Transcript #516

QAV 516 Club

Cameron  00:07

Wel­come back to QAV. This is episode 516, we’re record­ing this on the, I think it’s the 26th of, I think it’s April, today. I think it’s 2022. I have no idea what’s going on, but what else is new? How are you, TK?

Tony  00:28

Yeah, we’ve had a great time. We’ve had lots of peo­ple stay­ing with us. We had Jen­ny’s sis­ter and her daugh­ter, we had Rud­dy, peo­ple com­ing around to watch the races. It’s just been a great time. But they’ve all gone back now. Although, Alex’s boyfriend Sean comes in tonight. He’s work­ing in Syd­ney for a few days and stay­ing with us, but he won’t be a prob­lem.

Cameron  00:50

No, he’s a nice guy. Love­ly guy.

Tony  00:52

He’s a love­ly guy, yeah.

Cameron  00:53

Good stuff. We do have a spe­cial guest on the line, but before we get to him… well, I’ll wel­come him: Chair­man Map from the Aus­tralian Share­hold­ers Asso­ci­a­tion. The Chair­man Mao of the Aus­tralian Share­hold­ers Asso­ci­a­tion, Chair­man Steven Mabb. Wel­come back to QAV, Chair­man Mabb.

Steven  01:09

Thank you very much, hon­oured to be back. And yeah, look­ing for­ward to hav­ing a quick chat today before you guys get on to more impor­tant things.

Cameron  01:17

You can tell us about the long march that you’ve been doing with the ASA. Well, the big news that we have to cov­er obvi­ous­ly, this week, I’m sure every­one’s heard this by now is that Elon Musk is buy­ing out QAV. It’s been a bit of a tense nego­ti­a­tion over the last cou­ple of weeks, he upped his bid 60 odd bil­lion dol­lars, I think, was the last I heard and we’d like to wel­come Elon as our new Over­lord and Mas­ter.

Tony  01:47

Well, he had to sell out even­tu­al­ly, I mean, he wants to con­trol every­thing. He did­n’t like us point­ing out that growth stocks to the moon will nev­er work out in the long term. And hey, Net­flix is down again this week as well, so kind of all play­ing out there for peo­ple to watch.

Cameron  02:03

Well, he has­n’t bought that yet. When he buys that he’ll turn that around as well. Steven Mabb, I think you’ve been on the show since you’ve been chair­man. How long have you been chair­man now, is it since the begin­ning of this year or was it last year? I can’t even remem­ber?

Steven  02:16

No, only since March offi­cial­ly. So, I don’t think I had been on the show since then. But yeah, appre­ci­ate the invite back and obvi­ous­ly been fol­low­ing lots of what our reg­u­lar QAV mem­bers and sub­scribers are post­ing in the chat and on the forums and all that kind of stuff, and there are a few things pop­ping up there that I thought might be, you know, help­ful to have a quick chat about today. So yeah, appre­ci­ate the invite.

Cameron  02:40

So, specif­i­cal­ly, you want­ed to talk about why it’s impor­tant that we don’t be like Tony and blow off AGMs — why we should vote in the AGMs. Because, for those lis­ten­ers who are new, Tony’s posi­tion over the last few years of doing this show on vot­ing in AGMs is he rarely both­ers to get involved unless it’s a big issue, like some­thing that par­tic­u­lar­ly grabs your atten­tion, your vote, but gen­er­al­ly speak­ing you don’t tend to vote, Tony. Steven seems to think that’s a big mis­take — big, huge — and he’s gonna, you guys are gonna… two men enter, one man leaves in the QAV dome.

Steven  03:27

Absolute­ly. No, I think the first thing I’d say is while TK is an extra­or­di­nary man, this is pret­ty ordi­nary or usu­al behav­iour. Most share­hold­ers don’t vote at GMs and don’t both­er. So, with that in mind, I just thought it might be worth men­tion­ing what ASA, or the Share­hold­ers Asso­ci­a­tion, does there to help out if you are not that inclined to vote your­self or to both­er with it all. So, maybe kind of step­ping back a sec­ond. If you’re a share­hold­er, obvi­ous­ly, you get the right to vote at each of your shares at an annu­al gen­er­al meet­ing on the var­i­ous res­o­lu­tions that the com­pa­ny’s putting up for share­hold­ers to vote on. And as I said, most peo­ple prob­a­bly don’t vote it seems. But it’s a bit like, maybe it’s a bit like democ­ra­cy; if no one votes, you know, you kind of don’t real­ly get a say. So, yeah, what ASA does is all vol­un­teers, but we have a team of vol­un­teers across the coun­try that are what we call com­pa­ny mon­i­tors, and those folks are just, you know, reg­u­lar share­hold­ers like all of us that are real­ly inter­est­ed in the com­pa­nies and the gov­er­nance of the com­pa­nies and the way that they’re, kind of, treat­ing and respect­ing their share­hold­ers. So, they’ll go along to the AGMs and they will vote their own and/or any oth­er share­hold­ers or mem­bers of ASA’s prox­ies if they would like us to. And what they’ll do is they’ll have a look at the annu­al report when the com­pa­ny puts it out, and then ide­al­ly, they’ll go and have a meet­ing with the com­pa­ny before the Annu­al Gen­er­al Meet­ing. And that’s some­thing that, again, as a reg­u­lar share­hold­er you don’t real­ly get a chance to do most of the time, you know, indi­vid­ual share­hold­ers rarely get access to par­tic­u­lar­ly big­ger com­pa­ny man­age­ment and boards. So, the ASA mon­i­tor will. They nor­mal­ly meet with the Chair of the com­pa­ny, maybe the head of the remu­ner­a­tion com­mit­tee from the board, maybe the com­pa­ny sec­re­tary, and they’ll just talk through what it is that the com­pa­ny’s propos­ing to have their share­hold­ers vote on, talk through the pros and cons of that, make sure they’ve got a real­ly clear under­stand­ing and then from there write up a report and they’ll put that report on our web­site where any­one that’s a mem­ber can go and read what it is that the mon­i­tor has, kind of, deter­mined from that meet­ing and from what the com­pa­ny is doing, and rec­om­mend how you should vote. And again, if you’re not the kind of per­son that likes to vote, or you could­n’t be both­ered — and I was­n’t, you know, I’d throw those let­ters in the mail when I first start­ed get­ting them as well. You can allo­cate your votes to ASA and that ASA mon­i­tor will go and vote them on your behalf. It’s all anony­mous, we don’t know who you are and how many shares you own and any­thing like that, the reg­istry con­trols that all. So, com­put­er share or link or those var­i­ous dif­fer­ent peo­ple that you get, or com­pa­nies that you get the let­ters from, they’ll just aggre­gate all that togeth­er and tell us on the day of the meet­ing, “here you are ASA mon­i­tor, you’ve got this many votes to vote on the day.” So, you know, broad­ly speak­ing that’s kind of how the process works. If you’re inter­est­ed I can, kind of, talk through a few of the hot issues, I sup­pose, that the mon­i­tors real­ly focus on.

Tony  06:20

Yeah, Steve, maybe you could just take us through some of the mechan­ics of vot­ing at AGMs. I mean, what putting a proxy in means when you give it to ASA, how do you do that and/or give it to the chair­per­son of the board? What’s the dif­fer­ence? Just walk us through that process. How do I do that?

Steven  06:37

Yeah, absolute­ly. So, the process itself nor­mal­ly is you’ll get a let­ter or an email from the reg­istry, or some­times the com­pa­ny if they’re not using a reg­istry, with notice of the meet­ing and what the res­o­lu­tions are, and then ask­ing you for your votes. And if you don’t vote, gen­er­al­ly what hap­pens is your votes will just be allo­cat­ed to the chair of the meet­ing or the chair of the board, and typ­i­cal­ly, the chair of the board is going to vote for what­ev­er it is that they want to do. They’re not going to think about each and every share­hold­er, they’re just going to think through, you know, what it is that as the head of the board they think should hap­pens. So, when you get those let­ters or those emails you have the option to actu­al­ly look at it all and go in and vote on each res­o­lu­tion, or you can just write in a proxy. So, that’s where you can put in the chair of the meet­ing, which is the default option nor­mal­ly, or you could write in Aus­tralian Share­hold­ers Asso­ci­a­tion, for exam­ple, and not have to wor­ry about all the issues. The Aus­tralian Share­hold­ers mon­i­tor would then, based on what we think is in the best inter­ests of retail share­hold­ers, vote on each of those issues on your behalf. So, it’s pret­ty sim­ple, you just write that in either on the email that you get or online, or the paper form. There is anoth­er way you can do it too, so if you don’t want to do that each and every time you can do what’s called a stand­ing proxy where you fill out a form for all the com­pa­nies you own and you send it off to the reg­istry and say “here’s the twen­ty com­pa­nies,” for exam­ple, “that I own with your reg­istry, I’d like to nom­i­nate the Share­hold­ers Asso­ci­a­tion as my stand­ing proxy so that I don’t even have to both­er each time I get the form, they’ll just go and do that.” Now, if you buy and sell a com­pa­ny you have to update it because it’s not default for you as a share­hold­er, it’s based on the com­pa­nies that you nom­i­nate with the reg­istry when you fill that form out. So, it’s a bit clunky, we’d love it to be a lot eas­i­er. The reg­istries on the ASX at the moment don’t allow us to make it any eas­i­er. We are hop­ing when the new clear­ing sys­tem comes in, the cur­rent sys­tem being Chess that most peo­ple know about, the ASX are try­ing to or plan­ning to update that sys­tem. And once that’s up and run­ning, they’ve told us that it should­n’t be a lot eas­i­er just to make this a sim­ple process and just to have a stand­ing proxy all the time that you can do online that cov­ers every­thing. So, hope­ful­ly down the track it’ll get a bit eas­i­er. But in the mean­time, either fill out that form and send it the reg­istries, or you do it for each and every com­pa­ny each time they send you the vot­ing form or the notice of meet­ing.

Tony  08:55

So, take us through an aver­age com­pa­ny if you can. How much of the vote would the ASA prox­ies con­trol at an AGM?

