com­ing to see what’s going on.” So, I’m not going to do the Zoom call at sev­en o’clock every Wednes­day night if peo­ple don’t want it. So, I’m gonna take a break and pause those for a while and let’s fig­ure out… I do want to make myself avail­able, par­tic­u­lar­ly for new peo­ple, to do Q&A’s, and for any­one else, too. But we need to find time that works for peo­ple and there has to be, obvi­ous­ly, inter­est. I don’t want to be sit­ting here on a Wednes­day night with my gun in my hand… just try­ing to para­phrase Son­ny Cor­leone there, but keep it clean. That’s it for me. What have you got for news this week, TK?

Tony  27:43

Not much more than what we’ve spo­ken about. A cou­ple of things; I’ve noticed the yield curve has right­ed itself. So, two weeks ago I spoke about the yield curve invert­ing in the States — I don’t think it ever did in Aus­tralia. And that was impor­tant, of course, because ana­lysts were say­ing “oh, well, it always pre­cur­sors a reces­sion.” But now the long-dat­ed bonds are back high­er than the short-dat­ed bonds, so the inver­sions reversed itself again. All that, sort of, doom and glooms gone away from the finan­cial press as soon as that start­ed to hap­pen. So, that was of inter­est, but a fleet­ing inver­sion of the yield curve. I just want­ed to high­light a mis­take I heard when I lis­tened to our pod­cast record­ing last week. I said some­thing like that ris­ing inter­est rates will be a head­wind for banks, and I should have said tail­wind. So, I mis­spoke. I think my point was clear from the rest of the con­text of dis­cussing the banks we talked about last week, but their prof­its should get a tail­wind from ris­ing inter­est rates. If I said head­wind, I apol­o­gise — I did say head­wind, I think, but it meant to be tail­wind.

Cameron  28:45

So, break that down for me. Ris­ing inter­est rates, basi­cal­ly, just good for banks is what you’re try­ing to say?

Tony  28:52

Yeah, pret­ty much. They give the bank’s prof­it a tail­wind, a boost. I think I went through those points last week, but if I can recall them the banks will be quick to pass on inter­est rate ris­es when they can be slow the past on inter­est rate decreas­es. And also, too, just like with the min­ing com­pa­nies, when the under­ly­ing com­mod­i­ty goes up, the per­cent­age mar­gin might stay the same. In fact, it usu­al­ly improves with the banks because they don’t have to put any more mon­ey into costs, the same num­ber of branch­es are open, the same IT sys­tems are there, but they get a big­ger spread on both their dol­lars and their mar­gins.

Cameron  29:30

All right. Well, thanks for clar­i­fy­ing that. You want to talk about PRU in more detail, do a pulled pork?

