Transcript QAV #521

QAV 521 Club

Cameron  00:07

Wel­come to QAV. This is sort of a weird episode.

Tony  00:13

Spe­cial Edi­tion.

Cameron  00:14

Yeah. Tony and I are in his apart­ment in Bris­bane. He’s up here for a few days for the QAV din­ner and oth­er things. We’re record­ing this bit of it — I don’t know if there will be dif­fer­ent bits. Any­way, for the record, this bit we’re record­ing on the after­noon of Fri­day the 27th of May. So, how are you, TK?

Tony  00:43

Good.

Cameron  00:45

Tell us, tell every­one where you’ve been, what you’ve been doing.

Tony  00:47

Drove up from Syd­ney on Sun­day, stayed at a friend’s place at Oxley Island — they’ve got a a con­vert­ed boat­shed we could use, which was good. Very nice on the Man­ning riv­er, but very, very wet. We got bogged, my car got bogged.

Cameron  01:03

Real­ly?

Tony  01:04

Yeah, ’cause it’s like a farm, so we drove in.

Cameron  01:06

Oh, right.

Tony  01:07

… And just off the wheel ruts going in, and then we turned off onto the grass and start­ed to slide, and I just thought, okay, we’ll leave the car there, its on a bit of a slope. Worst case is we’ll come out tomor­row and we’ll roll it down the slope. Came out the next day, it had just sunk in the mud.

Tony  01:11

What did you do?

Tony  01:26

Well, we tried to get it out our­selves. Could­n’t do it. The peo­ple we’re stay­ing with had a ute, four wheel dri­ve ute, could­n’t pull it out. Could­n’t tow it out.

Cameron  01:34

What car were you dri­ving?

Tony  01:35

A Merc. The four wheel dri­ve Merc. It just spun its wheels and dug deep­er.

Cameron  01:40

What’s the point of a four wheel dri­ve if it won’t get you out of some mud?

Tony  01:44

Any­way, so luck­i­ly it was a farm. They had a trac­tor, they went and got a trac­tor, and towed us out. So, that was fun. Then, drove up to the Gold Coast, and man, there was so much rain around on the week­end and mon­day tues­day. Got to the Gold Coast, went to a hors­esale, a Mag­ic Mil­lions brood­mare sale was on. A friend of ours, the guy I was trav­el­ling with, had a horse that sold on Mon­day, which was a good out­come for them. A horse called She’s Ide­al. It was actu­al­ly quite inter­est­ing going to the brood­mare sales, it’s a very top­py mar­ket which is inter­est­ing.

Cameron  02:22

Top­py?

Tony  02:22

Yeah, lots of high prices, record prices being set.

Cameron  02:25

Thought that meant every­one was wear­ing top hats.

Tony  02:27

No.

Cameron  02:28

That’s how I imag­ine a whole­sale is, is peo­ple wear­ing top hats and tails.

Tony  02:32

Its quite the reverse, actu­al­ly, yeah. They’re all farm­ers and horse peo­ple. A few wankers in RM Williams.

Cameron  02:40

Hey, I’m wear­ing RM Williams.

Tony  02:40

Are you? Okay, sor­ry.

Cameron  02:44

Jeez.

Tony  02:45

What do they call them? More hat then cows or some­thing, isn’t that the say­ing? Yeah, so a few of those, but main­ly pret­ty down to earth peo­ple. And some very rich peo­ple there as well: Jer­ry Har­vey was there. Any­way, so yeah, a horse sold for $4 mil­lion and set the record — $4.2 mil­lion. It’s usu­al­ly a sign that the econ­o­my’s doing so well it’s gonna come off, so, bit of fog around about how inter­est rates would affect the horse mar­ket — and I guess every­thing else, the share mar­ket and the econ­o­my. Some peo­ple were hold­ing back, wait­ing for a crash to come in the brood­mare mar­ket in the next cou­ple of years. Any­way, we’ll see. So, that was real­ly inter­est­ing, spend­ing a day there. And then we played golf a cou­ple of days, even though it was real­ly, real­ly mud­dy. The rain had stoppped so we could go and play, so that was good.

Tony  02:45

Do you have spe­cial shoes with cleats or some­thing on them?

Tony  02:45

Spikes?

Cameron  02:45

Yeah.

Tony  02:51

Yeah, def­i­nite­ly. But my golf shoes are trashed after the mud. But it was good. And then lots of negro­nis and din­ner at night.

Cameron  03:59

Drunk Face­book post­ing at 1:00am.

Tony  04:00

Drunk Face­book post­ing, yeah. We’re stay­ing in a nice place, the sub pent­house at the Wave on the Gold Coast, which we’ve stayed at before and loved.

Cameron  04:07

Right.

Tony  04:08

Look­ing over Broad Beach, and it was just so nice at one o’clock last night, did­n’t want to leave.

Cameron  04:12

That’s nice.

Tony  04:13

I pulled open a nice bot­tle of scotch and I was sit­ting out there with Rud­dy and Jeff who I was trav­el­ling with, they went to bed and I kicked on.

Cameron  04:21

Oh, that’s nice. Well, let’s talk about some invest­ing stuff. Noth­ing’s going on in invest­ing. It’s all been qui­et out there the last cou­ple of weeks.

Tony  04:31

I thought that’s why we should get togeth­er today and answer a few ques­tions.

Cameron  04:36

You know, I’ve been think­ing about, you know, Buf­fet­t’s old thing about cir­cle of com­pe­tence. I’ve been think­ing about this for the last cou­ple of weeks, and, you know, there’s a lot of peo­ple in invest­ing — and even in our com­mu­ni­ty — peo­ple that know a lot about this busi­ness or that sec­tor of this indus­try, and they go deep on what busi­ness­es are doing, and I was think­ing real­ly what I think I want my cir­cle of com­pe­tence to be is just QAV. That’s it.

Tony  05:09

No, I agree.

Cameron  05:09

There’s a lim­it­ed amount… I start­ed read­ing the paper­work for the AFSL test dur­ing the week. I thought, “final­ly, I’m going to sit down, I’m going to start read­ing this.” Oh, my god, like, it’s so bor­ing. I know I need to do it, but I was like, “urgh.” But you know, just, like, that’s, it. Like, I just want to know how to do the process well, and I think if I focus on that as just my cir­cle of com­pe­tence, that should be enough for a while.