Steven  09:02

Yeah, so that’s a good ques­tion. I mean, across the whole mar­ket we gen­er­al­ly vote around $4 bil­lion worth of prox­ies a year. So, it’s a pret­ty big num­ber. And for a lot of the com­pa­nies the ASA prox­ies will be in the top twen­ty. So, as an indi­vid­ual share­hold­er you don’t have a lot of clout nor­mal­ly, but col­lec­tive­ly when all of the ASA mem­bers and oth­er retail share­hold­ers give us their prox­ies, we typ­i­cal­ly end up some­where in that top twen­ty list of shares being vot­ed. So, you know, well, I would­n’t say it’s enough to move the nee­dle on every issue, there’s times where the vote can be real­ly close and 1 or 2% might be enough to move the out­come one way or the oth­er. Par­tic­u­lar­ly on things like remu­ner­a­tion, where if you’re not famil­iar, each year there’s what’s called a non-bind­ing vote on remu­ner­a­tion. So, that’s kind of the incen­tive plan and the salary plan for the man­age­ment team etc., and the com­pa­ny puts that to share­hold­ers each year. It’s not bind­ing in the sense of how it’s vot­ed on does­n’t nec­es­sar­i­ly mean the com­pa­ny has to change the plan, but what does have some teeth is a pro­vi­sion that was brought in a few years back which essen­tial­ly is called a strike. So, if at least 25% of the share­hold­ers vote against the remu­ner­a­tion plan because they’re unhap­py with how the man­age­ment or the board­’s been reward­ed, or, you know, how mis­aligned it might be with share­hold­ers, all those kinds of issues, if at least 25% of share­hold­ers vote against it and they get a first strike, that’s record­ed. And then the fol­low­ing year, if the same thing hap­pens again and there’s a sec­ond strike against remu­ner­a­tion report, the board or a num­ber of board mem­bers can be spilled or a res­o­lu­tion can be put for­ward to spill the board. So, it does have some teeth. There’s this new way, if you like, that, you know, did­n’t exist twenty/thirty years ago for share­hold­ers to have their say when they’re real­ly unhap­py with how man­age­men­t’s being incen­tivised, reward­ed, per­form­ing, etc. And it’s, you know, it’s very com­plex, it’s the most dif­fi­cult part of an annu­al report to read, I find, is the Rem report. It’s not con­sis­tent across com­pa­nies, and, you know, as an indi­vid­ual share­hold­er you’re prob­a­bly not that inclined to read through these for all the com­pa­nies you own. And again, that’s where ASA can help. The mon­i­tor that cov­ers that com­pa­ny — and most mon­i­tors will only cov­er one or two com­pa­nies a year because it is pret­ty hard and com­plex and time con­sum­ing — they’ll dig into all that detail for you and make a judge­ment call on whether the remu­ner­a­tion plan this year is fair and rea­son­able and looks after you as a small share­hold­er. So, that’s an issue where, you know, 1 or 2% of the vote that ASA might vote, for exam­ple, can have a mean­ing­ful dif­fer­ence on whether the remu­ner­a­tion plan records a strike or not. The oth­er thing is direc­tors. So, I think the oth­er major thing you want to have your say on as a share­hold­er is whether the direc­tors or the board mem­bers that have been put for­ward for elec­tion or re-elec­tion are a good fit for you as a share­hold­er in the com­pa­ny in gen­er­al. So, while the bars a lot high­er there, you know, you only have to get 50% plus of the vote, I think, to be elect­ed. Most of the time, most of those direc­tors get in with 98/99% in favour. When you see a sig­nif­i­cant against vote, 10–20% of share­hold­ers vot­ing against the direc­tor, that’s nor­mal­ly a warn­ing shot for the chair to say share­hold­ers are real­ly not sup­port­ive or not hap­py about this per­son and you may want to con­sid­er future direc­tor nom­i­na­tions — and whether this per­son stands again in the future, for exam­ple. So, even a few per­cent there can sway the longer term think­ing of the board and the chair around whether this direc­tor is a good fit, for exam­ple, for this com­pa­ny.

Steven  09:02

I think prob­a­bly the only times I’ve ever vot­ed in AGMs have been for the Rem report, if I haven’t, if I’ve tak­en a dis­like to the board in gen­er­al. I think that’s an impor­tant dis­tinc­tion to make: a Rem report, per­haps I’ll be mis­chie­vous and say even delib­er­ate­ly is dif­fi­cult to read. I can be less mis­chie­vous and say that putting togeth­er a Rem incen­tive plan for a CEO can be a lit­tle com­pli­cat­ed, but you know, it should­n’t be. Should just be get the share price up and that’s it, get your bonus. But they do make it more com­pli­cat­ed than that… I think these days peo­ple view the Rem report first­ly to say whether it’s a vote in favour or not of the board, and sec­ond­ly, it’s a vote in favour or not of the Rem report. So, the first one is prob­a­bly the one that we all focuse on. So, yes, the very few times I vot­ed… and of course the ulti­mate vote is just sell­ing shares if you don’t like what the board­’s doing, right? You don’t have to sit around and, you know, patient­ly try to sway their minds, just sell your shares and move on. There’s plen­ty of oth­er com­pa­nies. So, the Rem report I think is impor­tant. The oth­er one which I just want to high­light which is impor­tant too is merg­ers, acqui­si­tions, and takeovers. So, take us through the mechan­ics of that. They often also have that 75% rule and it’s also a lit­tle bit more com­pli­cat­ed, because some­times it’s 75% of the peo­ple who were there or the votes cast at the time. So, that’s the oth­er one where I’ve vot­ed in the past. I think the most recent time I’ve vot­ed and prob­a­bly the only time that I can recall was when Alac­er Gold was propos­ing to merge with SSR min­ing in the US and it looked close and I thought, okay, maybe my vote will help it get over the line when I put it in. But there are some spe­cial rules around that often too, aren’t there?

Steven  14:05

Exact­ly. Yeah, so, again when that comes up, you know, that’s nor­mal­ly out­side AGM sea­son, it might come up at some oth­er point dur­ing the year. Then, the ASA mon­i­tor and our pol­i­cy and advo­ca­cy peo­ple will take a look at it and then write a, you know, a thor­ough review of the sit­u­a­tion for reg­u­lar share­hold­ers to read and make your deci­sions from. And, I guess a segue there is cap­i­tal rais­ings in gen­er­al. So, that’s some­thing else the mon­i­tors real­ly focused on with the com­pa­ny, to make sure that when a com­pa­ny does raise cap­i­tal and issues new shares, that retail share­hold­ers are get­ting a fair deal; they’re get­ting the same deal as the big guys do, for exam­ple. And sur­pris­ing­ly, some­times that does­n’t hap­pen. You would think that they would, but there’s — par­tic­u­lar­ly below the, you know, the ASX 50 — there’s times where com­pa­nies will raise cap­i­tal and not give their retail or their small share­hold­ers a chance at all to par­tic­i­pate. So, you’re just instant­ly get­ting dilut­ed when that hap­pens, for exam­ple. It hap­pened quite a bit dur­ing the COVID cough, where some com­pa­nies got into pret­ty quick finan­cial trou­ble and had to raise cap­i­tal quick­ly. And obvi­ous­ly, it’s a lot eas­i­er for them to go to Mac­quar­ie or some­one and, you know, get a big insti­tu­tion to buy in than it is for the more time-con­sum­ing process to send out paper­work and let­ters and all that kind of stuff to their small­er share­hold­er. So, if it’s real­ly a mat­ter of sur­vival and life and death for the com­pa­ny and they had to act incred­i­bly urgent­ly, the ASA would­n’t nor­mal­ly ding them for that. But out­side of that where you’re just rais­ing cap­i­tal for acqui­si­tions, bal­ance sheet strength­en­ing, all the things that the com­pa­nies use it for, we expect that the retail share­hold­ers get at least the same oppor­tu­ni­ty to par­tic­i­pate and the same kind of dis­count as the big­ger share­hold­ers do. And when that does­n’t hap­pen, again, that’s a time where we’d con­sid­er vot­ing against the direc­tors when they’re up for re-elec­tion, because they haven’t act­ed in the best inter­est of their share­hold­ers. And remem­ber, the job of par­tic­u­lar­ly the inde­pen­dent direc­tors is to rep­re­sent all share­hold­ers, it’s not to look after man­age­ment. So, if you’re an inde­pen­dent direc­tor on an ASX list­ed board, your small share­hold­ers are just as impor­tant to you as the man­age­ment of the com­pa­ny — or they should be, and I’m not going to say that’s always the way they think, but that’s how they’re sup­posed to think. They’re sup­posed to be rep­re­sent­ing all share­hold­ers and all stake­hold­ers equal­ly, not just the man­age­ment of the com­pa­ny.

Tony  16:21

So, does that mean that you should be run­ning for ASX boards as our inde­pen­dent direc­tor nom­i­nee, Steve, look after us?

Steven  16:27

I’m far too smart for that, mate. No, look, I don’t have any… per­son­al­ly, I don’t have any aspi­ra­tions to do that. I think it is a pret­ty tough job; there’s a lot of pres­sure and, you know, a lot of eye­balls and a lot of media scruti­ny on you. So, it’s not some­thing I’m per­son­al­ly that moti­vat­ed by. I mean, ASA’s a vol­un­teer organ­i­sa­tion, so I’m doing all this, you know, with my spare time and because I think it’s a good cause. And like you, it con­cerns me when small­er retail mom and dad share­hold­ers aren’t get­ting a fair deal or are get­ting over­charged or, you know, pay­ing too much in fees, all those kinds of things. So, that’s the rea­son I per­son­al­ly got pret­ty active with­in ASA to try and help out a lit­tle bit there, if I could. But yeah, I do think just as peo­ple who have been post­ing about vot­ing in AGMs, I get it. It’s not some­thing that every­one’s going to dig into and read every report and vote on every issue. So, the next best option, I think, is to either find some­one that you trust that does do it or if not then look to the ASA as some­one that could go and vote on your behalf at the com­pa­nies we cov­er. We don’t cov­er every com­pa­ny because we don’t have enough peo­ple, but we try and cov­er the top 200 plus com­pa­nies. So, all those com­pa­nies with high­er aver­age dai­ly trade on the QAV list, they’re nor­mal­ly the com­pa­nies that some­one from ASA is going to be mon­i­tor­ing and vot­ing on. And you can see all of the poli­cies on our web­site, so if you want to make sure that you’re hap­py with them and you think we’re rep­re­sent­ing you fair­ly all that stuff is real­ly clear­ly spelled out on the web­site around how we vote and what our poli­cies are. And you can change it at any time. So, if you decide you don’t like it or you want to vote dif­fer­ent­ly for one com­pa­ny or the oth­er, you can do that, too. It’s not some­thing that you can’t change. You can change it, you know, right up to a minute before the meet­ing kind of thing if you choose.

Tony  18:03

You said before that the ASA reps can meet with the board or the chair of the sub­com­mit­tee’s before­hand. What kind of recep­tion do you get? Do they take you seri­ous­ly or are you just a both­er?