Tony  29:36

Yeah, I’m quite sur­prised I haven’t talked about it yet already, but it’s cer­tain­ly been a part of my port­fo­lio for a num­ber of years now. A lit­tle while ago I did a pulled pork on West African Resources and PRU, Perseus Min­ing, is anoth­er West African gold min­er. So, again we start to see themes in the port­fo­lio and on the buy list, but we don’t set out to buy West African gold mines. They just come onto the port­fo­lio on a case by case basis, and after a while we see that there are a cou­ple of stocks in our port­fo­lio that fit that pro­file. The first ques­tion that always gets asked when we talk about over­seas gold min­ers or any sort of over­seas based com­pa­ny is sov­er­eign risk, and is this a risky asset? And my clas­sic answer to that is if every stock I owned was a West African gold min­er I might, you know, be a lit­tle bit con­cerned about sov­er­eign risk. But, if I only own one or two and there is a prob­lem, well, the port­fo­lio can with­stand it. The flip­side to sov­er­eign risk in this case, of course, is that these stocks are val­ue stocks because a lot of fund man­agers don’t want to take on the sov­er­eign risk of West African gold min­ers. And for new lis­ten­ers, sov­er­eign risk is basi­cal­ly the risk that you are oper­at­ing in a coun­try that may not have the rule of law that Aus­tralia does, it may not have the same par­lia­men­tary sys­tem, the same democ­ra­cy, the same law/legal process, and they prob­a­bly won’t have all those things. And so there’s a risk, and it has hap­pened from time to time, that — I think there was a case recent­ly where there was a jun­ta in one of these African coun­tries and West African resources dropped by 20% even though it was in the neigh­bour­ing coun­try, it was­n’t the one that was hav­ing the coup. But there has been cas­es where a new gov­ern­ment takes over and they decide that all this prof­it should­n’t be going from the coun­try and they should be get­ting a big­ger take of it, and so they put up tax­es. There’s been cas­es where the min­er has sold the mine but the gov­ern­ment has­n’t let the mon­ey out of the coun­try, things like that. So, that’s what sov­er­eign risk is, and that’s always a risk when we’re invest­ing over­seas. But on the flip side, we get com­pen­sat­ed for it because the price of these com­pa­nies are a bit down because of that. And like I said, if I had a whole, if I only had one stock and it was a West African min­er I might be a lit­tle bit con­cerned about sov­er­eign risk, but one or two in the port­fo­lio I think is an accept­able lev­el. So, Perseus Min­ing owns three gold mines, one in Ghana and two in Cote d’Ivoire. They’re both in Africa, obvi­ous­ly. And just recent­ly, and one of the rea­sons that there’s been a bit of a rock­et under its share price, they announced that they had acquired anoth­er mine in Sudan. And on top of that, they’ve also announced that one of the mines they already own has dis­cov­ered more gold reserves. So, there’s been a writ­ing up of the reserves pro­ject­ed, both the qual­i­ty of the min­er­als and the life of the mine gets a boost. And that, of course, means the assets and prof­it pro­jec­tions get a boost. So, that’s one of the rea­sons why its on the increase. This com­pa­ny has been very, very cash pos­i­tive, and it trades at a Pr/OpCaf of 5.5. So, it’s get­ting up close to our lim­it but it’s always thrown off a lot of cash and in the last twelve months the cash has increased dra­mat­i­cal­ly. And, the earn­ings per share is fore­cast to grow by a fur­ther 24% next year, so it’s one of those min­ers who are in, you know, a good space. They own minds where peo­ple believe that the reserves will keep get­ting upgrad­ed and extend­ed, and it becomes a bit of a fly­wheel effect that the cash that gets thrown back at the com­pa­ny from sales from these mines can also be used for acqui­si­tions, and the whole cycle starts again. So, that’s what’s hap­pen­ing with Perseus min­ing at the moment. It’s a large-cap stock, I mean, it has­n’t always been; its ADT now is 10.69 mil­lion per day, but it’s four times big­ger than what it was when I first bought it. So, has grown, but it’s cer­tain­ly a large-cap com­pa­ny now which I think every­one can fit into their port­fo­lios. Share price that I did for the analy­sis is $1.99, I think it may even be super­seded now, I think it’s gone up again today. So, do your own research when you hear this, the num­bers could have changed for some of these scores. Par­tic­u­lar­ly the price to con­sen­sus tar­get because it was sit­ting at about 99% when I checked that this morn­ing. It’s a Star Growth Stock, so it scores for that. The finan­cial health is strong and steady which you’d expect from a star growth stock. As I said, Pr/OpCaf, its price to oper­at­ing cash flow is five and a half times which is good. It’s price is above the IV1 cal­cu­la­tion but less than our Intrin­sic Val­ue 2 cal­cu­la­tion, so it scores a point for that. The price to book though is about dou­ble, so it’s not going to score for that — or price to book plus 30%, it’s not gonna score for that either. Because the fore­cast EPS growth is 24% growth over PE, though, is above 1.5. It’s cur­rent­ly 1.86, so it scores for that. I guess the flip side to all these min­ing com­pa­nies that are in their growth stages is it has a very small yield, of only point 4%. So, it’s not going to pass our test for yield. On the man­u­al­ly entered data it has a record low of six-over the last six halves it has a record low PE for the six halves, so that’s good. It gets score for that. The equi­ty has been con­sis­tent­ly increas­ing and that’s always a good one to see, so it scores for that. And over­all, it’s scores four­teen out of fif­teen items, or 93%, for its qual­i­ty score. So, pret­ty good, pret­ty high for that. And a QAV score of 0.17 which prob­a­bly puts it about halfway down the buy list, but still worth look­ing at. A com­pa­ny which just seems to be always in that growth space.

Cameron  35:27

And I know a lot of peo­ple get sort of skeeved out, Tony, by stocks that have a graph that looks like PRUs. Like, you know, it’s easy to look at that chart and go, “oh, it’s gone up so much. It’s stu­pid to buy this, all the growths gone. It’s done, its grown — look at it, it’s gone from,” what’d I say? $5 to $20 in five years?

Tony  35:49

50 cents to $2.

Cameron  35:52

Same thing, same same.

Tony  35:56

Same graph, dif­fer­ent val­ues.

Cameron  35:57

Peo­ple look at it and go, “I’m not buy­ing that!” How do you think when you see a graph that goes up to the right like that?

Tony  36:05

Yeah, so it does­n’t both­er me at all that the price is going up and that the graph is bot­tom left to top right. That’s kind of like what we want to see, and it’s a long way above its sell line. And the rea­son it does­n’t both­er me, par­tic­u­lar­ly in this case, is if you just do a bit of dig­ging you can see that the com­pa­ny’s swim­ming in cash, and it’s just gonna keep com­pound­ing. So, they’re either gonna spend it on acqui­si­tions or explo­ration at their cur­rent mine sites. There’d have to be some­thing pret­ty dread­ful to hap­pen before all that cash would slow down the growth of the share. And its com­pound growth, so that’s just going to keep increas­ing as far as we can see. I’m not going to pre­dict things and there’s sov­er­eign risk and all those things that could hap­pen, but at the moment it’s in a very good sweet spot.

Cameron  36:48

Maybe peo­ple might wake up this week and decide they don’t like gold any­more.

Tony  36:52

Yeah, well, that’s one of the risks; the gold price drops. I mean, there’s always those kinds of things when you’re invest­ing over­seas. We’re invest­ing in a local­ly list­ed com­pa­ny, but the busi­ness is over­seas so there’s always cur­ren­cy risk. You know, I think they’re prob­a­bly sell­ing in US dol­lars but there prob­a­bly would be local cur­ren­cy risk because they’re prob­a­bly pay­ing work­ers in what­ev­er the local cur­ren­cy is in Cote d’Ivoire. If there’s hyper­in­fla­tion all of a sud­den in Cote d’Ivoire, their costs go up. If the US dol­lar, or the Aus­tralian dol­lar drops, or the US dol­lar ris­es, there’s cur­ren­cy risk there. As you say, if peace sud­den­ly breaks out in Europe then the gold price might come down. So, all of those risks are there and that’s one of the rea­sons why the com­pa­ny looks cheap. If you turned it around and say, “my cof­fee shops gonna make 24% more prof­it next year. It’s been doing that every year for the last four years.” I doubt if I’d offer you‑I doubt if you’d accept five times oper­at­ing cash flow as the price for the cof­fee shop, right? It’s the goose thats laid the gold­en egg; you’d want a much high­er mul­ti­ple for it.