Tony  05:44

I agree. It’s my cir­cle of com­pe­tence too.

Cameron  05:46

Well, it’s not, though. You know a lot of stuff. Because this is where I was at, I was think­ing, “I’m nev­er going to know all the stuff that Tony knows about this busi­ness, and that indus­try,” and all that, and then all of our mem­bers do too.

Tony  05:58

But that’s just expe­ri­ence.

Cameron  06:00

Yeah, I know.

Tony  06:00

I’ve been invest­ing for thir­ty years, and there’s two thou­sand stocks on the ASX, and some of them have been there the whole thir­ty years.

Cameron  06:06

Yeah.

Tony  06:07

You brush up against them enough times, you get to know a lit­tle bit about them. Yeah. But you’re right, I mean, the anal­o­gy is like, you know, why breed hors­es but not out­source it and all that? But spend­ing time with the peo­ple who run the studs and all that, there’s a lot going on which you only learn through that kind of solo expe­ri­ence.

Cameron  06:26

Yeah.

Tony  06:27

But I can still breed and trade hors­es.

Cameron  06:30

Right.

Tony  06:31

It’s the same sort of thing, right?

Cameron  06:32

Yeah, okay.

Tony  06:33

You know, I know how to invest in the share mar­ket using the QAV method, but I don’t have to know the ins and outs of iron ore min­ing or each par­tic­u­lar silo.

Cameron  06:45

Right, well that’s good. Because, it’s been three years now and I think I under­stand the basics of QAV rel­a­tive­ly well, but I’ve got a lot more to learn. But, its like, that’s it. I just want to be real­ly good at run­ning the process. And I think that’s all I need to be able to do. I don’t think I need to know any­thing else.

Tony  07:05

You will, though, you’ll pick it up.

Cameron  07:06

Oh, I’m sure I will learn stuff, but I don’t feel the pres­sure to be able to speak elo­quent­ly about inter­est rates and how they work or the RBA or blah, blah, blah.

Tony  07:20

Yeah. And also, the cir­cle of com­pe­tence, I think, is not just around QAV but it’s around the sec­tions of the mar­ket that QAV focus­es on. So, you know, do I know much about Bit­coin? Do I know much about growth stocks? A lit­tle bit, but it’s not my cir­cle of com­pe­tence.

Cameron  07:35

Yeah. Don’t talk about Bit­coin. Been banned. Elec­tion, we had an elec­tion, Tony, I don’t know if you noticed. I don’t know if you heard this while you’ve been vaca­tion­ing, but there was an elec­tion.

Cameron  07:47

The Labor Par­ty is going to form gov­ern­ment of one sort or anoth­er, major­i­ty of minor­i­ty. It’s fun­ny on the Zoom call that we had last night, Kane, I was ask­ing Kane how his jew­ellery busi­ness was going in Syd­ney. He said for some rea­son retail drops off for a few weeks before an elec­tion, he said, “I don’t real­ly know why.” He said some­body in real estate told him the same thing hap­pens, like peo­ple will stop buy­ing prop­er­ty before an elec­tion. How do you think this elec­tion result is going to impact on QAV and invest­ing?

Cameron  07:47

Yeah.

Tony  08:26

Oh, not at all. Not at all.

Cameron  08:29

I knew that.

Tony  08:31

I mean, go back and have a look at all the elec­tions and what the share mar­kets done. It’s just pow­ered on as nor­mal. It’s not all the stock­bro­kers have their hands on the but­ton after the elec­tion to swap all of their port­fo­lios now. I mean, there are some peo­ple out there who will say things like, “well, there’s a Labor gov­ern­ment, that will favour things like health care stocks.” You know, there might be an increase in Medicare, which will favour med­ical stocks. There might be more tight­en­ing on coal min­ers or some­thing like that. But that’s all spec­u­la­tion. Until you know what’s going to hap­pen, what’s been leg­is­lat­ed, you can’t real­ly act on it.

Cameron  09:11

And Albo real­ly went into this elec­tion very bold­ly, promis­ing next to noth­ing. I read an arti­cle some­time since the elec­tion, some guy was say­ing, you know, the the major par­ties in Aus­tralia have learned over the last few years that the worst thing that you can do is have any poli­cies going into an elec­tion. And he said it’s actu­al­ly not a bad thing real­ly, because what we know — and I talked about this in the psy­chopath book — is that politi­cians very rarely live up to their cam­paign promis­es any­way, so what does it mat­ter if they don’t make any? They’re not gonna do it, does­n’t mat­ter. But, like, I know with the last fed­er­al elec­tion, Labor were push­ing this frank­ing cred­it changes.

Cameron  10:00

But this time they did­n’t put that for­ward. There’s no car­bon tax, there was maybe a lit­tle bit stricter, sort of, hit­ting our imag­i­nary 2050 reduc­tion goals. But you know, okay.

Tony  10:00

Frank­ing cred­it changes, neg­a­tive gear­ing changes. And they’ve learned their les­son from then.

Tony  10:16

Yes. Small pol­i­cy elec­tion, pol­i­cy light. And the main pol­i­cy is “I’m not the oth­er guy.”

Cameron  10:23

Yeah. It was the same as Biden, right. It was like, “Yeah, I’m not that guy.”

Tony  10:28

Yeah, exact­ly. And look, the oth­er side of that coin is for the last, I don’t know, ten years, fif­teen years, the gov­ern­men­t’s have gone into elec­tions with poli­cies and then the game has just changed. GFC comes along, COVID comes along. They react.

Cameron  10:45

Yeah.

Tony  10:46

So like, the poli­cies get thrown out of the win­dow. Does­n’t mat­ter.

Cameron  10:50

Yeah. SEQ, Tony, this is one of these “it was a Josephine and now it’s not, or is it? And is it a falling knife?” Ques­tions some­body asked. So, SEQ was a Josephine, then it went back up above the end of month price. But some­body on Face­book asked the ques­tion, is it a falling knife? And I said, “look, you know what, when I think falling knife I think of a chart that goes from high left down to low, right. And this goes from low left to high right.” But then it did start com­ing off. And then I pulled up the tran­script from last week, or the last episode that we did, and you were talk­ing again about the sec­ond buy line. Now, the sec­ond buy line for SEQ would be up here.