Steven  18:12

I have to say, very high lev­el of respect from 95%+ of the com­pa­nies, I’d say, that we cov­er. Most of the com­pa­nies do real­ly want a pos­i­tive rela­tion­ship with their small share­hold­ers, it’s a PR night­mare for them if their small share­hold­ers are being quot­ed in the press or the ASA’s quot­ing them in the press. So, most of the com­pa­nies do real­ly respect that con­ver­sa­tion and give us the time to work through those things. Where you see, I guess, the oppo­site may be is where you’ve got boards or founders that don’t real­ly believe in good gov­er­nance in gen­er­al and they’re going to do it their way. And as you said, Tony, that’s fine. If you know that going in and you’re hap­py with some­one run­ning the com­pa­ny that way, buy the shares; if you’re not, don’t buy the shares. You know, that’s my prag­mat­ic approach to that kind of board or that kind of com­pa­ny. But also, when com­pa­nies come in to the ASX 200 or 300, that’s often a time where ASA can real­ly help them shape bet­ter gov­er­nance and bet­ter respect for their small­er share­hold­ers. Because a lot of the time those small­er com­pa­nies just haven’t had the con­tact or haven’t had to wor­ry about what their small­er share­hold­ers think. And when they get to the big leagues, if you like, a lot of the time those first few meet­ings with those boards can be real­ly help­ful to them. They’re like, “what are you guys look­ing for? And why do you look for that? And,” you know, “how do we do that?” And there’s a few com­pa­nies that I’ve mon­i­tored up in Queens­land that after the first year of mon­i­tor­ing them, in the sub­se­quent cou­ple of years, they have real­ly improved how easy it is to read their report; how well they com­mu­ni­cate, how they, you know, have incen­tivize their man­age­ment. So, some­times I think it may not be wil­ful, it’s just they haven’t ever real­ly had to wor­ry about real­ly trans­par­ent or super clear gov­er­nance until they get to the big leagues. And there’s a com­pa­ny I’ll talk about briefly, one called EML which is Bris­bane based. It’s an ASX 200 com­pa­ny and I owned this com­pa­ny pri­or to my QAV con­ver­sion. This was a Mot­ley Fool rec­om­men­da­tion that I had bought, and the sto­ry had been great. We weren’t cov­er­ing them, so I vol­un­teered to cov­er them and I went and met with the board pri­or to the AGM. And they said a cou­ple of things that kind of irked me a lit­tle bit, but they also — this was the COVID year, 2020 — they decid­ed to use dis­cre­tion to pay out a bunch of man­age­ment bonus­es when they had­n’t hit the num­bers using the COVID dis­rup­tion as the excuse: “was­n’t our man­age­men­t’s fault that COVID hap­pened, and as a result they’ve worked real­ly hard and we’re gonna pay them their full bonus­es any­way.” Now at that point in time, share­hold­ers were down 40% for the year. So, if you’d had of held the shares for that full finan­cial year you were down a lot, and yet they were going to use dis­cre­tion as a board to pay out man­age­ment bonus­es in full. And they were acquir­ing a busi­ness in Ire­land called PFS which they had rene­go­ti­at­ed the deal after the COVID crash hap­pened to buy it cheap­er, and that was part of the jus­ti­fi­ca­tion they were using to pay out bonus­es in full, too, because man­age­ment did such a good job with this rene­go­ti­a­tion. Any­way, at the AGM that came up they did­n’t get a strike, ut there was a sig­nif­i­cant vote against the Rem report, and I asked the ques­tion of the Chair “why did you feel it was appro­pri­ate?” And he basi­cal­ly said, “look, not only did we use dis­cre­tion, but we’d use it again if we have to. We’re in a com­pet­i­tive mar­ket­place to peo­ple.” So, he was real­ly say­ing “we don’t have an incen­tive plan. We’re just going to pay out bonus­es in full,” I think, “regard­less of whether we hit the num­bers or not.” And then sub­se­quent­ly, a cou­ple of months lat­er, the Irish Cen­tral Bank announces an inves­ti­ga­tion into PFS for alleged mon­ey laun­der­ing. So, the share price cre­at­ed because of this acqui­si­tion that they’d made that was sup­posed to be, you know, one of the key rea­sons man­age­ment deserved a big­ger bonus was now a very ques­tion­able pur­chas­ing. The share price has bounced up and down a lit­tle bit since then, but it has­n’t real­ly recov­ered. So, I’ve only men­tioned that sto­ry to say if I had­n’t have gone in and mon­i­tored them and then writ­ten up that report, I’m not sure some of that would have come out for small share­hold­ers at the AGM and in the report after­wards. And some peo­ple did read that and it did change their minds, I think on whether EML was a good invest­ment at that point in time. Now, who knows, they might go gang­busters from here. I’m not cast­ing any asper­sions on them, just using it as an exam­ple of that access to man­age­ment and that deep­er review of their Rem struc­ture and why they were using dis­cre­tion to pay bonus­es, for exam­ple. So, that’s an exam­ple I guess of some­thing you get out of the mon­i­tor­ing process that you don’t nec­es­sar­i­ly read any­where else.

Cameron  22:25

Steve, I for­got to tell you we’re live stream­ing this to the mar­ket.

Steven  22:30

Fan­tas­tic.

Cameron  22:34

EML won’t be hap­py, because I just checked their share price. They’re down 38% today. 38% today!

Steven  22:45

I don’t know what the news is today, but they went down 40% when the ICB announced, the Irish Cen­tral Bank announced the inves­ti­ga­tion. It was up 40% that day a year or so ago as well.

Cameron  22:55

Today!

Steven  22:56

Yeah. It’s not a good day. I don’t know what’s hap­pened to them. I don’t hold them any­more. I mean, I sold them after the chair said that, right. Once I heard the chair of the board was say­ing “we’ll use dis­cre­tion to pay bonus­es when­ev­er we have to,” for me, that was a yel­low flag if you’d like to say. Well, that’s not real­ly the kind of incen­tive struc­ture and man­age­ment style that I want as a share­hold­er. So, again, each have their own and some peo­ple, you know, might love their prospects and might love them as a com­pa­ny and not wor­ry about that stuff. That’s fine. You need dif­fer­ent views to make the mar­ket, obvi­ous­ly. But yeah, just as an exam­ple of how the mon­i­tors at times dig into these things and find out these things from first­hand access to the com­pa­ny and then can report on it back to mem­bers and retail share­hold­ers

Tony  23:37

What are the hot but­ton issues this AGM? What are the three things that we should focus on, which three com­pa­nies, what three issues? Because, you know, I’m an ASA sub­scriber and I get the reports, but they can be very detailed and bland — as much as the com­pa­ny announce­ments about the AGM detail them bland — but take the eyes out of it for us and tell us what to focus on.

Steven  23:57

Yeah, so look, our focus issues for this year as always remu­ner­a­tion. So, you know, that’ll prob­a­bly always be one; just hon­ing in on the remu­ner­a­tion and mak­ing sure it’s fair and rea­son­able. Direc­tors as always is the oth­er one. And then this year we’ve added in ESG for the first time, so this will be the first time the ASA starts report­ing to mem­bers on, well, par­tic­u­lar­ly the ENX. I mean, “G”, the gov­er­nance part of ESG, that’s some­thing ASA already does, that’s what all this is real­ly about. But the envi­ron­men­tal and the social side of it, that’s obvi­ous­ly become a real­ly big trend and top­ic in the invest­ment indus­try and up until now ASA has­n’t real­ly had a posi­tion or a pol­i­cy around that. So, what we’re going to start doing is ask­ing the com­pa­nies ques­tions on what it is that they’re mea­sur­ing and report­ing around their envi­ron­men­tal and their social num­bers. And as the indus­try stan­dards emerge, there isn’t nec­es­sar­i­ly a lot of great stan­dards that the whole indus­try is using like GAP account­ing prin­ci­ples, for exam­ple, that’s real­ly easy — not easy, but it’s the stan­dard, if you know what I mean. On ENS there’s less of a stan­dard, so there’s some things emerg­ing.  What­ev­er emerges as the default posi­tion or the gold posi­tion, ASA will report to mem­bers in our annu­al com­pa­ny reports on what the com­pa­ny is say­ing and doing. We’re not going to tell you you should or should­n’t buy a coal com­pa­ny or an oil com­pa­ny, which is great news for QAV sub­scribers, obvi­ous­ly, so it won’t be about is this a good invest­ment? It’ll just be, what’s Beach Ener­gy say­ing about their car­bon impact and their car­bon plans, and any strand­ed assets, and real­ly, you know, what­ev­er the com­pa­ny is report­ing, and then how’s that mea­sur­ing up against the stan­dard? So, you’ll start to get that going for­ward, this will be the first year so it’s a first step, I’m sure it won’t be per­fect. Our mon­i­tors are not going to be experts on every­thing to do with envi­ron­men­tal and social stan­dards, but they are going to start to report on what the com­pa­nies are say­ing and doing around it. And I think that’s impor­tant because I was at the direc­tor sum­mit ear­li­er this year down in Mel­bourne and Joe Lon­go, who’s the new head of ASIC, was there and he gave an hour-long keynote to the audi­ence that was the same day they were announc­ing that they weren’t going to pros­e­cute Crown direc­tors, which was inter­est­ing. And I think James Ship­ton who was the pre­vi­ous ASIC chair, one of his philoso­phies I believe was, you know, why not lit­i­gate? So, they were very liti­gious pre­vi­ous­ly, ASIC would be hap­py to take you to court and try and win a case against you. And Lon­go basi­cal­ly said, and I’m para­phras­ing here, but “we’re going to be a bit less liti­gious. We’re not tak­ing the Crown direc­tors to court, not because we don’t think they did any­thing wrong, but because we don’t think we’re nec­es­sar­i­ly going to win the case. And it’s,” you know, “tax­pay­ers mon­ey tak­ing these cas­es to court. If we don’t win them, then that’s a waste of tax­pay­ers’ mon­ey, essen­tial­ly.” So, they look like they’re going to be a bit more con­sul­ta­tive was my take­away, but what he did say was there’s “two things we’re turn­ing our atten­tion to: whistle­blow­ing poli­cies, which are you know, do they have teeth? Are they actu­al­ly gen­uine whistle­blow­ing poli­cies? Can peo­ple with­in the com­pa­ny gen­uine­ly raise an issue with­out fear, and does the pol­i­cy work? And the sec­ond thing is green­wash­ing. And I thought, well, that’s real­ly inter­est­ing that the ASIC chair is call­ing out that they are turn­ing their atten­tion to green­wash­ing, which is essen­tial­ly all com­pa­nies and espe­cial­ly list­ed com­pa­nies mak­ing out that they’re doing a lot bet­ter job in these areas than maybe they are. And lis­ten­ing to a lot of the pre­sen­ta­tions at that same sum­mit from ASX chairs and CEOs, they were all pre­sent­ing very pos­i­tive or opti­mistic or pol­ished sto­ries around what progress or what they were doing to reduce their cli­mate impacts and make the world a bet­ter place. And I’ve got no idea whether each of them was true or not, but it seems to me that Joe Lon­go and ASIC have decid­ed or have an inkling that maybe some of its exag­ger­at­ed or some of its a lit­tle bit of spin and they’re going to turn their atten­tion to it, which I think is a great thing. If they’re going to hold com­pa­nies more account­able and keep them more hon­est, that’s a good thing for all of us as small­er share­hold­ers, prob­a­bly. So, they’re prob­a­bly the big things that we’re going to focus on this year.

Tony  27:54

Yeah, I mean, I’m not a big fan of green­wash­ing. I mean, the obvi­ous one that gets up my nose is when a big com­pa­ny like a Rio or BHP sell off their coal mines and say, “see, we’re car­bon neu­tral now.” You know, all they’ve done is sell it to some­body else, the mine still oper­ates, the world’s still suf­fer­ing from the emis­sions that mine makes but they claim them­selves to be ESG heroes. It’s just rub­bish.