Cameron  37:54

Although, I hear a lot of sto­ries say­ing that the price of cof­fee is gonna go through the roof over the next cou­ple of years. We’re run­ning out a cof­fee, we’re at peak cof­fee, Tony.

Tony  38:05

I think it already has.

Cameron  38:06

Yeah, I know it’s been going up.

Tony  38:08

Yeah, I did look at the graph a lit­tle while ago — six months ago — and it was def­i­nite­ly a buy, but I could­n’t find any stocks on the ASX any­way that would ben­e­fit from that.

Cameron  38:17

Yeah, no, the guy I buy my green beans from — because I roast my own beans — he’s like, “yeah, man,” he says “the Chi­nese are buy­ing it all.” That’s his thing. He’s like, “ah, the Chi­nese are buy­ing all the beans. It’s all going to Chi­na, Chi­na’s dis­cov­ered cof­fee. It’s crazy.”

Tony  38:33

Why are you roast­ing your own beans?

Cameron  38:36

The very fact that you need to ask that ques­tion, Tony, means that you prob­a­bly aren’t sophis­ti­cat­ed enough to deserve an answer.

Tony  38:45

Cor­rect. I’m in the War­ren Buf­fett School of sophis­ti­ca­tion.

Cameron  38:50

All us cool peo­ple. Look, I got a pony­tail, Tony. Look! Oh, I did. I took it out. I have a pony­tail.

Tony  38:57

Yeah that’s cool. In 1990.

Cameron  38:59

I had one in 1990, and I’m going back to 1990–1988. You got­ta roast your own cof­fee beans, I don’t know why. They reck­on it’s bet­ter.

Tony  39:10

Do you get them cheap­er if you roast your own beans?

Cameron  39:11

Yeah, it is a bit cheap­er, yeah.

Tony  39:13

Okay, that’s worth­while then. I under­stand that.

Cameron  39:15

But if you fac­tor in my time that I spent doing it, it’s half an hour depend­ing on, you know, what my hourly rate is. You know, it’s $15 an hour, and half an hour spent roast­ing, that’s $7.50 you’ve got to add on to the cost.

Tony  39:28

What. you have to stand there while they roast? You don’t just put them in the oven and go away?

Cameron  39:31

If you have a fan­cy high-end cof­fee roast­ing machine as some of my friends do, yeah, you just turn it on and it goes and does it all for you. But I don’t do that because to me, that feels like cheat­ing. I like to… it’s a bit, I tell you what it is, it’s a bit like clean­ing your own car, you know? It’s prob­a­bly been a long time since you’ve cleaned your own car, Tony.

Tony  39:54

There’s a car wash up the street that will do it for me.

Cameron  39:56

I know, but there’s a thing when I clean my own car, which I do most of the time, I kind of feel like I’m in touch with my car. I’m tak­ing care of it. I’m not a mechan­ic, my mechan­ic comes tomor­row to do my ser­vice. I’m, to the best of my abil­i­ty, I’m in touch with my… I’m in touch with my cof­fee beans and my food. I’m par­tic­i­pat­ing. I’m not grow­ing and I’m not pick­ing it, that’s the hard stuff, I acknowl­edge that. But I don’t know, there’s some­thing about roast­ing it that just puts me… I don’t know…

Tony  40:26

This is like Zin and the Art of cof­fee bean roast­ing.

Cameron  40:29

I wish you had­n’t asked that ques­tion because, like, my entire life choic­es are now just dis­solv­ing in front of me. Why am I roast­ing my own cof­fee beans?

Tony  40:39

I’ve nev­er heard… you’ve got this inter­est­ing under­ground group of friends in Bris­bane going around and roast­ing their own… do you get togeth­er and have cof­fee bean par­ties? “Hey, I just roast­ed some cof­fee beans…”

Cameron  40:49

We do. No, the way I do it is I have a big old cast iron pan and I throw them in there and I just stand there and stir them for twen­ty to thir­ty min­utes. Got­ta keep stir­ring it, keep stir­ring it, keep stir­ring.

Tony  41:00

Your time real­ly isn’t worth much, is it?

Cameron  41:04

But I feel… and the house smells like, you know, roast­ing cof­fee, so it gets real­ly hot. Any­way, I think it’s prob­a­bly the last time I’m ever gonna do that now, you just took me out of that. Are you ready for Q&A?

Tony  41:16

Yeah, sure. Send your cof­fee bean ques­tions in for Cameron next week peo­ple.

Cameron  41:23

Why do you cook your own food-occa­sion­al­ly?

Tony  41:26

I hard­ly ever. Oh, at Cape Schanck I do because I can’t get out. But yeah.

Cameron  41:31

Yeah, you have to. Yeah, okay. You don’t make your own break­fast, you go down to the cafe for that. You don’t make your own din­ner.