Tony  11:38

So, it would be a buy on that basis, yep.

Cameron  11:40

Right. So, even though the price ticked up, back above the end of month, you would wait for it to cross the sec­ond buy line.

Tony  11:49

I would, yeah. But it’s good ques­tion. If it’s above the clos­ing price at the end of the month, it’s way above its sell price at this stage. Yeah, I think you could prob­a­bly buy it, but I would prob­a­bly wait until it has crossed the line cre­at­ed by H1 and H2.

Cameron  12:08

It’s way above its buy line, it’s way above its sell line.

Tony  12:16

The graph is going side­ways, slight­ly down, yeah.

Cameron  12:20

Since its peak.

Tony  12:20

Yeah, I prob­a­bly would wait.

Cameron  12:22

Right.

Tony  12:22

Let’s get a big, let’s get an upswing going and a trend estab­lished, right.

Cameron  12:26

Right, so reaf­firm­ing the sec­ond buy line. Steven Mabb, chair­man Mabb, who I hear was say­ing nice things about you at the ASA con­fer­ence down in Mel­bourne this week, lit­tle birdie told me. I don’t believe he said it on stage, unfor­tu­nate­ly, but just to QAV mem­bers he said nice things. He sent us an arti­cle. There’s a study by Bain and Co that found that “a dis­pro­por­tion­ate num­ber of com­pa­nies which main­tained prof­itable growth were, one, founder-led, two, had a founder on the board of direc­tors, or three, still adhered to the founder’s prin­ci­ples and oper­at­ing meth­ods. Founder align­ment with share­hold­ers, deep knowl­edge of the busi­ness and indus­try, and a long-term mind­set can con­tribute to out­per­for­mance by founder-led com­pa­nies.” And he said, he just said, “yeah, that’s sort of reflects the scor­ing in QAV. Good to see Bain, sort of, reaf­firm­ing that as an impor­tant met­ric.

Tony  13:26

Yeah, I think there’s been oth­er research pri­or to that on it, which I would have read years ago. Yeah, so I think Steve was also say­ing that in Stock Doc­tor you weren’t nec­es­sar­i­ly see­ing if there was a large own­er­ship of direc­tors in the com­pa­ny’s stock, because they could have it through trusts or com­pa­nies, or super funds or what­ev­er, and he was pick­ing it up in Yahoo Finance and oth­er areas.

Cameron  13:58

Yeah, that was with PTL. I sent his com­ments to Vic­tor Di Pasquale at Stock Doc­tor, who did send me a reply basi­cal­ly say­ing, “yeah, Yahoo Finance’s data is out of date.” And that their data is the right data, and all the oth­er data you should­n’t trust. Be care­ful what you trust, or some­thing. I haven’t had a chance to for­ward that on to you or Steven yet, but I will do that.

Tony  14:27

Yeah. But it’s a good point. It’s, I mean, and you think about why that’s the case. I mean, talk­ing about cir­cle of com­pe­tence, if you’ve built a busi­ness up from scratch to the stage where it can be list­ed, you know a lot about that indus­try, a lot about what makes that busi­ness tick. And then you would have a long-term men­tal­i­ty about invest­ing and run­ning the busi­ness.

Tony  14:47

As opposed to some­one you’ve hired who does­n’t have skin in the game who’s going to prob­a­bly try and run the com­pa­ny for short term KPIs that they’ve been told to man­age the busi­ness by. Yeah.

Cameron  14:47

Yeah.

Cameron  14:59

And that they’re usu­al­ly on a three-year stint as a CEO, three or five years.

Tony  15:03

I think the aver­age lifes­pan of a CEO in Aus­tralia is like four years.

Cameron  15:07

Yeah, so they’re in for short term gain. Yeah.

Tony  15:11

And they’re often employed to, or they’ve been giv­en the man­date to turn around the com­pa­ny or expand the com­pa­ny, what­ev­er. So, they’ve got a spe­cif­ic job and a short time to do it. Where­as a founder is more like­ly to say, “okay, well, we need to move here, but we can take five years to get there.” Yeah.

Cameron  15:29

NHC had a mas­sive drop yes­ter­day. Did you notice that?

Tony  15:33

Only because you raised it with me, I haven’t been watch­ing the mar­ket.

Cameron  15:36

Oh my god. And then it bounced back. So, it’s still down, I think, but not as far down as it was. I did­n’t under­stand why, but some­body on Face­book said some­thing about fore­casts.

Tony  15:51

I looked it up. There was a, well, they came out with a quar­ter­ly report and send that they’d been affect­ed by two things — or, the busi­ness had been affect­ed by two things — flood­ing, which I can tes­ti­fy to dri­ving through New South Wales, and not being able to find enough work­ers because of COVID. How­ev­er, they also said that they increased their prof­it fore­cast by, I think, 4%.

Cameron  16:14

Right.

Tony  16:14

Yeah. So, the neg­a­tive was picked up on quick­ly, but I think peo­ple are just real­is­ing it’s a bit of a blip.

Cameron  16:24

Right. Well, my ques­tion was going to be, is it a bad news sell? Because, and I know you’ve been, you know, tight­en­ing the belt on what we clas­si­fy as bad news sells recent­ly, because we tend to go, “oh, it’s rain­ing. That’s a bad news sell.”

Tony  16:46

Yeah right, yeah.

Cameron  16:47

But when these sorts of fore­casts come out and they say, “well, we’re not going to hit this, and this hap­pened.” Does that play into a bad news sell still?

Tony  16:55

I think it does if it’s real­ly bad news. Like, if NHC had of come out and said there was a mine col­lapse and ten peo­ple died, we’re gonna have to shut the mine for six months and inves­ti­gate what went wrong, etc. Yeah, I mean, it’s a mate­r­i­al change to the busi­ness.

Cameron  17:09

Right.

Tony  17:10

But just com­ing out and say­ing it’s been rain­ing, and we can’t find some employ­ees because of COVID…

Cameron  17:17

Well, the share price dropped by 12%, so some­body thought that was bad news.

Tony  17:21

Yeah. It is bad news, but is it enough to sell the share? No, I don’t think so.

Cameron  17:28

Right. So, how do we tell, though, when they come out with some­thing that’s bad news by some mea­sure, the share price drops mas­sive­ly…

Tony  17:42

Well, 12% isn’t that mass1ive, real­ly. You think it is? I don’t think it is.