Steven  28:16

Exact­ly what Ken Macken­zie, the BHP chair, he was at that same meet­ing, and he gave a keynote as well and that ques­tion came up. “Why did you divest your ther­mal coal assets?” I think it was, and/or the oil assets. And he said, “it was pure­ly an eco­nom­ic deci­sion. We just did­n’t think we were going to get the returns in those assets going for­ward. But, we’ve kept our cok­ing coal because we believe that’s crit­i­cal to decar­bon­i­sa­tion, the world’s going to need more steel. With­out the cok­ing coal to go with the iron ore, we can’t make the steel to decar­bonize. So, that was his expla­na­tion around that. But I think if you, you know, as we all know, if you’ve seen the price of oil and coal late­ly it was a ques­tion­able eco­nom­ic deci­sion if you’re using that as the basis for it as well. Any­way, who knows what’ll hap­pen from here?

Tony  29:00

Well, that’s good. Well, thanks, Steve. Peo­ple should con­sid­er writ­ing Aus­tralian Share­hold­ers Asso­ci­a­tion on their proxy forms. I’m going to call you guys the Milky Bar Kids from now on; you’re out there fight­ing the good fight. You’re the front line for us retail share­hold­ers, so well done.

Steven  29:15

Try­ing our best, try­ing our best, thank you. And one thing we are going to do which Cam will send out some info, I’m sure, on is all QAV sub­scribers, we’re hap­py to offer a com­pli­men­ta­ry twelve-month mem­ber­ship. So, any­one that is inter­est­ed, I’m sure Cam will send some details out to you in the next week or two on how you can take up that offer and you can try ASA risk free for twelve months and, you know, kind of get these reports and read the mag­a­zine and all that kind of stuff and see if you find any of it help­ful or not. Noth­ing in con­flict with QAV of course, but if any­one is inter­est­ed you’ll get that offer soon and feel free to give us a try.

Tony  29:50

Yeah, great. Thank you.

Steven  29:51

No prob­lems.

Cameron  29:53

Before you go, Steve, I did go on Face­book a few days ago and ask if any­one had any ques­tions for you. I’ve only got one ques­tion, this is from some­body called “Anony­mousCEO”: “what is the offi­cial amount of unmarked bills in a brown paper bag required to encour­age an ASA mon­i­tor to vote cor­rect­ly? I heard it was 10,000, but my mon­i­tor keeps com­ing back for more. I’d appre­ci­ate your guid­ance on this mat­ter, because my new yacht isn’t going to by itself. Please advise your account num­ber in the Cay­man Islands. Thanks.”

Steven  30:31

Well, that mon­i­tor obvi­ous­ly was­n’t me, because my fee is much high­er than that. No, look, every­one, it’s a good ques­tion. We do dis­close on the report whether the mon­i­tor owns any shares in the com­pa­ny or not, because that’s impor­tant, right? So, some of the mon­i­tors do hold shares in the com­pa­nies that they cov­er, they’ve got an inter­est, and that’s dis­closed on the vot­ing form. But we have a qual­i­ty process where our pol­i­cy and advo­ca­cy man­ag­er and our state chairs read every report before it gets pub­lished. So, even if you, you know, you might have been a lit­tle biased or you par­tic­u­lar­ly liked the com­pa­ny, if you write up a report that does­n’t match the guide­lines and the stan­dards of ASA it’s very unlike­ly that it’s going to get through and get pub­lished. So, I’m not say­ing we nev­er make a mis­take and that every­thing’s black and white, there’s grey areas at times, but for the most part, yeah, there’s a pret­ty good qual­i­ty check process there before any­thing gets pub­lished that may not be accu­rate or fair.

Steven  30:32

Well, Tony and I are excit­ed to announce the launch of QAV ASA Watch. Its a new ser­vice that we’re launch­ing where we’re going to mon­i­tor the mon­i­tors…

Cameron  31:35

… Of the ASA, and just go through their bank accounts and look at their lifestyle and try and make sure, “hey, where did they get that Porsche from? Where did that come from exact­ly.”

Steven  31:35

Fan­tas­tic.

Steven  31:49

I think you might be talk­ing about the Aus­tri­an Share­hold­ers Asso­ci­a­tion because I don’t think the Aus­tralian Share­hold­er mon­i­tors have Porsches.

Cameron  32:00

Okay, well, good luck with the cul­tur­al rev­o­lu­tion at the ASA, Steven, I hope it all goes very well for you and the pro­le­tari­at does well out of it.

Steven  32:12

Fin­gers crossed, and look, much appre­ci­at­ed. Appre­ci­ate the time and the chat and, and more impor­tant­ly, appre­ci­ate all of the great invest­ing wis­dom you guys are pass­ing on every week. I know I cer­tain­ly appre­ci­ate it and I’m sure every­one else does too. So, keep up the good work and thanks very much from me.

Cameron  32:27

And our next lunch is on the ASA, obvi­ous­ly.

Steven  32:31

Thanks, guys.

Cameron  32:32

Thanks.

Tony  32:33

Thanks, Steve.

Cameron  32:34

That was fun. Well, Tony, we’ve got a tonne of ques­tions but there’s some news that I think you should get into before we get into the Q&A.

Tony  32:44

Yeah, just some quick stuff. So, want­ed to let peo­ple know that the Berk­shire Hath­away AGM is this week­end, which is Christ­mas in May — it’s usu­al­ly the first week­end in May. It will be live streamed. I haven’t looked up the details, but it’s usu­al­ly Mon­day morn­ing our time I think, maybe Sun­day morn­ing, I’m sor­ry. Yahoo Finance are gonna live stream it, so that might be of inter­est to peo­ple. I was going to do a pulled pork on Pros­per Group this week which was, I think, one of our stocks of the week but I’ll leave that for lat­er. But the only rea­son I want­ed to do that was because it’s not often, if at all, that we get a so called “growth stock” on the QAV buy list, and Pros­per Group is prob­a­bly the first of those in a long time that comes on the buy list. It’s a, I think they call them a neobank or a Fin­Tech bank, so they’re a non-bank lender. They were meant to do it all in a new way of doing it, inter­ac­tive­ly and dig­i­tal­ly and away from branch­es and big banks and all that kind of thing. They float­ed at a high mul­ti­ple and crashed pret­ty soon after that, but they’ve been chug­ging along in an hour on our buy list. So, the rea­son why I was going to high­light it was because this reminds me of what hap­pened after the dot­com crash when all those high-fly­ing val­u­a­tions came back to Earth. And, per­haps this could be the Ama­zon of 2001 when it was trad­ing for about 10 bucks US and, you know, was still able to be bought at a good price and obvi­ous­ly con­tin­ued on to be a great com­pa­ny. So, Pros­per may be in that kind of realm. If it’s on our buy list it prob­a­bly is gen­er­at­ing income, at least on the oper­at­ing cash­flow lev­el. And… you’re shak­ing your head you, Cam.

Cameron  34:20

I went through its finan­cials yes­ter­day. We picked it as a stock of the week.

Tony  34:24

Yeah.

Cameron  34:25

It’s not mak­ing mon­ey, that’s for sure. But, I’m inter­est­ed in your drill down to see why it has­n’t. I mean, there’s very high board own­er­ship of the stock, but yeah, it’s not mak­ing mon­ey, but it’s on the buy list.

Tony  34:41

I’ll do a pulled pork on it at some stage in the future, I haven’t done it today because I knew we’re pressed for time. But yeah, so it’s back on, it’s on our buy list. It was a bit of a sur­prise to me, but peo­ple might want to have a look at it if that kind of thing suits them. We often get peo­ple ask­ing us, “why aren’t we buy­ing some of these growth stocks?” Well, now one has crashed out but it’s back on our buy list to take a look. So, that’s Pros­per. I want­ed to do a shout out to rugby42!?6, who gave us a good review. Thank you very much for that, rugby42. I’m not sure what the num­bers and let­ters mean, but thanks very much for that. I said before, Net­flix is still declin­ing. So, that was on the theme of our expe­ri­ence with some of these high-fly­ing stocks, they’re com­ing back to Earth now. And I think it dropped again last night when they did their quar­ter­ly report. So, watch out for those. I think the last thing to say is that Chi­na is in lock­down with COVID, and I think that’s now hap­pen­ing in Bei­jing. And so, iron ore and oil took a tum­ble last night, the mar­ket was down on Fri­day, it’s down again today. This hap­pens, but the one thing I would say about this kind of mar­ket is keep an eye on your com­mod­i­ty three point sells and also go back and look at your alerts, at your three-point trend­line sells and your rule 1 sells, because the mar­ket is down at the moment.

Cameron  35:56

Oh, sor­ry, I was just going to com­ment on the Net­flix thing. I had no appre­ci­a­tion for how far it’s fall­en; like, in Novem­ber, six or sev­en months ago, it was trad­ing around $700 a share. It’s cur­rent­ly at $209 a share. Wow.

Tony  36:14

So, three quar­ters of its val­u­a­tion is gone in six months.

Cameron  36:18

And yet, like, I know it’s los­ing sub­scribers, which is inter­est­ing. So, I guess that’s what’s behind it, but yeah, fas­ci­nat­ing.

Tony  36:27

Well, I guess the learn­ing point for us is this is what’s gonna hap­pen with all of these growth stocks, right? So, every­one buys them think­ing that they’re going to just keep soak­ing up sub­scribers, keep gen­er­at­ing new sales, etc., etc., for­ev­er and ever and ever, like in the BNPL space. Even­tu­al­ly, they’re going to become a mature com­pa­ny and they can’t keep doing that. So, Net­flix is show­ing signs of becom­ing a mature com­pa­ny. So, after it can’t keep grow­ing and get­ting new eye­balls, or new sub­scribers, it’s going to have to be judged based on its busi­ness mod­el, and that’s when these com­pa­nies go from heroes to zeros which Net­flix has done. And, that is in the future of every high-fly­ing growth stock. I’ve seen it all hap­pen before, and it will hap­pen again. And, I mean, peo­ple out there know what we’re talk­ing about, the BNPL’s, all the high-fly­ing growth stocks, I’ll even go out there on a limb and say com­pa­nies like Zero. Even­tu­al­ly they’re going to stop grow­ing and start hav­ing to be a prof­itable busi­ness. May not be now, may not be for fifty years, but it’s going to hap­pen. And when it does, this is what hap­pens to their share price.

Cameron  37:25

The last time Net­flix was around the $210 mark was Jan­u­ary 2018. Four years of growth has been wiped out in the last six months. Wow.

Tony  37:39

Yes. It is, yeah. And it hap­pens. At least grow stocks are a bit like, you know, musi­cal chairs when you’re a kid. Just imag­ine… their crowd­ed trades, right? Every­one’s play­ing musi­cal chairs think­ing that they can be faster than all the oth­er kids to get out and grab that seat. So, this is like when it’s get­ting down to a cou­ple of chairs and then ten new kids turn up to the par­ty, which is just like com­ing into Net­flix a cou­ple of months ago, and say­ing, “yeah, take my mon­ey. I’m going to be able to sell out before it stops,” and the music stopped and every­one’s been caught out, and the price drops. And, it’s exact­ly like ten new kids turn­ing up to the par­ty late in their musi­cal chairs game; instead of hav­ing to find there’s only one chair that goes miss­ing there’s now, sort of, twen­ty kids try­ing to get into nine­teen chairs, there’s now thir­ty kids try­ing to get into nine­teen chair. It’s always going to come a crop­per for most peo­ple.