Tony  41:37

Beau­ti­ful, yep. Buy the paper, read the Fin Review, bacon and eggs. Love­ly. Bel­lis­si­mo. Great way to start the day.

Cameron  41:44

Yeah, well, you’re spread­ing the mon­ey around in the econ­o­my, that’s good.

Tony  41:48

That’s right.

Cameron  41:49

Yeah, you’re putting it back. Ques­tion from Aiden. This is from our first Zoom call a few weeks ago. He asked if you don’t have Stock Doc­tor, where do you find board own­er­ship lev­els? Is it just the annu­al report?

Tony  42:03

It is, yeah, that’s where I’d look. So, it’ll be in the direc­tors’ report in the annu­al report. Some­times it gets also dupli­cat­ed in the rem. report, the remu­ner­a­tion report sec­tion, because they’ll tell you the CEOs stock hold­ings there too. But, the direc­tors report in the Annu­al Report will have it. I did look at it, I was going through a half-year­ly report for Perseus Min­ing when I was pulling togeth­er the pulled pork today and they did­n’t have the direc­tors hold­ings, but they were there in the annu­al report.

Cameron  42:33

I think I found it on that Zoom call, too, in like Yahoo Finance. So, I think that might be anoth­er place, you can go there. But if any­one has any oth­er sug­ges­tions for Aiden, please let us know. Post it in one of the many comms chan­nels that we now have that I have to mon­i­tor con­stant­ly.

Tony  42:56

You can set up like three or four screens in front of your cast iron skil­let while you’re roast­ing cof­fee beans.

Cameron  43:00

That’s what I need, yeah. Thank you for that. Dun­can says “I saw this arti­cle on the AFR recent­ly and I won­dered if the for­eign con­nec­tions to a non-demo­c­ra­t­ic coun­try should be a source of con­cern for the likes of YAL and GRR to investors. I won­der if it is some­thing that TK has an opin­ion on?” This arti­cle from the Fin Review dat­ed March 4, Christo­pher Joy col­umn. “Investors blind­sided by glob­al con­flict risks. Mar­kets have under­es­ti­mat­ed the prob­a­bil­i­ty of con­flicts exac­er­bat­ed by investors blind­ly pro­vid­ing equi­ty and debt fund­ing to despots and dic­ta­tor­ships.” What do you think about the risks? It gets back a lit­tle bit to the stuff you were talk­ing about sov­er­eign risks with PRU.

Tony  43:48

It does, yeah, sov­er­eign risk. Although, the spe­cif­ic com­pa­nies Dun­can’s raised here — Yan­coal and GRR — although they have a ver­sion of sov­er­eign risk, it’s in reverse. So, Yan­coal and GRR are two com­pa­nies with over­seas own­ers. And I think in both cas­es, it’s a big Chi­nese com­pa­ny which owns a major­i­ty of at least 40%, maybe even 50% or more of those com­pa­nies. But the mines, so Yan­coal’s coal mines are in Aus­tralia, in the Hunter I think, and in West­ern Aus­tralia, per­haps. And GRR has an iron ore pel­let busi­ness in Tas­ma­nia. So, a lot of the risk goes away from a sov­er­eign risk point of view, because we know what the legal pro­ce­dures and the rule of law is life in Aus­tralia and the tax rates and what democ­ra­cy is like and all that kind of stuff. So, it’s unlike­ly that the assets will be seized. I guess there could still be a coup and it would seize the assets, but it’s less like­ly here than in some over­seas com­pa­nies. There would be still maybe some risk if one of these over­seas own­ers was a Russ­ian com­pa­ny right now and there were sanc­tions against them. I don’t know what the legal reper­cus­sions would be in Aus­tralia, per­haps some of the assets would be frozen and these com­pa­nies. I know there was a case recent­ly where Rusal, I think that’s the right name, which is a Russ­ian alu­mini­um com­pa­ny had a JV with Rio Tin­to for an alu­mini­um mine, or baux­ite mine, Alu­mini­um smelter, I think. And basi­cal­ly, the Rusal side was sanc­tioned and could­n’t receive any income from the com­pa­ny that they had the JV with, or the com­pa­ny that the JV owned. And Rio just did some kind of side deal and they took over tem­porar­i­ly total own­er­ship, and I guess they’ll pay Rusal back when and if the sanc­tions get removed. So, yeah, I think the sov­er­eign risk of an over­seas com­pa­ny own­ing Aus­tralian assets and us invest­ing along­side them is a lot low­er than the sov­er­eign risk of an ASX list­ed com­pa­ny own­ing the mines over­seas. But it’s still not with­out risk. But again, I mean, that’s one of the rea­sons why these com­pa­nies are… why we’re being con­trar­i­an and why US com­pa­nies appeal to a val­ue investor, because we’re hap­py-we’re aware of those risks and we’ll take them on giv­en that the price being offered to us is com­pelling.

Tony  44:43

But do you even look into these com­pa­nies enough to know that they have sig­nif­i­cant for­eign own­er­ship?