Cameron  17:50

In two hours, yeah, I think it is.

Tony  17:53

It’s rapid, but its not mas­sive.

Cameron  17:55

No? Okay.

Tony  17:58

Okay, so, first of all, don’t pan­ic. If you see a share price drop­ping 10% in two hours…

Tony  18:06

Yeah, and maybe a mus­cle relax­ant. But, find out what the rea­son­ing is, and then ask your­self the ques­tion “is that real­ly the end of the world for this com­pa­ny?”

Cameron  18:06

Just grab your tow­el?

Cameron  18:21

Right.

Tony  18:21

Because often­times, like when we’ve had — I think I can think of one case of a bad news sell based on results and that was Kath­man­du, and it was so bad the CEO resigned on the same day, which was our nor­mal bad news. If the CEO’s fall­en on his sword, it’s pret­ty bad.

Cameron  18:40

Yeah.

Tony  18:41

And that was because of a mate­r­i­al miss of the prof­it fore­cast.

Cameron  18:46

Right. Well, NHC has recov­ered a bit but it’s still quite a way away from where it was. So, the mar­ket has­n’t react­ed pos­i­tive­ly to that.

Tony  19:00

Well, I don’t expect it to react pos­i­tive­ly to it, though. They’ve come out and said they’ve got some prob­lems. And, like, is it going to flood for the rest of the year? Well, I hope not. It should­n’t, maybe it will, but it should­n’t. And they’ll solve their employ­ee prob­lems, the bor­ders are open­ing up, so…

Cameron  19:14

Okay. So, it is bad news, but not bad enough news?

Tony  19:18

Well, I mean, I think every busi­ness — and you know, peo­ple out there who work in busi­ness­es or who run busi­ness­es will know — you’ll have speed bumps.

Cameron  19:29

So, that’s a speed bump, not bad news?

Tony  19:31

Yeah.

Cameron  19:32

Okay.

Tony  19:33

And I can’t put any more sci­ence on it than that.

Cameron  19:35

Right. What about the YAL trad­ing halt? Did you read up on that at all?

Tony  19:41

I did. I own both NHC and YAL, and I’ve been buy­ing into YAL — I sold RIO shares a week ago, and I’ve been slow­ly buy­ing back. I went to cash with those pro­ceeds, did­n’t go straight back to back into buy­ing some­thing because every­thing was a Josephine. Start­ed buy­ing YAL at the end of last week and been doing it a lit­tle bit this week. So, yeah, I’m famil­iar with it. Let me just, I’m try­ing to just get my facts straight in my head. So, the sto­ry that I want­ed to tell today was I actu­al­ly hes­i­tat­ed in buy­ing Yan­coal last week before I bought it, but it was the top thing on the buy list and I bought it because of that. But, I’ve had expe­ri­ence with YAL many years ago when it was good enough ADT on the way in, but then every­thing just dried up on the way out.

Cameron  20:33

How does that work?

Tony  20:34

Because it’s got two or three big com­pa­nies who I think between them have about 65% of the shares, and if there’s no one else trad­ing, they’re not trad­ing, the ADT can be a lit­tle bit mis­lead­ing.

Cameron  20:47

It can evap­o­rate.

Tony  20:48

How does that work?

Tony  20:48

Yeah, it can evap­o­rate. So, I was toss­ing up whether or not to do it, so I decid­ed to buy in slow­ly. Now it’s in a trad­ing halt. What it looks like that’s hap­pen­ing, and we don’t know — this is just rumour and spec­u­la­tion at the moment — is that the big, I think there’s three share­hold­ings, the big­ger of those three is think­ing of lob­bing a bid for the com­pa­ny. The rumour is it’s going to be less than the cur­rent share price.

Tony  20:51

Well, exact­ly. I will be a very short takeover.

Tony  20:55

Why would any­one sell their shares at 20% less than the cur­rent price?

Tony  21:20

Because one of the minor com­pa­nies who still owns a fair bit of stocks, say 10–20% of the stock, may have to offer that dis­count to move that block. So, if there’s a block trade — it’s called block trades, and you might read about them occa­sion­al­ly in the AFR — but if some­one has 10% share­hold­ing in the com­pa­ny they’ll gen­er­al­ly approach a num­ber of dif­fer­ent banks or stock­bro­kers to sell it for them in one trade overnight when the mar­kets shut.

Cameron  21:48

Right.

Tony  21:49

And to get that much stock away, they nor­mal­ly have to offer a dis­count.

Cameron  21:52

20% sounds like a big dis­count. And if you have a series of block trades in a row, is that a blockchain? Does it become cryp­to then? Can we NFT it?

Tony  22:02

Kryp­tonite. So, yeah, so, but this is all rumour. No one knows what’s going on.

Cameron  22:09

Right.

Tony  22:10

But I am pay­ing atten­tion to it, and par­tic­u­lar­ly to the ADT, and see what the changes are. If the big com­pa­ny does take out the small­er com­pa­nies that may have an impact on ADT.

Cameron  22:21

Because you’ve got one less share­hold­er?

Tony  22:25

But also, too, if it gets to the stage where a share­hold­er has 90%, they can com­pul­so­ri­ly acquire your shares.

Cameron  22:35

And force you to pay the 20% dis­count, buy them at the price?

Tony  22:40

Yeah, and I think they — I don’t know what the law is, but they can often take months and months and months to pay you. So, I’d rather sell out in advance of that. And I think oth­er peo­ple will know that and so you might see, if this is what they think’s going to hap­pen, if they think that some­one’s creep­ing up to takeover by tak­ing out the oth­er two small share­hold­ers and then launch­ing a low­ball bid, they may just get out.

Cameron  23:02

Well, the share price does seem to have come back a lit­tle bit this week. From $6.18 on the 25th, it’s now at $6.06.

Tony  23:12

Yeah, but the mar­ket has­n’t been that strong this week.

Cameron  23:16

I mean, on the 23rd it was $5.92, so it’s high­er than it start­ed the week. So, it looks like the mar­ket has­n’t react­ed neg­a­tive­ly to it yet.

Tony  23:25

Well, it can’t, it’s in a trad­ing halt.