Cameron  38:29

And they’re all fart­ing on the chairs every time they sit down one, so it’s cumu­la­tive farts, is what you’re get­ting there. I mean, it’s shock­ing but it’s also good to see this play out in this era. Because, when­ev­er we’ve had guests on and you’ve talked about, you know, the dot­com crash, and you’ve talked about the glob­al finan­cial cri­sis, the com­men­tary I think we’ve got a lot of the time from a lot of the tech evan­ge­list type guests we’ve had on is “well, that was then, but it’s dif­fer­ent now. This time, it’s dif­fer­ent. Low inter­est rates. We did­n’t have iPhones then, Tony, and we did­n’t have, you know, hun­dred megabit Wi Fi every­where, Tony. And we did­n’t have this, Tony…” and yeah, “every­thing is dif­fer­ent.”

Tony  39:15

This time it’s dif­fer­ent, Tony, TTID.

Cameron  39:17

I don’t want to get, I don’t want to get dis­tract­ed, but it’s like when­ev­er I get into an argu­ment with our friend J. David over this inva­sion or that inva­sion, or… then I go, well, “yeah, it’s like the Russ­ian inva­sion of Ukraine is ille­gal. Yeah. It’s like when Amer­i­ca invad­ed Iraq, that was ille­gal, invad­ed Viet­nam, that was ille­gal, invad­ed,” blah blah. And he always says, “well, that’s not exact­ly the same thing.” I’m like, “no, no things are ever exact­ly the same thing. If it was exact­ly the same thing, it would be exact­ly that. I’m not say­ing it’s exact­ly the same thing. I’m say­ing the­mat­i­cal­ly, on a lev­el of prin­ci­ples and themes, it’s the same kind of process that we’re talk­ing about here.” So, of course, noth­ing’s ever exact­ly the same. Except in… even in Ground­hog Day, it was­n’t exact­ly the same. He had a dif­fer­ent day every time. Any­way.

Tony  40:10

His­to­ry does­n’t repeat, it rhymes. Again, one last com­ment I’ll make on the news and along this theme is that there was a very inter­est­ing and provoca­tive arti­cle writ­ten by Christo­pher Joy in the week­end Finan­cial Review. I’d rec­om­mend peo­ple have a look at it. I liked the way it was phrased. So, he is say­ing that the deal the Solomon Islands gov­ern­ment has done with Chi­na has, I think he said, a 40% chance of lead­ing to con­flict with Chi­na. And he laid out a case where, based on his evi­dence, was that the Sprat­ly Islands were turned into mil­i­tary bases very quick­ly. His the­o­ry is that the Solomon Islands will very quick­ly get a Chi­nese base, that Chi­nese base could be used to knock out the five eyes, includ­ing Pine Gap in Aus­tralia, either through sin­gle jam­ming or through phys­i­cal means, and that that will pro­vide the cov­er­age or the dark­ness to allow Chi­na to invade Tai­wan. So, inter­est­ing arti­cle, I guess I’m call­ing it out now as a way of say­ing we’re in inter­est­ing times, both with Ukraine, with infla­tion, now with this, and the mar­ket does­n’t like cer­tain­ty. So, I’m not…

Cameron  41:13

Does­n’t like uncer­tain­ty. Uncer­tain­ty.

Tony  41:16

Uncer­tain­ty, sor­ry, does­n’t like uncer­tain­ty. So, I’m not see­ing any sort of… I’m see­ing the chop­py mar­ket con­tin­u­ing for us going for­ward, I guess. That’s a pre­dic­tion. I know I’m not good at pre­dic­tions, but inter­est­ing arti­cle.

Cameron  41:27

When you pre­dict you make a dict out of your­self.

Tony  41:31

Yes.

Cameron  41:32

I love the Solomon Islands news cov­er­age, because for the pre­vi­ous two months it has been “Ukraine has the right to do what­ev­er they want. If they want to join NATO, they should be able to join NATO. Where does Rus­sia get off telling them they can’t do stuff? They should be able to do what­ev­er they want? Oh, hold on a sec­ond, the Solomon Islands wants to do a deal with Chi­na. What? No, I don’t think so, Solomon Islands. No, no, no, no, I don’t think so. We’re gonna sit down and we’re gonna have a chat about that. You can’t, you don’t get to make your own deci­sions about what alliances you make. What boat did you just get off of?”

Tony  42:09

That’s it from me for the news. We’re in inter­est­ing times, I think, and I prob­a­bly can’t recall when there’s been so much going on in the world that could affect us.

Cameron  42:16

Well, the mar­kets obvi­ous­ly hav­ing a rough day, had a rough day on, I think it was, Fri­day. Was the mar­ket open on Fri­day, Good Fri­day?

Tony  42:25

It was, yeah.

Cameron  42:26

It was, yeah? Rough day on Fri­day, rough day today when it opened again. But as I’ve seen peo­ple post­ing on the Face­book group, thank God we have a sys­tem.

Tony  42:35

Cor­rect. Well, I’ve seen this and much worse all before and it’s a sys­tem that saves us. We can spec­u­late all we like on the Solomon Islands or Bei­jing being in lock­down, but we real­ly don’t need to; the sys­tem will take care of us.

Cameron  42:49

Yeah, it’ll tell us what to do, when we need to do it. It’s a beau­ti­ful thing. It’s like hav­ing a wife. Tell you what you need to do and when you need to do it. You don’t need to think.

Tony  43:01

It is a beau­ti­ful thing.

Cameron  43:06

All right, you ready to get into some ques­tions?

Tony  43:08

Yeah, I think we should.

Cameron  43:09

I’ll get myself into trou­ble. We had a cou­ple of ques­tions about BHP and WPL, there was anoth­er one in the group ear­li­er today, I think, or a day or two ago. But this one’s from Jere­my: he says, “BHP and WPL, Wood­side Petro­le­um, has released a heap of doc­u­men­ta­tion about the pro­posed demerg­er of BHPs oil and gas assets to Wood­side. It all looks rather com­pli­cat­ed to me. How will this merg­er affect exist­ing BHP and WPL share­hold­ers? I’m wor­ried about how this demerg­er will affect the QAV approach. I cur­rent­ly hold BHP, do I need to cal­cu­late a new buy price for my BHP shares once I get paid WPL shares for my rule 1, or do I stick with my orig­i­nal buy price just like we do with a reg­u­lar div­i­dend? Do I use the WPL share price on the day I get those shares as my buy price for rule 1? Please explain.”

Tony  44:06

I think we’ve cov­ered demerg­ers and this kind of thing, and merg­ers, before. There’s two lev­els of oper­at­ing here. One is, they have pro­vid­ed enough infor­ma­tion for us to go and do a pro for­ma on what the demerged BHP looks like and what the WPL new busi­ness looks like. And just in sum­ma­ry, BHP is divest­ing itself of its petro­le­um assets, is cre­at­ing a new com­pa­ny which is going to be bought very quick­ly by Wood­side Petro­le­um, and that mon­ey is going back to BHP. And then, that will be giv­en the share­hold­ers as a spe­cial div­i­dend which I think is going to be paid as Wood­side Petro­le­um shares. All up, if you’re pay­ing atten­tion to the demerged BHP and the enhanced Wood­side Petro­le­um there would be enough infor­ma­tion in the pro for­ma detail to be able to go through and plug the num­bers into our check­list and decide whether both were on the buy list — and Wood­side Petro­le­um is on the buy list at the moment. So, it’s nice to see that BHP share­hold­ers will be get­ting a stake in a com­pa­ny which is on our buy list. So, that’s one way to do it. That’s pret­ty hard to do — not hard to do, it’s time con­sum­ing to do. The way I nor­mal­ly approach these things is to use the three-point trend­line. So, I’ll use sen­ti­ment to tell me what to do. So, the BHP share price will con­tin­ue to have its three-point trend lines and rule 1s in place, it will pay us a spe­cial div­i­dend — I’m not a share­hold­er, but it will pay the share­hold­ers a spe­cial div­i­dend. And we’ll treat that the way we treat div­i­dends. So, we’ll add it back to the share price until we actu­al­ly get the phys­i­cal shares trans­ferred to us, which, I’m not sure how long that will take, it will take a cou­ple of days at least if not weeks, and then I’ll back it out again. So, the BHP three-point trend lines will stay in place and the rule 1s will stay in place. And Jere­my’s right, Wood­side Petro­le­um will become a new share for us and it’s rule 1 will be the price it was when it became a new share to us as if we had a bought it with a div­i­dend. So, imag­ine that BHP paid a cash div­i­dend and then we use that cash to buy Wood­side Petro­le­um shares. So, that sets our rule 1, and then every­thing trades as nor­mal from there. If BHP drops because of the sale, then if it breach­es the line its a sell. If Wood­side drops soon after the demerg­er and it goes below rule 1, its a sell — or, 10% below rule 1. So, if the rule one is 10% below the ini­tial price for Wood­side it becomes a sell. They all stick with their trend lines going for­ward.

Cameron  46:36

Okay, so let me just repeat that back and see if I under­stood it. So, if you were an own­er of BHP today, you would con­tin­ue to use the three-point trend­line to work out your sell line for BHP but you have to fac­tor back the spe­cial div­i­dend that you’ll be get­ting. With the WPL shares that you would get, you would use the price on the day that you get them to cal­cu­late your rule 1. Even though you’re not hand­ing over mon­ey for it, you still have a the­o­ret­i­cal rule 1 buy price — a the­o­ret­i­cal buy price. And then, after you have them you will just use the three-point trend­line of Wood­side Petro­le­um going for­wards to deter­mine your sell line.

Tony  47:18

Cor­rect, for both BHP and for Wood­side, yeah.

Cameron  47:20

I do own WPL I think, in my super fund, and it has­n’t react­ed well to this merg­er acqui­si­tion or what­ev­er… the announce­ment. Share price is down about 30%.

Tony  47:34

Yeah, I real­ly can’t com­ment. I haven’t fol­lowed it. I also know that we’re in quar­ter­ly report­ing sea­son for some of these resource com­pa­nies and their shares are bounc­ing around with that. And, you know, with the, like I said, the oil price drop­ping overnight in reac­tion to Chi­na’s lock­downs. There’s a lot going on, but the frame­work for using the sen­ti­ment is still in place for all those things: demerg­ers, div­i­dends, new share pur­chas­es.

Cameron  47:56

I don’t think I’ve writ­ten any­thing about that for the Bible, so I should get some word­ing around that and put it in.