Tony  46:13

Yeah, I do. And not for the sov­er­eign risk angle, because I think the sov­er­eign risk is low, more from the own­er­ship struc­ture point of view. So, I had owned Yan­coal years ago and I remem­ber when I want­ed to sell my shares it took a long time because the ADT went right down to a very low num­ber because the mar­ket was being sup­port­ed along the way by these large com­pa­nies that were, for what­ev­er rea­son, buy­ing and sell­ing shares, and it can be a prob­lem when there’s big names on the reg­is­ter, the liq­uid­i­ty can dry up. And if any­one wants to have a look at it — Dun­can might want to have a look at it — have a look at Yan­coal in Stock Doc­tor any­way, and look at the twelve-month vol­ume move­ments in the share price and you can see that even though the ADT is some­thing like just under a mil­lion dol­lars for Yan­coal, you know, some days it does­n’t even trade. So, it’s kind of volatile. So, that’s the rea­son I paid atten­tion to the own­er­ship struc­ture. When­ev­er I see a com­pa­ny that has large share­hold­ings on the reg­is­ter I will be real­ly care­ful about apply­ing my ADT rules, because I know you can get caught get­ting out.

Cameron  47:26

So, at what point do you check these things? It does­n’t show up in the check­list.

Tony  47:33

No, it does­n’t. It’s a nor­mal ADT rule, so I’m not doing any­thing dif­fer­ent. But like I said, I have been caught out before. So, if I was going to buy into Yan­coal now, and I would­n’t be because the ADT isn’t high enough, I’d want it to be a much high­er num­ber than where it is now for me to buy into it just because I know that with large com­pa­nies dom­i­nat­ing the share reg­is­ter, the liq­uid­i­ty can dry up quite quick­ly. I don’t have a rule for it. I don’t know if we should mod­i­fy the ADT rule for it, but that’s the rea­son why I would look at a com­pa­ny like Yan­coal, just from expe­ri­ence. And because I’ve had that expe­ri­ence with Yan­coal I look at oth­er ones. I think from mem­o­ry AGG, Angl­o­Gold Ashan­ti might have a cou­ple of large share­hold­ings. GRR has one, so that prob­a­bly won’t have the same sort of ADT risks that Yan­coal has. I had looked at it today and there’s still some­thing like 45% minor­i­ty share­hold­ing, so it’s going to be liq­uid. But yeah, Yan­coal has a cou­ple of big com­pa­nies own­ing a lot of the shares. But yeah, so Dun­can, not too wor­ried about sov­er­eign risk there. What’s the oth­er thing I can prob­a­bly say about the large over­seas own­er­ships? Again, I’ve had expe­ri­ence where if they dom­i­nate the board they might — if, like, the com­pa­ny that owns, say, a large part of GRR influ­ences the board because they own a cus­tomer that’s buy­ing the pel­lets from GRR, you get these relat­ed par­ty deals which can be sub­op­ti­mal for the com­pa­ny. So, that can hap­pen. I’m not say­ing it’s hap­pen­ing with GRR but it’s pos­si­ble. I think we were talk­ing about Mur­ray Zir­con, which was a sand min­ing com­pa­ny we spoke about a lit­tle while ago where there was an over­seas com­pa­ny try­ing to tip the board out and put their own direc­tors in place so they can do that kind of deal with them­selves, because they also owned the the end cus­tomer that was buy­ing prod­uct from the com­pa­ny. So, that’s a risk, but that’s prob­a­bly the end of it. To me, those are risks and the stock mar­ket’s pret­ty good at price dis­cov­ery. So, if some­thing starts to smell a bit on the nose with what the board­’s doing for these com­pa­nies, or if there are sanc­tions applied to a coun­try that these com­pa­nies are domi­ciled in, that might affect the oper­a­tion of the com­pa­ny or liq­uid­i­ty of the stock. The price will reflect that pret­ty quick­ly and the nor­mal set of rules apply.

Cameron  49:57

Thank you for the ques­tion, Dun­can. Phil asks, “how does TK deter­mine the num­ber of stocks he owns? I know he says fif­teen-twen­ty, but there’s a big dif­fer­ence between those num­bers. How many does he have now and why that num­ber?

Tony  50:11

Well, I own fif­teen. I will go to twen­ty if I get addi­tion­al cash from, not sure from where, but if I do, and the oppor­tu­ni­ty per­mits.

Cameron  50:21

When the film gets picked up by Net­flix, Tony.

Tony  50:26

Yeah, good, okay. So, if I get more cash and there’s enough things on the buy list to buy, because I’m run­ning up against ADT issues on the buy list with my port­fo­lio, then I’ll go up to twen­ty. But at the moment it sits at fif­teen. Fif­teen-twen­ty stocks I’ve just read about this in invest­ing books over the years, that seems to be the sweet spot for a port­fo­lio. A lot more than that and you start to get returns clos­er to the index, and a lot less than that you do get bet­ter returns but it’s very volatile. So, I mean, giv­en I’ve been doing this for a long peri­od of time I would prob­a­bly, I would be hap­py to have a small­er, more con­cen­trat­ed port­fo­lio and take on the volatil­i­ty risk, but at the moment I can find fif­teen big stocks to put in my port­fo­lio. So, that’s what I do. And Char­lie Munger says the opti­mal num­ber is four, and I think the research will prob­a­bly bear that out but it’s incred­i­bly volatile to hold four stocks. And I don’t think most peo­ple lis­ten­ing to this would stom­ach the port­fo­lio being worth 50% less next quar­ter and then, you know, dou­ble a quar­ter after, and then half the quar­ter after that. You think about if he had one stock and you look at the graph, no share graph goes up at a 45-degree smooth angle; they go up, they come back, they go up, they come back. So, volatil­i­ty is an issue. But I’m also remind­ed of what one of our guests said from Collins Street Funds, Collin’s Street Val­ue Man­agers, Michael Gold­stein I think his name was, Gold­berg. Apolo­gies if I have that wrong, if that was­n’t his name. He said, you know, if you have a good idea why buy your fourth best idea? Buy your first best idea. So, I have some sym­pa­thy with that but it does come with a whole heap of volatil­i­ty. So, I’ve just found over the years fif­teen was good. I had a peri­od where I owned like fifty stocks and that was just ridicu­lous, so I’ve been… in fact, Schafer, you know, peo­ple who were pay­ing close atten­tion I sold my Schafer stock today as well, like you did, and I’d had it for about five years and it was a good com­pa­ny. But, I had a very small hold­ing and it came from a time pri­or to the QAV pod­cast where, you know, I did some research and formed the view that it did­n’t mat­ter what size ADT, if the stock was at the top of the buy list I should buy it. It took me fifty stocks to fill out my port­fo­lio or there abouts. But I had a port­fo­lio of big hold­ings and small hold­ings, and at the end of the day, if some­thing small like Schafer even dou­bled in val­ue, all it took was Fortes­cue Met­als Group to move 5% either way and that drowned it out. So, I think what I’m doing now makes more sense, where I’m start­ing off with at least fif­teen even­ly weight­ed stocks and they’re all high ADT so I can buy them with some kind of con­fi­dence.