Cameron  23:29

Apart from that.

Tony  23:31

It’s gonna come out of a trad­ing halt on the ear­li­est, if there’s news of this offer, on May 30th. So, we could be wait­ing for a few more days.

Cameron  23:40

Is that Mon­day?

Tony  23:42

What’s today? The 27th? Mon­day.

Cameron  23:46

All right. Murph died.

Tony  23:48

Yeah. What is it with these super investors who live until they’re 96?

Cameron  23:56

It’s the Berk­shire — See’s Can­dy, liv­ing on a dock on See’s Can­dy. So, for peo­ple who don’t know, we’ve talked about him sev­er­al times over the years, but who was Thomas S. Mur­phy?

Tony  24:08

Yeah. So, they want to read a book called The Out­siders, which is real­ly good, and it talks about peo­ple who’ve been great investors but don’t have a high pro­file. And so, Mur­phy start­ed off in a small tele­vi­sion sta­tion and even­tu­al­ly kept buy­ing them and rein­vest­ing the cash flow into new ones, and had a rule of doing it on a price to oper­at­ing cash flow of 6 or less. And, you know, Murph mor­phed the whole thing into the ABC net­work in Amer­i­ca.

Cameron  24:42

Buf­fett was a big fan.

Tony  24:43

Buf­fett was a big fan and bought in, and then often says things like, “I learned every­thing I knew in busi­ness from two peo­ple, one of which is Murph.”

Cameron  24:51

So, his com­pa­ny Cap­i­tal Cities Com­mu­ni­ca­tions became ABC and then sold it to Dis­ney for a gajil­lion dol­lars: $19 bil­lion, he sold it to Dis­ney.

Tony  25:06

Yeah, so all that from one TV sta­tion.

Cameron  25:09

He acquired ABC in 1985 for 3.5 bil­lion and then sold it to Dis­ney for 19 bil­lion. Cap­i­tal City stock increased in val­ue 2000 times between 1957 when the com­pa­ny first sold stock to the pub­lic and 1995 when Dis­ney bought it. Not bad.

Tony  25:31

And, a dis­ci­plined focus on what to buy.

Cameron  25:35

That’s a cir­cle of com­pe­tence.

Tony  25:36

He knew TV sta­tions, he knew lots of cash can be thrown off by them, but he was­n’t going to over­pay for them.

Cameron  25:44

And of course the price to oper­at­ing cash flow met­ric is now at the core of QAV.

Tony  25:53

Yeah. Yeah, that’s right. Its a heavy lifter, yeah, exact­ly.

Cameron  25:57

Which you learned from Buf­fett, Buf­fett learned from Murph, and Murph just died. 96.

Tony  26:04

96. Incred­i­ble. I think actu­al­ly, I think Berk­shire Hath­away may actu­al­ly have been a Dis­ney share­hold­er, so I won­der if he actu­al­ly put togeth­er the deal. There’s that great scene in the last, I think it’s the last series of Entourage.

Cameron  26:15

Yeah?

Tony  26:16

Where Ari Gold’s run­ning the stu­dio — and he’s always run­ning around like a head­less chook — and War­ren Buf­fett dri­ves past in the golf cart and goes, “fix it, Ari.”

Cameron  26:28

Oh, I did­n’t stick with the show that long, that’s good. Did Ari say, “let’s hug it out, bitch.”

Tony  26:33

No.

Cameron  26:35

Buf­fett cameo’d in Entourage. I love that. I like this, in the New York Times obit. for Murph it says, “he met Mr. Buf­fett in the ear­ly 1970s, and Mr. Buf­fett bought 3% of Cap­i­tal Cities. After the price went up, Mr. Buf­fett sold the stock, that way miss­ing the huge increas­es in share prices to come. Tem­po­rary insan­i­ty, Mr. Buf­fett lat­er said of his deci­sion to sell.” So, you know, some­body on the Zoom call last night — I think it was Liz — was ask­ing about GRR, and she’s like, “it’s gone up so much. When has it gone up too much? When do we sell? When is it gone up too high to buy in?” I’ll just say it’s, you know, I’ll quote Buf­fett from now on.

Tony  27:23

Why do you want to bench Michael Jor­dan?

Cameron  27:25

Yeah, I mean, GRR is on a crazy run.

Tony  27:30

What’s hap­pened, though? I bought it and then had to rule 1 it and last about 12%.

Cameron  27:35

Some­body emailed me and said “I feel sor­ry for Tony.”

Tony  27:39

Tem­po­rary insan­i­ty!

Cameron  27:40

Its up 30% this month, its up 120% since we added it to one of the port­fo­lios a cou­ple of months ago.

Tony  27:48

So, we should add it to the check­list: if Tony rule 1s it, its gets 10 points and we buy it.

Cameron  27:54

Well, you know, there’s a lot of peo­ple who don’t like rule 1, because they go, “well, you know, might go back up.”

Tony  27:59

They were right in this case. But let me talk about Nufarm, which I also sold out on a rule 1.

Cameron  28:05

Yes, for every GRR there’s an NUF. Well, we’ll get to a NUF in a minute. I just want­ed to men­tion Howard Marks’ lat­est memo which I start­ed to read this morn­ing before I came over. I got to this bit, he says, he’s talk­ing about investor psy­chol­o­gy. “When investors turn high­ly bull­ish, they tend to con­clude that a) every­thing’s gonna go up for­ev­er, and b) regard­less of what they pay for an asset, some­one else will come along to buy it from them for more (the greater fool the­o­ry). Because of the high lev­el of opti­mism, stock prices rise faster than com­pa­ny prof­its, soar­ing well above fair val­ue excess to the upside. Even­tu­al­ly, con­di­tions in the invest­ment envi­ron­ment dis­ap­point, and all the fol­ly of the ele­vat­ed prices becomes clear, and they fall back toward fair val­ue (cor­rec­tion), and then through it. The price declines gen­er­ate fur­ther pes­simism and this process even­tu­al­ly caus­es prices to far under­state the val­ue of the stocks excess to the down­side. Resul­tant buy­ing on the part of bar­gain hunters caus­es the depressed prices to recov­er toward fair val­ue (cor­rec­tion). The excess to the upside makes for a peri­od of above aver­age returns and the swing towards excess on the down­side makes for a peri­od of below aver­age returns. There can be many oth­er fac­tors at work, of course, but in my view, excess­es and cor­rec­tions cov­ers most of the ground. We saw a num­ber of excess­es to the upside in 2020 and 2021, and now we’re see­ing cor­rec­tions there­of. ” I thought that was nice­ly put.