Tony  48:01

And, I think the oth­er thing, too, that’s inter­est­ing, and you know, peo­ple may come back and ask ques­tions lat­er on, the sen­ti­ment is impor­tant to me. Because, let’s take a pro for­ma case, let’s just say BHP is divest­ing a com­pa­ny which has a real high oper­at­ing cash flow and what’s left of BHP has a real low oper­at­ing cash flow. And so, if we do the pro for­ma cal­cu­la­tions or we wait until the next six-month­ly results come out, BHP drops off our buy list. I would still hold BHP as long as the sen­ti­ment had­n’t dropped below a three-point trend­line, right, because there are oth­er rea­sons why peo­ple are buy­ing BHP shares. One of the most obvi­ous ones is what we were talk­ing about before with Steve, is that BHP is kind of bur­nish­ing its ESG pro­file here. It’s sell­ing its oil and gas busi­ness, and it’s going to turn around to all the car­bon activists and say, “hey, you can buy BHP shares,” right, because there are a lot of super­an­nu­a­tion funds out there and fund man­agers out there who’re say­ing we’d love to buy BHP shares, but we can’t because our mem­bers or our own share­hold­ers won’t let us do it because you have this oil and gas expo­sure. So, BHP could be a worse busi­ness after the divest­ment in terms of how it looks on our check­list, but its share price might go up because peo­ple who could­n’t buy it before are now buy­ing it. So, that’s the rea­son why I’m using sen­ti­ment to guide me on these things and not using pro for­ma num­bers to do it.

Cameron  49:24

Thank you, Jere­my. Next ques­tion is from Samuel. Bon­jour, Samuel. “Cameron, I’m look­ing at the Chi­na sit­u­a­tion. And, although there is no par­tic­u­lar rea­son to do any­thing about it until the share prices move in a direc­tion or anoth­er, or in oth­er words, sell lines are crossed or rule 1 applies, giv­en Chi­na is the largest client for most of the resource com­pa­nies in my port­fo­lio I’m a lit­tle wor­ried about over­ex­po­sure to Chi­na and resources both at the same time. All the com­modi­ties prices are high, and although this is not QAV vocab­u­lary, it feels like it could drop. I think it was men­tioned before that some shares, when they’ve done very well, become a much larg­er hold­ing than those who have not grown so much. Per­haps lev­el­ling the biggest val­ues can be one way to keep up with the prin­ci­ple of QAV by seek­ing to have twen­ty shares with a rel­a­tive­ly even weight. Thoughts, please, TK.”

Tony  50:16

Yeah, so I think the key words here are “it feels like it could drop.” So, I com­plete­ly under­stand Samuels feel­ings and it’s good analy­sis, Samuel, but the whole rea­son for hav­ing a sys­tem like QAV is to guide us when we get these feel­ings that, you know, the world’s going to hell in a hand­bas­ket. Chi­na’s going to slow its growth down, there may be con­flicts going for­ward around the world, all those things will be dealt with by our sys­tem, and we don’t act until we we get those three-point trend­line sells or rule 1 sells, or prob­a­bly more impor­tant­ly in the case of Chi­na, three-point trend­line sells for the under­ly­ing com­modi­ties. And even though oil and iron ore have been sold off in the last few days because of slow­downs in Chi­na, they’re still well above their sell lines. I think coal would be in the same boat too. So, as much as I feel unset­tled by all these things that are going on, I’m not going to take action until the com­modi­ties become sells or the shares become sells. I’m not say­ing that can’t hap­pen, it may well hap­pen. I mean, I think, Samuel, you’re prob­a­bly right on the but­ton here to be ner­vous, but the feel ain’t real, as they say, when they teach you how to play golf. I feel like I’m hit­ting the ball prop­er­ly, but you look at the ball and its going to the right in a big slice. The feel ain’t real, and it’s the same with the share mar­ket. We can feel all these sorts of things. It’s human nature. It’s good to have a frame­work and a sys­tem to help us. As to your sec­ond point, Samuel, about rebal­anc­ing — that’s what you’re sug­gest­ing that we do — in oth­er words, peri­od­i­cal­ly sell down our top hold­ings and put the mon­ey into our low­er hold­ings. I’m not a fan of rebal­anc­ing. I’ve cer­tain­ly done some test­ing on it. Dylan is a fan of rebal­anc­ing. He’s run some share mar­ket tri­als which sug­gest that we should be rotat­ing out of our best stock each month and buy­ing our worst stock.

Cameron  51:58

Dylan, for new lis­ten­ers, is Tony’s intern.

Tony  52:01

Yeah. And so I took that to the next stage and ran a dum­my port­fo­lio for about six months and it did­n’t work for me dur­ing that test. So, I’ve dropped it. But I’m always guid­ed by War­ren the Wiz­ards words on rebal­anc­ing. He says, “if I own Michael Jor­dan, why on Earth would I bench him?” And it’s the same thing with me with my invest­ments. If I own a stock that’s been a run­away suc­cess, why on earth would I sell it and put it into some­thing which has­n’t been a run­away suc­cess? So, I’m not a fan of rebal­anc­ing.

Cameron  52:28

Well, you don’t know.

Tony  52:29

And you don’t know, yeah. Every time you sell a stock you’ve got a 60/40 chance of buy­ing one that goes up, right? So why take that risk?

Cameron  52:36

Well, to sum it all up Samuel, when you pre­dict, you make a dict out of your­self.

Tony  52:42

Annd you may be right, Samuel, I under­stand why you’re unset­tled, and I can ful­ly under­stand if you decide to sell some of those shares your­self. But I won’t be.

Cameron  52:44

All right. Thank you, Samuel. Car­o­line asks, “I under­stand the rules as to when to sell a stock, but what about those stocks in your port­fo­lio that basi­cal­ly have sat there and done noth­ing or are at a slight loss since you bought them? Sell and instead buy some­thing that is high­er up in the buy list that will hope­ful­ly give a bet­ter result, or just hang on to the slow stocks and wait to sell when/ if a prop­er sell sig­nal occurs just in case it even­tu­al­ly heads upwards? The cul­prit in my port­fo­lio is WGX, West­gold Resources. It’s been in my port­fo­lio for a while now and still just sit­ting at a loss. Very tempt­ing to sell it even though it has­n’t breached its three-point sell line, and replace it with some­thing high­er up the buy list. Every­thing else I own is in pos­i­tive ter­ri­to­ry, cur­rent­ly. Won­der­ing what TK might do in this instance, and apolo­gies if this has already been cov­ered mul­ti­ple times.”

Tony  53:46

No, well thanks Car­o­line, I don’t think it has. And per­haps Car­o­line should talk to Samuel, because Samuel wants us to sell out of our best stock and buy West­gold — buy a stock and slow it down on the per­for­mance run. Car­o­line, I think every port­fo­lio is going to have a stock like West­gold, mine does. For me, it’s ASX. It’s gone side­ways since I bought it, but I can pret­ty much guar­an­tee that the day I sell ASX it’ll shoot up. That’s capit­u­la­tion in the mar­ket, right? We’ve been patient, been patient, been patient, and then we go “crap,” and then we sell it and it bounces up soon after that. So, look, every port­fo­lio is going to have a West­gold, it’s going to have a stock which isn’t shoot­ing the lights out. That’s just the nature of the game. I’m hap­py to hold those, one; because in the case of the ASX its pro­vid­ing div­i­dends, so I’m still get­ting an income which is bet­ter than cash for that par­tic­u­lar share. I’m not sure about West­gold, it may or may not pay div­i­dends. But cer­tain­ly, the hard­est part about being a share investor is get­ting the tim­ing right. So, if West­gold is still tick­ing all the box­es, which I believe it is, and it has­n’t crossed any the three-point trend­line sells then I would still hold it because, you know, it’s gonna have its day at some stage.

Cameron  54:57

Yeah, the one I had like that in the last year I know is IGL. I held IGL for four, five months, and it did noth­ing and even went back­wards. It came close to a rule 1 sell a cou­ple of times, but did­n’t quite make it. So, I held on to it and then it shot up by 50% even­tu­al­ly, quick­ly.

Tony  55:18

Yeah. And that’s what tends to hap­pen. Regres­sion to the mean is the game we’re play­ing, and some­times it needs a cat­a­lyst. And that cat­a­lyst may take months and months and months, if not even longer to come along. Yeah, I remem­ber years ago, the clas­sic one for me was David Jones’ shares, which, you know, sort of fit­ted the bill for a val­ue investor. This is kind of pre-QAV check­list times. And then there was a takeover bid from Wool­worths, I think, in South Africa, they bought the shares. And Solomon Lew had been a share­hold­er for a long time and he would­n’t sell out his last block­ing stake in the com­pa­ny. So, it was list­ed on the ASX still because Wool­worths could­n’t mop it up, they were patient, they weren’t pre­pared to pay his price. He wait­ed for some­thing like ten years and the share price went side­ways, and then sud­den­ly Wool­worths decid­ed to capit­u­late and pay shares and the share price jumped three, four, five times in a day as they mopped up the retail share­hold­ers. So, it can be worth, it can be very well worth­while being patient. And don’t for­get, we’re look­ing to get 20% on aver­age per year. That can be 0% for five years and 100% in the fifth year, right, and that’s an aver­age of 20% for five years. So, that’s just the way this game works.

Cameron  56:28

You know, I know with the IGL exam­ple, when it shot up for me was in Feb­ru­ary this year after its report came out –its half year report. It was track­ing along, you know, doing noth­ing, and then it’s Decem­ber report came out in Feb­ru­ary and it went up by 50% in the next cou­ple of weeks. And of course, you know, we’re buy­ing stocks that we think are under­val­ued, but we’ve looked at their finan­cials and we know that it’s a sol­id busi­ness that’s head­ing in the right direc­tion; gen­er­at­ing cash, lots of pos­i­tive growth hap­pen­ing, etc., etc. Its up high on our buy list, usu­al­ly, and we’re just wait­ing for the rest of the mar­ket to wake up to that, or some­body in the mar­ket to wake up to that, right?

Tony  57:16

Exact­ly. And in the case of small com­pa­nies like IGL, they’re not get­ting a bro­ker cov­er­age or any ana­lyst cov­er­age because they’re small, right? So, as they grow they start to attract more analy­sis and that’s when they can often take off.

Cameron  57:29

Or, you know, a com­peti­tor decides to take them out or some­thing like that. So, you hang in there is the answer, Tony?

Tony  57:38

Cor­rect.

Cameron  57:39

Dance with the girl who brought you — or the man who brought you, I don’t want to be sex­ist about it. The per­son of non­de­script gen­der bias that brought you. Glenn has a ques­tion.

Tony  57:49

Dance with one you brought.

Cameron  57:51

That’ll do. Glen: “hi, Cameron. In a recent pod­cast, Tony men­tioned that if he was unable to man­age his port­fo­lio for an extend­ed peri­od, i.e. due to ill health for exam­ple, he’d just give you all the mon­ey and let you take care of it.” Yeah, Tony did say that. That was off air, though, Glen.

Tony  58:09

Note to Alex in the tran­script, just cross that one.