Cameron  53:06

When Char­lie said four stocks was the ulti­mate set­up, do you think he was talk­ing about buy­ing them on the mar­ket like we do, or going and buy­ing stuff Char­lie and War­ren style? Like, buy­ing big chunks and sit­ting on the board?

Tony  53:23

Yeah, its a good ques­tion. So, Char­lie has said he has four stocks in his own pri­vate port­fo­lio I think from mem­o­ry, obvi­ous­ly his share­hold­ing in Berk­shire is one of those, Berk­shire Hath­away. I think he has a chunk of Wal­mart, a chunk of Ama­zon, and he’s buy­ing into Aliba­ba now I think as well. So…

Cameron  53:42

What about the news­pa­per that he owns that he does the AGM?

Tony  53:45

Oh, yeah, of course. He’s also Wells Far­go and West­ern Couri­er?

Cameron  53:51

The Dai­ly Couri­er I think, or some­thing-its got “dai­ly” in the name.

Tony  53:55

Okay, yeah. So, you’re right, he might have four or six. But I did read recent­ly he said four was the ulti­mate num­ber. And of course, he does­n’t apply that sort of think­ing to Berk­shire Hath­away. They have, I don’t know, maybe a hun­dred dif­fer­ent hold­ings in indi­vid­ual com­pa­nies or list­ed com­pa­nies. So, he has­n’t applied that there. And it prob­a­bly is hard­er to do it with Berk­shire Hath­away, because if you’re buy­ing a com­pa­ny you don’t want to toss it next month if you don’t like it. They’re try­ing to buy things and hold them for life. And then that com­pa­ny throws off cash and they have… and the insur­ance com­pa­nies give them float, so they’re always get­ting access to free or cheap mon­ey to invest more with. But yeah, it’s pos­si­ble that they may have done bet­ter if they had gone back and just kept build­ing and buy­ing the first four com­pa­nies that they ever bought. Maybe that would have been a bet­ter out­come for them. I’m not sure.

Cameron  54:44

All right. But bot­tom line to answer Phil’s ques­tion is you just think it’s, you’ve found that it’s a nice even point between not too much volatil­i­ty and not water­ing down your returns as you approach the size of the All Ords.

Tony  55:03

Cor­rect. That’s a good way to put it, and it’s not just made that’s found out that. It’s cer­tain­ly been things I’ve read in invest­ment books in the past as well. The research sup­ports it.

Cameron  55:12

Thanks for the ques­tion, Phil. Annette asks: “Hi, Cam and TK. Gen­worth Mort­gage Insur­ance has been on the buy list for a cou­ple of weeks but I’m won­der­ing what the impact the fed­er­al and state gov­ern­ment schemes — espe­cial­ly the fed­er­al gov­ern­ment cam­paign scheme — will have on the com­pa­ny. Mort­gage insur­ance is need­ed for peo­ple who don’t have the full 20% deposit for a house, first time buy­ers with only 5% have the remain­der guar­an­teed by the gov­ern­ment, sin­gle par­ents and First Nations only 2%. Will this be reflect­ed in the share price of Gen­worth? The state gov­ern­ments also have inde­pen­dent schemes. Won­der­ing if this is a sell on bad news?”