Cameron  28:23

Par­tic­u­lar­ly in the US, I mean, that’s had big swings in the share mar­ket. We haven’t been as volatile here.

Cameron  29:26

But we saw the After­pays and the BNPLs, the Bit­coins and all of that kind of stuff. All of the tech stocks went through that, sort of, exces­sive opti­mism and you were, you know, call­ing bull­shit on the whole thing through­out the whole thing.

Tony  30:01

Well, he makes a good point. There’s two, there’s two fun­da­men­tals at work in the mar­ket. There’s the under­ly­ing com­pa­ny, and that’s why Buf­fet­t’s always said “you’re not not buy­ing chips in the casi­no, you’re buy­ing shares in the com­pa­ny.” And then there’s what peo­ple’s reac­tion to pos­i­tive news is, and they just keep beat­ing the price up. It’s that two stage effect that’s impor­tant in the mar­ket, the vot­ing machine and the weigh­ing machine, as Ben Gra­ham said.

Cameron  30:24

Yeah, and the longer I’m doing this with you, the more I’m con­vinced that, you know, one of the great advan­tages of QAV — apart from the method­ol­o­gy of telling us what to buy and when to buy and when to sell it — is the fact that I can just ignore all of the hype. The psy­chol­o­gy part of it which I think — accord­ing to Howard and the begin­ning of his memo, he talks about this, you know — the hard­est thing I think, to be a suc­cess­ful investor seems to be the psy­chol­o­gy.

Tony  30:55

Dis­ci­pline.

Cameron  30:56

Yeah, dis­ci­pline. Not get­ting caught up in the hype, not get­ting caught up in the hype both ways: on the upswing, and on the down­swing.

Tony  31:03

That’s right. Wait until we have a few inter­est rates ris­es and every­one’s run­ning around say­ing doom and gloom.

Cameron  31:08

Jump­ing out of win­dows.

Tony  31:09

Blood on the streets. But it’s very pro­found, because what you’re say­ing is what we need to do as investors is not be human beings. We need to take our human brain and just put it aside and go, no, we’re gonna do what we need to do with­out think­ing about it.

Cameron  31:24

The Vul­can mind.

Tony  31:25

If we think about it, yeah. If we think about it, we would­n’t do it.

Cameron  31:28

Yeah, and the great thing — and I’ve said this a num­ber of times recent­ly, but I’ll repeat it — like, I’m at a point now with QAV when I have to sell some­thing or buy some­thing, I don’t even think about it. Like, it’s like brush­ing my teeth. I’m just like, it says sell, I sell. It says buy, I buy. This is why I say the cir­cle of com­pe­tence is QAV. It’s like, I just obey, you know? Just obey QAV. I don’t think. Like, because there’s no point. I mean, there’s no point. In fact, not only is there no point in try­ing to think out­side of QAV with this stuff, I think, but that’s dan­ger­ous, because that’s when you get involved in the psy­chol­o­gy of it. You’re try­ing to spec­u­late, you’re try­ing to out­smart the sys­tem. And not just the sys­tem, but the mar­ket, right? And every­one is doing that. They’re get­ting caught up in the psy­chol­o­gy of the mar­ket.

Tony  32:28

Isn’t that inter­est­ing? There’re so many lay­ers to this. You’re right. All right, so you’ve got a cof­fee shop. It’s been mak­ing cof­fee for twen­ty-five years, or what­ev­er. Nice lit­tle busi­ness. And then some guy comes up with the idea of break­ing it up into shares and sell­ing it and putting the price up live, twen­ty-minute delay out­side of the cof­fee shop. So, peo­ple walk­ing past go, “wow, the shares are going up. I should race inside and buy some cof­fee shop shares.” Mean­while, the guys still doing the barista stuff, grind­ing it out. Where­as peo­ple are jump­ing out of win­dows because the price on the cof­fee shop went up or down or down in par­tic­u­lar. Yeah, there’s just two ele­ments to it, isn’t there?

Cameron  33:07

Yeah. And it’s the thing I’m so grate­ful for, is just the fact that all of the psy­cho­log­i­cal and emo­tion­al side of it is, you know, it just gets negat­ed by QAV. You don’t need to wor­ry about it. It’ll tell us what to do.

Tony  33:24

Yeah. And I should flag that at some stage in our invest­ing futures there’ll be times when we under­per­form.

Cameron  33:31

Yeah.

Tony  33:32

Because we’re work­ing with aver­ages and sta­tis­tics, and they’re the par­tic­u­lar­ly try­ing times where you real­ly do have to switch off and just say “it’s going to get bet­ter.”

Cameron  33:40

Well, the O’Shaugh­nessy book, What Works on Wall Street or what­ev­er it’s called, he high­lights that when peo­ple do fol­low his method — which is very sim­i­lar to QAV — you know, when he’s con­vinced fund man­agers or bro­kers or what­ev­er, to pro­fes­sion­al investors to fol­low it, they’ll fol­low it for six months or a year and then it will under­per­form for a peri­od and they’ll go “oh, screw this.” They’ll change horse mid-race. It’s like, no, that’s not how this works.

Tony  34:17

And they’re under pres­sure, right? Because they’re in the fund man­ag­er busi­ness. They’re com­pet­ing with oth­er peo­ple, and they’re sud­den­ly under­per­form­ing them. So, their funds are going out, they’ve got to do some­thing. Where­as the real­ly good fund man­agers are like Buf­fet­t’s: “yeah, sell your shares if you want. I’m not chang­ing what I’m doing. I’m going to keep doing this.”

Cameron  34:32

Yeah. All right, well, that’s all from my notes for this week. What have you got to talk about?

Tony  34:38

I have a cou­ple. I noticed in the news that Sri Lan­ka default­ed on $18 bil­lion of gov­ern­ment bonds, and that’s fol­low­ing on the Russ­ian default on gov­ern­ment bonds. And I’m just, I’m just high­light­ing it because I’ve seen this movie before: when coun­tries start default­ing on their bonds that can have a big flow on into the mar­ket.