Cameron  58:11

Alex just had a heart attack writ­ing the tran­script. “He’s gonna what!”… “He said his QAV shares would be sold and moved to a low cost LIC, such as Aus­tralian foun­da­tion Invest­ment. Won­der­ing Tony’s thoughts on why an LIC over an ETF? Would there be any oth­er con­sid­er­a­tions or instruc­tions? I was just think­ing about some of the QAV guides, for exam­ple, not buy­ing more than 20% of the aver­age dai­ly trade, three-point trend­lines, not buy­ing above the NAV. Sor­ry about the nature of the ill health ques­tion and obvi­ous­ly wish­ing Tony and all QAVers good health, it’s just a process I’d like to think about now rather when it may be too late. PS. real­ly enjoyed Tony’s sum­ma­ry of bonds on a recent pod­cast. If any­one has found,” I don’t think he means your sum­ma­ry of the last Bond film, which we agreed was a com­plete urgh, well, I’ll tell you about that in after hours.

Tony  59:06

Please, Live and Let Please Die.

Cameron  59:09

Third time to wrtie a script, James Bond. “If any­one has found the paper or link to the mate­r­i­al Tony men­tioned from Philip Lowe that explains it fur­ther, would appre­ci­ate where they found it.” That’s from Glen.

Tony  59:20

Yeah. Thanks, Glen. Hope its not Glen who used to run the RBA. Any­way, I’ll post Philip Lowe’s, I’ll link to Philip Lowe’s paper in our Face­book group. I can do that. A cou­ple of things in that. I think you’ve raised a good point, Glen, and this is prob­a­bly rel­e­vant to every­one out there: you should be think­ing, hav­ing the con­ver­sa­tion with your spouse or your kids, and doc­u­ment­ing what’s going to hap­pen should you become finan­cial­ly inca­pac­i­tat­ed so that they can decide and take over what you’re doing now. For me, the con­ver­sa­tion I had with Jen­ny was to call the stock­bro­ker and have all the shares sold and the mon­ey put into the top three list­ed invest­ment com­pa­nies on the ASX. But it’s worth­while peo­ple doing that, and don’t think it won’t hap­pen to you because it will at some stage, so get it down on paper now. And even put it into your will now in case it goes even fur­ther south than just your health. So, that’s the first thing peo­ple should be think­ing about and tak­ing action on. The ques­tion about LIC is why do I pre­fer an LIC over an ETF? The big rea­son is that an LIC is what’s called a “closed end­ed” fund; an ETF is an open-end­ed fund. And what that means is that if I sell my shares in a List­ed Invest­ment Com­pa­ny, the under­ly­ing stocks owned by that LIC don’t need to be sold to pay my mon­ey out. My shares are being bought by anoth­er investor who becomes a share­hold­er of the LIC, but the under­ly­ing fund is intact. Where­as if it’s an ETF, if I sell my shares then the ETF man­ag­er has to sell shares on the mar­ket at the time to pay me out. There’s no change of the share­hold­er, my share­hold­ing to anoth­er share­hold­er, it’s straight redemp­tion. And the prob­lem I have with that is that most peo­ple, unfor­tu­nate­ly, who aren’t very sophis­ti­cat­ed with share mar­kets will try and sell out when the share mar­ket is down. It’s human nature, the share mar­ket’s not the place to be, I’m gonna sell my shares. A List­ed Invest­ment Com­pa­ny has its cap­i­tal intact, except for what’s dropped because of the share mar­ket drop­ping, and if they decide to they can be a buy­er in that mar­ket. Where­as, the ETF is a sell­er in that mar­ket, and they have to sell at the bot­tom to pay out my shares as I redeem and leave. And I think that’s not a great way to invest. That’s the main rea­son. A cou­ple of oth­er rea­sons; ETFs are a bit of a black box to me. Look, I think if you’re buy­ing a large well-known ETF that’s track­ing an index like the ASX 200, or even the All Ordi­nar­ies, and it has a low expense fee — and that’s some­thing else to watch out for with ETFs, not all ETFs have a low expense fee, and not all LICs do too, so pay atten­tion to fees. If you’re in a large ETF, you’re prob­a­bly going to be okay. There are all sorts of dif­fer­ent types of ETFs, though, just as there are with List­ed Invest­ment Com­pa­nies. The big things I would watch out for are what’s called syn­thet­ic ETFs. And again, I’m not say­ing that these aren’t worth buy­ing, but do your home­work. So, what I mean by that is par­tic­u­lar­ly in the com­mod­i­ty space, if I’m buy­ing into a gold ETF, I may not actu­al­ly be telling the fund man­ag­er to go off and buy anoth­er bar of gold. They, if it’s a syn­thet­ic ETF, might just be buy­ing options and futures con­tracts on the gold index — on the stock mar­ket that tracks the gold index — to try and make the ETF share price mim­ic the share price to the gold price, if that makes sense. So, the trade in futures and use options to do that rather than buy­ing the phys­i­cal com­mod­i­ty, and 99.9% of the time that will work fine. But, there have been cas­es where there’ve been flash crash­es where the mar­kets mis­be­haved and, you know, fall­en dra­mat­i­cal­ly only to recov­er dra­mat­i­cal­ly, very quick­ly, because of the fact that the, you know, high fre­quen­cy trad­ing or what­ev­er has got­ten into that mar­ket and there’s a fair bit of tur­moil. So, just be care­ful of syn­thet­ics. Again, they’ll work most­ly, but there could be times when they let you down. And prob­a­bly the last thing I’ll talk about with ETFs is prob­a­bly a com­ment around pas­sive invest­ing in gen­er­al. Cer­tain­ly, the busi­ness case behind index invest­ing has been proven now, and it start­ed off being man­aged funds that tracked index­es, then it became List­ed Invest­ment Com­pa­nies that tracked index­es, then it became ETFs that tracked index­es. ETFs seem to have gained all the trac­tion, but I think that they do, as they become big­ger and big­ger plays in the stock mar­ket — and the same rule applies for man­aged funds as well — they can have an ampli­fy­ing effect on the stock mar­ket. So, if there’s a crash tomor­row and peo­ple head for the doors, the fact that man­aged funds that track the index­es and ETFs are forced sell­ers to pay for those redemp­tions means that they’re in the mar­ket sell­ing as well, that’s the mul­ti­ply­ing effect that hap­pens on the down leg. It’s hap­pen­ing on the upleg too, of course, as more and more mon­ey comes into the stock mar­ket through these pas­sive funds. They’re out there buy­ing BHP and Rio and Com­mon­wealth Bank, which is help­ing to sup­port their price, but they’re doing it grad­u­al­ly. Where­as, when a crash hap­pens every­thing hap­pens on day one, and they’re sell­ing of those stocks which have already dropped is just forc­ing those stocks to go low­er. Where­as, if you’re in a List­ed Invest­ment Com­pa­ny, it’s up to the man­ag­er whether they’re sell­ing or not. So, my com­ments on ETS ver­sus LIC, I think the last com­ment I’ll make on ETFs is I still don’t ful­ly under­stand how they work. So, when I drill down into them, this process of me buy­ing shares in the ETF and in the ETF going out and buy­ing shares under­ly­ing com­pa­nies and hav­ing it all come out in the wash so that the ETF still mim­ics the index is more com­pli­cat­ed than peo­ple think. At the heart of it is a black box called a mar­ket mak­er. So, there is some­one in there who is try­ing to keep every­thing bal­anced, and I sus­pect that again, that’s anoth­er, I guess, poten­tial weak­ness in the mod­el; that if things real­ly do get out of con­trol, and things move fast and are volatile, the ETF that’s meant to be track­ing the index might lose pace with an index for a short peri­od of time. So, that might become unset­tling for peo­ple and cause them to sell, which just per­pet­u­ates that whole, that whole prob­lem. So, they’re the dif­fer­ences. Glen asked some ques­tions about how do we buy the LICs? Are we still apply­ing the QAV rules about ADT and net asset val­ues? I think if I was to fall sud­den­ly ill my wife would­n’t wor­ry about those, Jen­ny would go out and buy the top three LICs by mar­ket cap on the Aus­tralian mar­ket. I would think that they’re big enough to eas­i­ly accom­mo­date our invest­ments. 20% of the ADT prob­a­bly won’t be a prob­lem, she’s not going to wor­ry about three-point trend­line, she’s going to go out and buy them and we’ll take the index from there — or she’ll take the index from there. And the last point about whether they’re trad­ing above or below the net asset val­ue, again, won’t both­er her, she will just go out and buy. And I guess that’s the last point to just quick­ly make, is that List­ed Invest­ment Com­pa­nies can trade above or below the val­ue of their port­fo­lios, the under­ly­ing port­fo­lio, and I have from time to time trad­ed LIC’s on that basis. So, if they dropped to 10 or 20% below the net asset val­ue they’re a buy, and if they climb to above their NAVs by 10 or 20%, they’re a sell. Again, you know, in this dif­fi­cult sit­u­a­tion where things are hap­pen­ing quick­ly and Jen­ny’s try­ing to right the ship, she’s not going to wor­ry about the asset val­ue. She’ll just buy the top three LIC’s in the mar­ket.

Cameron  1:06:32

Yeah, just throw the mon­ey into a hold­ing pat­tern.

Tony  1:06:36

Yeah, and get the index per­for­mance going for­ward.

Cameron  1:06:38

All right. Hope that helps, Glen. By the end of this show, not this episode, but by the end of QAV as a series, my goal is to make sure that Tony will just hand it all over to me to look after. But, ya know, I’ve got a lit­tle while to go yet and prove myself.

Tony  1:06:56

Hand the show over to you or hand my mon­ey over to you?

Cameron  1:06:59

The mon­ey. Can’t do the show with­out you, just the mon­ey. I want you to keep doing the work, just give me the mon­ey. If I had the mon­ey I would­n’t need to do the show. I don’t care, I’m out. I’m Rich. Hey, get to start rais­ing race­hors­es, play­ing golf.

Tony  1:07:18

If you have my mon­ey you can leave the show, but I have my own mon­ey I have to stay. Okay.

Cameron  1:07:22

You got it! You worked it out. Only took you three years. Mark asks, “TK touched on earn­ings share per growth this week for PRU. Can you expand on why this is impor­tant in the check­list, at what lev­el does it become impor­tant, and how to read it in Stock Doc­tor?” Earn­ings per share growth.