Tony  55:50

Well, to answer that last ques­tion first we sell on bad news, as I’m try­ing to get peo­ple to lim­it to, just if an inde­pen­dent direc­tor resigns or the CFO leaves unex­pect­ed­ly. The share price for Gen­worth I had a look at today and it’s it’s going up nice­ly. They pro­vide, as Anette said, they pro­vide mort­gage insur­ance for peo­ple who don’t have an 80% LDR — Loan Deval­u­a­tion Ratio — when they’re buy­ing a house. In oth­er words, you can have a low­er deposit amount than 20%. Take out this insur­ance and the bank will be hap­py enough to lend you the mon­ey to buy the house. The sell on bad news ques­tion, I think I kind of real­ly want to empha­sise for peo­ple that that is some­thing for cas­es where, like, an inde­pen­dent direc­tor has resigned from the board. Or, the last point I want­ed to make was that anec­do­tal­ly, so cer­tain­ly what peo­ple are telling me who are try­ing to access these first home buy­ers’ schemes, they’re say­ing that they’re dif­fi­cult to get a hold of. So, I don’t know if they’re going to be a big com­peti­tor for Gen­worth’s nor­mal busi­ness. And if you think about it, there’s a lot less first home buy­ers in the mar­ket than peo­ple who are going for repur­chas­es or refi­nanc­ing and all those kinds of things and might be tak­ing out mort­gage insur­ance for their sec­ond or third home. Yeah, so my gut feel is it’s not going to have a big impact. And cer­tain­ly, I think from mem­o­ry the first home buy­ers’ scheme was lim­it­ed by state by num­ber. So, it was a fair­ly small num­ber of peo­ple, I think, who were actu­al­ly tak­ing them out.

Cameron  57:24

But from a QAV per­spec­tive, we’re just gonna watch the num­bers and, you know, let the num­bers tell us about GMA rather than try­ing to pre­dict.

Tony  57:36

Cor­rect. Espe­cial­ly, like, I’m not a mort­gage bro­ker, I’m not an insur­ance spe­cial­ist; in the stock mar­ket I’m going up against peo­ple who are, and my pre­dic­tion is going to be prob­a­bly swamped by theirs, so I’m not going to try and take them on.

Cameron  57:48

That’s the old QAV say­ing, Tony, “when you pre­dict, you make a dict out of you and me.”

Tony  57:57

Some­thing like that. You hold your gun, is that what you said before?

Cameron  58:02

“Hey, I don’t want my broth­er com­ing out of the stall with just his pre­dic­tion in his hand.” Fifty years, The God­fa­ther. Fifty-year anniver­sary this year. I saw a thing recent­ly a cou­ple of… oh, it was at the acad­e­my awards. Cop­po­la, Paci­no and De Niro came out to say some­thing about it. But yeah, fifty years. Holds up good. Great film. This one’s from Michael: “I’ve been look­ing to add anoth­er stock to my port­fo­lio and going through the buy list this week few have a small spread between the buy and sell 3PTL.” For exam­ple, he lists ASG, TGA, ANZ. “The cur­rent price is very close to their sell line is anoth­er thing, like AVA. Does TK take this into account or just buys based on sen­ti­ment upward trend. I assume he just buys and lets the process take care of the rest. Part of me looks at these buys as poten­tial­ly more risky than ones like FEX which is going way up above the 3PTL.” See, we can’t win.

Tony  59:10

Yeah, I was just gonna say that.

Cameron  59:15

Half the peo­ple lis­ten­ing to this are going to look at PRU and go “uh, I’m not buy­ing that, it’s gone way too high — way too high above its sell line.” And then peo­ple, the oth­er half will be like Michael going “oh, these are way too close to their sell line, I’m not buy­ing those.”

Tony  59:27

Look, I under­stand both points of view but I just ignore them. I just buy it if it’s the next thing on the buy list and it’s in the buy ter­ri­to­ry. As for the ones which are close to their sell line, look, I have some sym­pa­thy with the per­son a cou­ple of weeks ago who said that he want­ed 10% above the sell line so that you would­n’t be three points sell­ing it before he was rule 1’d. So, look, I have some sym­pa­thy with that but I would still be buy­ing it myself. And you know if you look at stocks which have just crossed their buy line they could be close to their sell line, but if they’re going up they’re not always going to be close to their sell lines. So yeah, I don’t pay much atten­tion, if any atten­tion, to where the sell line is when I’m buy­ing.

Cameron  1:00:08

Right. There you go, Michael. I had a late ques­tion from Car­o­line. I don’t think you’ll be able to help much, but I thought some­one in our com­mu­ni­ty might have an answer. She says, “hi, Cameron, not strict­ly a val­ue invest­ing ques­tion but I would like to know Tony’s thoughts regard­ing dig­i­tal secu­ri­ty mea­sures for pro­tect­ing our port­fo­lios in a self-wealth sce­nario, out­side of antivirus and pass­word pro­tec­tion. Thanks.” You’re ask­ing the wrong guy, like…

Tony  1:00:39

You buy a big pad­lock. When you close your lap­top you lock it up.

Cameron  1:00:45

You put it in the safe.

Tony  1:00:48

Yeah.

Cameron  1:00:48

Tony just has, like, peo­ple who do these things for him, Car­o­line. Bail­lieu’s.

Tony  1:00:54

So, I use Nord VPN because I’m con­scious that when I’m doing online bank­ing, etc., that I want to stop some­one from gain­ing access to the Wi Fi or what­ev­er and screen scrap­ing my pass­words. So, I use Nord VPN, I always keep my soft­ware updat­ed, you know, the lat­est ver­sion of the Mac OS, etc., which should — they claim — improve the virus pro­tec­tion on your PC. But, that’s about it.

Cameron  1:01:22

I know that self-wealth do offer 2FA, two fac­tor authen­ti­ca­tion. So, I use self-wealth and I have it set up with two fac­tor authen­ti­ca­tions with Google’s authen­ti­ca­tor app. So, every time I try and log into self-wealth, if it’s on a com­put­er, I have to put in the 2FA code that I get out of the Google app. If I do it if I’m on my phone or my iPad it just uses facial recog­ni­tion. But yeah, if you haven’t already looked into the 2FA stuff with self-wealth, Car­o­line, you might want to take a look at that. I assume that’s what you’re wor­ried about, is peo­ple being able to log in and do that kind of stuff.