Cameron  34:59

Yeah.

Tony  35:01

It can become the sort of canary in the coal mine for a prob­lem. So, don’t know when the prob­lem is going to hap­pen, if the prob­lem will hap­pen and how long it will last for, but when coun­tries default on bonds it can have this big chain that flows through the finan­cial mar­kets.

Cameron  35:14

Because oth­er peo­ple are expect­ing that mon­ey and they don’t get their mon­ey?

Tony  35:19

Well, yeah. So, $18 bil­lion has been wiped off of Wall Street for the sec­ond time. Rus­sia had, I think, a big­ger default a month or so ago. Yeah. So, I mean, the mar­ket needs mon­ey. It’s a weight of mon­ey argu­ment; if you’re tak­ing mon­ey out of the mar­ket, there’s less peo­ple who are gonna go and invest, and that means there’s less froth in the mar­ket so share price’s will come down. But, it also has the flow on effect, too, that it makes it hard­er for oth­er coun­tries to bor­row debt, so their economies get hurt. You can have this whole chain reac­tion of coun­tries… I’m think­ing about in par­tic­u­lar, like, the South­east Asian default cri­sis that hap­pened where all these so called “tiger economies” were bor­row­ing lots of mon­ey, and then one default­ed and then they could­n’t bor­row any more mon­ey, which start­ed up a whole chain reac­tion through all the oth­er coun­tries. Sud­den­ly you have a quar­ter of the world mar­ket affect­ed. So, yeah, any­way, just some­thing I’ve noticed. It’s only a two-point trend at the moment, but if it con­tin­ues it could spell trou­ble.

Tony  35:24

British infla­tion is at 9%, which is pret­ty high. So, you know, there are some prob­lems out there. Amer­i­ca, I think is still at about 6, so it’s still pret­ty high.

Cameron  35:24

Right.

Cameron  36:34

But Britain’s got Boris John­son run­ning the coun­try, Tony, that can’t be right. The man is a genius.

Tony  36:42

A genius at mar­ket­ing. How he’s not in jail from hold­ing par­ties dur­ing COVID lock­downs and then deny­ing it and then get­ting shown the pho­tographs. Any­way. So, yeah, so Britain’s infla­tion is at 9%. We’re not there yet. The inter­est­ing thing is with us, remem­ber we had the inter­view with Alan Koehler at the start of our pod­cast­ing life?

Cameron  37:07

Yeah.

Tony  37:08

And he was say­ing, “watch the under­em­ploy­ment num­ber in Aus­tralia.” And at that stage I think it was 13 or 14%. And he argued, “for­get about the unem­ploy­ment num­ber. It’s the under­em­ploy­ment num­ber,” which is very high. It’s now down to 6%.

Cameron  37:20

I think it was about 7 or 8% at the time.

Tony  37:23

No, I think it was 13.

Cameron  37:25

I think if you added it to the offi­cial unem­ploy­ment rate, which was run­ning at 5 or 6%, that was the 13.

Cameron  37:32

I can look it up, but from mem­o­ry — because 12 or 13 would be high for under­em­ploy­ment.

Tony  37:32

Okay.

Tony  37:39

Under­em­ploy­ment is defined as some­one who has a job but wants to work more hours.

Cameron  37:42

Peo­ple doing the gig econ­o­my and that kind of stuff, yeah.

Tony  37:45

Or, work­ing casu­al shifts at Coles or what­ev­er, and Wool­lies. But any­way, so it’s quite low, and so I think the inter­est­ing thing going for­ward will be to see how the RBA han­dles that and how the gov­ern­ment han­dles that in terms of there’s pres­sure on them to open up the bor­ders to skilled migra­tion, but the down­side of that is the unem­ploy­ment rate goes up because all these peo­ple who are now pret­ty close to ful­ly employed are going to start los­ing out on their jobs. And if every­one’s rea­son­ably ful­ly employed, that does mean that wages should start to rise.

Cameron  38:19

I just googled it. Accord­ing to the ABS, Sep­tem­ber 2019, “the trend month­ly under­em­ploy­ment rate remained steady at 8.4% in Sep­tem­ber 2019, an increase of 0.1 per­cent­age points over the past year. The trend month­ly under­util­i­sa­tion rate remained steady at 13.7%.” I don’t real­ly under­stand what that is, do you?

Tony  38:41

Under­em­ploy­ment and under­util­i­sa­tion?

Cameron  38:43

Yeah.

Tony  38:44

I thought that was the same thing.

Cameron  38:45

You would think so, right? Well, maybe that is the com­bined of the two.

Tony  38:50

Okay.

Cameron  38:51

So, it’s down a lit­tle bit — well, it’s down 25% since then, so it is down.

Tony  38:57

And so, there should be wage increas­es and that will be infla­tion­ary.

Cameron  39:03

Well, that would only hap­pen if we had func­tion­ing unions.

Tony  39:08

I think it will hap­pen because of the mar­ket. I mean, like, just on the Coast in the last week we’ve had a cou­ple of — well, one wait­er in par­tic­u­lar, who was Manuel out of Fawl­ty Tow­ers. In a real­ly nice restau­rant, he comes over and says, “hi, I’m your wait­er. I’ve only been in Aus­tralia for six­ty days.”

Cameron  39:24

“I speak a very good Eng­lish.”

Tony  39:26

“I’m from Italy.”

Cameron  39:27

Oh, yeah. Did you whip out your Ital­ian?

Tony  39:30

We talked a lit­tle bit, but I’m a school­boy Ital­ian speak­er. I asked him where he’s from, Puglia, and told me about Puglia and all of that. He just made mis­take after mis­take, it was like com­i­cal in the end. He must have bought five bot­tles of wine before we got the one we ordered.

Cameron  39:47

Did you just keep them all and drink them?

Tony  39:49

No, we sent them back. But he made the mis­take of open­ing it and then show­ing us.

Cameron  39:54

Oh no!

Tony  39:55

He brought out the wrong main, “sor­ry mate, take it back.”

Cameron  39:59

Poor fel­la.

Tony  40:00

But any­way, I’m mak­ing that point because peo­ple are hir­ing who­ev­er they can, because there’s so many casu­al vacan­cies.

Cameron  40:04

Obvi­ous­ly no expe­ri­ence, just grab­bing peo­ple. Yeah.