Tony  1:07:48

We always want to be invest­ing in com­pa­nies that are grow­ing, that’s the basic rule of invest­ing; you want com­pa­nies to keep grow­ing. They can be stag­nant for a while I guess, but ide­al­ly you want them to keep grow­ing. In our check­list, we focus on earn­ings per share growth and then we look for com­pa­nies which have EPS over PE of 1.5 or greater than 1.5. And just to explain that con­cept, this was a con­cept intro­duced, I think, by Peter Lynch many years ago. And what it does is it says that even if we’re a val­ue investor, we have to acknowl­edge the fact that we’re pay­ing for a com­pa­ny which is going to keep grow­ing and how do we fac­tor that back into the price we’re pay­ing now. And if you think about it in extreme cir­cum­stances, if I buy a com­pa­ny today that’s trad­ing at a PE of 20 times but it’s grow­ing 100% each year, next year the PE is going to be 10 times based on my share pur­chase price from this year, and the year after that it’s going to be trad­ing on a PE of five. So, if it keeps grow­ing we’ll get low PE num­bers into the future which is attrac­tive to us as val­ue investors, right? We’re pay­ing a small amount giv­en the fact this com­pa­ny is grow­ing so quick­ly. So, how do we find a way of tying that up neat­ly into some­thing we can put in the check­list, and Peter Lynch came up with it. He said, you know, it’s a ratio between the growth of EPs and the PE. So, if some­thing’s grow­ing fast, the opti­mal solu­tion is high growth and low PE. That gives us a big num­ber when we put the growth over the PE and we try and set a thresh­old for that, which is 1.5. So, if some­thing is grow­ing rea­son­ably and the PE is rea­son­able it’ll prob­a­bly score on our check­list. It’s a way of try­ing to find a val­ue investors way of valu­ing growth, and that’s why it’s impor­tant to us. In terms of where you find it in Stock Doc­tor, its right there on the front page. Stock Doc­tor has the lit­tle box­es and num­ber three is out­look, and if I go down four lines the EPS growth per­cent­age for BHP is pre­dict­ed to be 36.8% as of when they pro­duce their June ’22 annu­al results, which will be in a few months’ time. But in June ’23 when they get to the stage of pro­duc­ing those results, ana­lysts are fore­cast­ing that they’ll have a‑the EPS will go down by 17.4%. Now, I don’t often pay much atten­tion to that EPS fore­cast going out into the future past the next results, because it’s much hard­er to fore­cast things going out into the future. And that down­grade could just be the fact that ana­lysts are say­ing that iron ore prices are going to regress back to the mean again. They might have, like, a $50 iron ore price in their spread­sheets. And that may well prove to be accu­rate or not going for­ward, and that num­ber will be changed over time. But cer­tain­ly, at the moment the growth in EPS is fore­cast to be 36.8% when BHP pro­duce their Jun ’22 num­bers, and that’s only a few months away so it’s going to be more accu­rate than the one going out. That’s where it’s avail­able in Stock Doc­tor.

Cameron  1:10:46

Very good. Thank you, Tony. Thanks for the ques­tion, Mark. Here’s 73 Ques­tions from Dave from New­cas­tle. He says “hi Cam, hope you’re well. Ques­tions for the pod, if I may. Feel free to spread them,” **E/N Cam says some­thing not worth repeat­ing.** “Num­ber one, could Tony do a pulled pork on PTL. Full dis­clo­sure, I already hold, would be keen to hear his sum­ma­ry of the num­bers.”

Tony  1:11:18

Can I do that next week?

Cameron  1:11:20

No, you’re doing PGL next week, I think, aren’t you?  Pros­per.

Tony  1:11:24

Yeah. Well, okay, I can do PTL on the fly now if you like but it will take some time.

Cameron  1:11:29

No, not now. One day, I’m say­ing you don’t have to do it next week, but one day. Yeah, one day.

Tony  1:11:35

Def­i­nite­ly.

Cameron  1:11:35

“Two: I think this has been asked before and I think I already know the offi­cial QAV answer, but I’m going to ask again. Is there a lim­it to how long to hold a stock if its not mov­ing?” We’ve just answered this ques­tion for some­body else, Dave, so I hope that helped. “Three,” see, we’re get­ting through your ques­tions so quick­ly, Dave. “Could Tony talk through the dif­fer­ences between ROIC and ROE? I’ve read up and I think I get it but I enjoy his nut shell sum­maries.” Just want­ed to read that care­ful­ly.

Tony  1:12:08

Yeah. Yeah, sure, Dave, ROI stands for Return on Invest­ed Cap­i­tal, ROE’s obvi­ous­ly Return on Equi­ty. They are slight­ly dif­fer­ent. In a lot of cas­es, they’re the same. So, equi­ty in the com­pa­ny is assets minus lia­bil­i­ties and invest­ed cap­i­tal is when the com­pa­ny makes a prof­it, how well are they doing in terms of the mon­ey they rein­vest back in the com­pa­ny? Now, over time that’s going to cre­ate a lot of assets, and so assets minus lia­bil­i­ties give equi­ty is going to in some cas­es going to be fair­ly sim­i­lar to ROE but they are both dif­fer­ent con­cepts. So, ROIC is how well man­age­ment are allo­cat­ing cap­i­tal. And to just explain that a bit fur­ther, you know, when I was work­ing at Coles Myer there were all sorts of busi­ness­es vying for cap­i­tal and projects and invest­ment by the board, and the board would have to say, “well, okay, we’re going to favour and invest this invest­ment over that invest­ment.” So, then they’d do, you know, a hur­dle rate dis­count­ed cash flow cal­cu­la­tion and say, “if I open up ten new super­mar­kets for Cole’s I’ll get this kind of return, and if I buy anoth­er online busi­ness for Myer direct, I’ll get this kind of return.” And they will weigh them up and make a choice. And so, that’s an exam­ple of ROIC. So, even­tu­al­ly after they’ve made a lot of choic­es like that the ana­lysts can start to say, “hey, Coles Myer board, you’re good or bad at allo­cat­ing the… mak­ing invest­ment deci­sions and allo­cat­ing cap­i­tal,” and that’s mea­sured by look­ing at the cap­i­tal that they rein­vest in the com­pa­ny. ROE’s slight­ly dif­fer­ent. That’s say­ing that, look­ing at the equi­ty that’s avail­able for Coles Myer, what’s the return like on equi­ty? One sort of feeds into the oth­er, obvi­ous­ly you’ll have a bad ROE if you make lots of bad invest­ment cap­i­tal choic­es, you’ll have a good one if you make good ones. But ROE, don’t for­get, can also be manip­u­lat­ed by how much debt you have. Because assets minus lia­bil­i­ties affects equi­ty, if you shrink your equi­ty by bor­row­ing more and get the same returns in the busi­ness, your ROE goes up and looks good. So, they both have their pit­falls, but they both can be use­ful. I guess, let me put it in terms that lis­ten­ers might under­stand a bit bet­ter. Look­ing at our port­fo­lios that we mea­sure using Navexa or Share­sight or Excel or Stock Doc­tor or what­ev­er, if I put $100,000 into the mar­ket and thats my port­fo­lio, and that makes a 20% return, that return is the return on equi­ty. If I then go out and bor­row anoth­er $100,000 and put $200,000 into the mar­ket and get a 20% return, my equi­ty has­n’t changed; I still have $100,000 of equi­ty. But 20% on $200,000 in the mar­ket means I’ve made $40,000, and if I look at the ROE, that $40,000 over the $100,000 of equi­ty sud­den­ly becomes a 40% ROE. So, ROE can be manip­u­lat­ed like that. And then, ROIC is when I take that 20% return, what do I do with it? And if I just judge, if I set up a new port­fo­lio and put that 20% into the mar­ket and I look at the return on that, that’s my ROIC. If I decide to take some of that return and pay myself a div­i­dend or buy a car or take a hol­i­day, ROIC goes down, because not all of it goes into the mar­ket. So, that’s basi­cal­ly what ROIC does. And over time, those invest­ment deci­sions on, you know, on how I’ve rein­vest­ed my cap­i­tal are impor­tant and they do affect ROE because the port­fo­lio grows based on what I put my mon­ey back into, or take it out, or what new shares I invest in. And so ROIC and ROE can start to merge, but that’s the dif­fer­ence in them. One is how I’ve invest­ed my prof­its and one is how I’ve invest­ed my orig­i­nal port­fo­lio, and gear­ing comes into play on the ROE cal­cu­la­tion.

Cameron  1:15:58

All right. I think I under­stood some of that.

Tony  1:16:03

I can go a lot deep­er, Cam, I mean, ROIC is often linked to anoth­er con­cept called Weight­ed Aver­age Cap­i­tal, Cost of Cap­i­tal, WACC. But don’t get me start­ed on that. That’s, you know, some of these things are invent­ed by Har­vard Busi­ness School to turn out Har­vard grad­u­ates that can say smart things to CEOs, but they real­ly don’t have much appli­ca­tion in the real world, I don’t think.

Cameron  1:16:24

Alright, hope that helps, Dave. Last ques­tion, again from Car­o­line: “It looks like AMP has recent­ly just popped above its three-point buy sig­nal. Would be inter­est­ing to hear Tony do a pulled pork on AMP and also his opin­ion on the audi­tor’s report in the last annu­al report. I’m still try­ing to work out whether a qual­i­fied opin­ion is some­thing to be con­cerned about or not. I’m think­ing not, but just want­i­ng this con­firmed. If it’s still too ear­ly to look at AMP as it’s only just above its buy line then I’m hap­py to wait for a bet­ter time in the future.” Well, we love things that are just above their buy line, don’t we?

Tony  1:17:00

We love all things which are above our buy lines, whether it’s just above or a long way. Anoth­er com­pa­ny that I will do a pulled pork on, we’ll do lots of pulled porks over the next few weeks. I’ll cer­tain­ly do one on AMP. Look, Car­o­line rais­es a real­ly good ques­tion, and I did look at the audit report for AMP today prep­ping for the show, and AMP does have a qual­i­fied audit opin­ion. Look­ing at it in detail, what the audi­tors of AMP are say­ing is that there was one sec­tion of AMP invest­ments in some kind of Chi­na Fund that had­n’t been audit­ed yet, and there­fore they could­n’t include it in their over­all audit of the P&L for AMP. And so, their qual­i­fy­ing their audit, they’re call­ing it out and say­ing every­thing looks kosher in AMP but we can’t give an opin­ion on this par­tic­u­lar invest­ment of there’s, the Chi­na Impact Fund or what­ev­er it’s called. In this case, a qual­i­fied opin­ion, I think, is fine. They’re not say­ing that AMP is going to face a mate­r­i­al going con­cern prob­lem, or any oth­er sort of mate­r­i­al con­cern, they’re just qual­i­fy­ing the audit and say­ing it’s not com­plete. So, Car­o­line rais­es a good point and it’s prob­a­bly my fault for the ter­mi­nol­o­gy I’ve used in the past for call­ing out qual­i­fied audits as a red flag. It’s real­ly audits that have a mate­r­i­al opin­ion or a going con­cern issue, a mate­r­i­al mat­ter or going con­cern issue, which are the ones that we’re focused on. It’s still worth­while look­ing at qual­i­fied opin­ions, but in this case, I think it’s fine. They’re just say­ing that they haven’t got the audit from this par­tic­u­lar invest­ment yet.

Cameron  1:18:33

Isn’t AMP just one big going con­cern?

Tony  1:18:35

A ques­tion­able going con­cern?

Cameron  1:18:39

Yeah. All right. Thank you, Car­o­line. Thank you, Tony. That’s all the ques­tions for this week. Sor­ry if we did­n’t get to your ques­tions, we’ll get to them next week. Do we have time for after hours?…

Cameron  1:18:55

QAV Pod­cast is a pro­duc­tion of spice craft 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.