Tony  1:02:03

That’s a good ques­tion. I would appre­ci­ate any advice that can help me as well, because that’s what I do and there might be some­thing bet­ter out there.

Cameron  1:02:09

Well, Chris­sy and I both got hacked real­ly bad­ly a few years ago while we were away. Hap­pened twice, actu­al­ly, over the course of six months. We go away camp­ing for the week­end with no mobile phone recep­tion and then we come back on the Mon­day or Sun­day night and find that our bank accounts have been cleared out. They’ve man­aged to change our, get into our emails. I think it start­ed with them being able to con­vince our phone com­pa­ny that they need­ed to change their pass­word for the phone num­ber or the email address, and then they were able to use that to hack our email address­es and change the pass­words. They got into our bank accounts and hacked those and took all the mon­ey just by chang­ing pass­words. I got hacked out of a bunch of things. That’s when I learned to use not a text mes­sage as 2FA, because a text mes­sage which you often get is no good to you if they’ve hacked your mobile phone, because then they can get your text mes­sages as well. Hack your mobile phone num­ber, I mean. But, if you have a 2FA app like the Google Authen­ti­ca­tor, or Microsoft has an authen­ti­ca­tor app, and you can get USB sticks as well, but the thing about the apps is they’re locked to your actu­al phone, to the hard­ware on your phone. So, for some­one to be able to get your 2FA code they have to have your phone and they need to be able to unlock your phone, get into your phone, and hope­ful­ly by the time they’ve done that you can shut things down.

Tony  1:03:42

Yeah. So, I have that with my bank­ing and port­fo­lio track­ing sys­tem I use, ser­vice I use. But just take me through it, how do you think it hap­pened? Did you, like, did they find your Face­book phone num­ber or some­thing? How would they get a hold of it?

Cameron  1:03:58

Yeah, we don’t know. We have no idea.

Tony  1:04:00

You don’t know? Okay.

Cameron  1:04:01

They’re just search­ing stuff, there are these bots and Russ­ian mafia — I don’t know.

Tony  1:04:08

Maybe we should get a secu­ri­ty expert on and grill him.

Cameron  1:04:13

Okay.

Tony  1:04:13

Do an inter­view on how we can pro­tect our­selves, because it’s a valid con­cern.

Cameron  1:04:16

Well, I’ll tell you what: I took it a lot more seri­ous­ly after we came home from camp­ing and lit­er­al­ly our bank accounts were wiped out. I mean, okay, they only got 15 bucks, but it was the prin­ci­ple that mat­ters.

Tony  1:04:29

And now you have to roast your own beans.

Cameron  1:04:31

Yeah, that’s how that start­ed. So, it’s like I was talk­ing… Ray and I on our show the oth­er day, we had an expert on Sto­icism. Got a guy who has a PhD in phi­los­o­phy and he’s an expert at Sto­icism. We got him to come on to talk about Seneca. Any­way, I was talk­ing about when we were in Athens and I got pick­pock­et­ed by the guys on the tram in Athens. And I said, you know, ini­tial­ly I was angry that I got pick­pock­et­ed and angry at myself more than any­thing that I did­n’t, you know, take more action when I thought I could feel fin­gers in my jeans pock­et on the tram.

Tony  1:05:10

You turned towards them. You’re sup­posed to back away.

Cameron  1:05:12

I could­n’t back away, I was sur­round­ed. These three large heavy­set gen­tle­man got on, sur­round­ed me on the tram, and when the train was bump­ing they were like putting their body weight into me knock­ing me. So, I had to because I had my hands in my pock­ets where my cash was, I had to grab hold of the sta­bil­i­ty han­dles and that’s when they would get into my pock­ets. And then as soon as I brought my hand down, they’d pull their hands out and they’d bump me around again. Any­way, at the end we got off the tram. I said to Chris­sy, “oh, I thought for a sec­ond there I was get­ting pick­pock­et­ed,” and I reached in and all my cash was gone. But, I felt angry ini­tial­ly, but then I thought it was hilar­i­ous because I realised they’d spent a good like twen­ty min­utes, half an hour to get like six­ty euro and there was three of them. They had to divide it by three. I fig­ured they must have thought I was rich because they looked at Chris­sy and they looked at me, and they went, “well, he must be rich because why else? Why else would she be with him, right?”

Tony  1:06:15

With a guy with a pony­tail? Yeah, I get it.

Cameron  1:06:17

I did not have the pony­tail then but they would have, you know, they would­n’t have dared pick­pock­et me if they saw the pony­tail. They would be ter­ri­fied.

Tony  1:06:27

You just have to wear your Kung Fu robe on trams.

Cameron  1:06:31

Oh yeah. By the way, Fox has his first Kung Fu class tomor­row.

Tony  1:06:37

Oh, excel­lent.

Cameron  1:06:38

Start­ing tomor­row, he’s super excit­ed. Oh, well. That’s it, Car­o­line. That’s it for the show, the ques­tions. After hours, Tony…

Cameron  1:15:12

The QAV Pod­cast is a pro­duc­tion of Space­craft Pub­lish­ing Pro­pri­etary Lim­it­ed, autho­rised rep­re­sen­ta­tive of AFS sale 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 invest­ment deci­sions.