Cameron  40:09

Maybe I can get a job.

Tony  40:09

That might change if there are more over­seas work­ers com­ing in, like the Ital­ian guy. You would­n’t get a job if there were lots of oth­er can­di­dates. So, this is going to be an inter­est­ing econ­o­my, I think, for prob­a­bly the next six months in terms of wages, infla­tion, employ­ment.

Tony  40:09

That might change…

Cameron  40:28

But, does­n’t change any­thing we do.

Tony  40:30

Does­n’t change what we do, no. QAV does­n’t change.

Cameron  40:34

What else you got? NUf? Enough of nuf.

Tony  40:40

Oh, Nufarm. Yeah. I was just going to men­tion the fact that I rule 1d it and I was real­ly glad I rule 1d it. We can talk about lat­er, some­one asked the ques­tion about Sum­it­o­mo and sell­ing out.

Cameron  40:51

Isn’t that the bank that Bruce Willis was in in Die Hard 1.

Tony  40:58

I dun­no.

Cameron  40:59

Naca­tone, no it was Nakato­mi, yeah. What’s Sum­it­o­mo?

Tony  41:02

I think they’re a chem­i­cal com­pa­ny, from mem­o­ry, a Japan­ese com­pa­ny. I think they took a share­hold­ing in Nufarm back when they paid $14 some­thing a share, and they sell­ing out now at six –or in the six­es. Took a bath, but I think they may have made up that dif­fer­ence because they were either a cus­tomer of Nufarm or a reseller of the chem­i­cal prod­uct.

Cameron  41:23

What hap­pened to Nufarm? Why did they crash?

Tony  41:26

They came out again with a prof­it down­grade. No, sor­ry, I’m telling a lie. Their prof­it was real­ly strong, so they’ve just report­ed in the last week or so, but the ana­lysts have said, “well, okay, you’ve had a strong half but we don’t think you’re going to have a strong half going for­ward.” Yeah, so peo­ple have been down­grad­ing their prof­it fore­cast. And then Sum­it­o­mo was sell­ing out, which may put some pres­sure on the price as well.

Cameron  41:55

So, we had it as one of our stocks on the buy list just before the results came out.

Tony  42:00

Cor­rect, I bought it.

Cameron  42:01

We bought it, and then the results came out and the ana­lyst trashed the results and it crashed.

Tony  42:07

I rule 1’d it and I was very glad I rule 1d it because it dropped even fur­ther down.

Cameron  42:10

So, get­ting back to the rule, the GRR exam­ple of rule 1ing.

Tony  42:19

Well, you can always but back into GRR, right? Nufarm is still a Josephine, so even though it’s on the buy list, you can’t buy it yet. So, even though I rule 1d out of GRR — and I would­n’t buy back in now because last time I looked at iron ore it was a Josephine, so I’m kind of sur­prised that GRR’s going up again — but if iron ore was­n’t a Josephine then I could have bought back into GRR as soon as it, sort of, had the uptick again.

Cameron  42:44

Yeah, you can buy back in.

Tony  42:44

You can buy back in, yeah. So, there’s that. I’m gonna men­tion…

Cameron  42:49

Oh, don’t do it.

Tony  42:50

Cryp­to. Again, talk­ing about the weight of mon­ey argu­ment, I’ll just read this quote from Christo­pher Joy from Coolabah Cap­i­tal: “accord­ing to banks, Aus­tralian shift­ed $20 bil­lion out of risk-free deposits into cryp­tocur­ren­cy last year which have since more than halved in val­ue.” So, there’s $10 bil­lion being tak­en out of peo­ple’s pock­ets in Aus­tralia, which is not going to go into the share mar­ket or any­where else.

Cameron  43:21

Yeah. But its gonna come back, Tony, cryp­tos…

Tony  43:28

Maybe. You just won­der…

Cameron  43:31

They have dia­mond hands, these peo­ple.

Tony  43:34

Sexy hands. What­ev­er they touch they screw.

Cameron  43:40

That’s good. Yeah.

Tony  43:41

Any­way, but prob­a­bly the best thing they can do is not sell, but I think a lot would have sold and just tak­en the loss.

Cameron  43:48

Yeah. All right.

Tony  43:51

That’s me, that’s my news.

Cameron  43:52

That’s the news.

Tony  43:53

Yep.

Cameron  43:54

You want to do any Q&A&V?

Tony  43:56

Yeah, let’s just knock some off.

Cameron  43:57

That’s what I’m call­ing it from now on, Q&A&V.

Tony  44:00

Is that what that meant? I saw it in the notes.

Cameron  44:02

Yeah, its Q&A&V. Ques­tion and answer and I don’t know what the V stands for yet, but it’s brand­ing. It does­n’t mat­ter what it stands for. It’s Q&A&V. Alright, Kazi, can we start with Kazi? “For small stocks like EVO how does rule 1 work? Should we alter or should we wait ’til end of day, etc.?” Now, I think you and I have talked about this a lit­tle while ago. So, EVO is Evolved Edu­ca­tion Group. They’re trad­ing at 70 cents, and so if you bought it at 70 cents and it dropped down to 63 cents, you would rule 1.

Tony  44:52

Cor­rect.

Cameron  44:52

That sim­ple. This ques­tion about — peo­ple have asked me this a few times late­ly, should you wait ’til the end of the day? I said, look, I don’t know about Tony, but I don’t get alerts until the end of the day, any­way.

Tony  45:04

Yeah, cor­rect. I’m the same.

Cameron  45:05

So, I look at them first thing in the morn­ing or at night. I see them at night and I just set a reminder to myself to do some­thing about it in the morn­ing. Mar­ket opens at 10:00, I wait to see what hap­pens ’til 11:00 and then I make a deci­sion.

Tony  45:24

Yeah, that’s my process. I did­n’t quite under­stand Kaz­i’s ques­tion, was he talk­ing about the fact that, like we did last week, that… is it 70 cents or 0.7 cents? I think one of the prob­lems was that Stock Doc­tor, for exam­ple, will give you three dec­i­mal places, where­as I don’t know if Yahoo Finance does that or what­ev­er. So, peo­ple were find­ing it hard to get 10% with­out see­ing that third dec­i­mal place.

Cameron  45:42

Yeah, but if you’re trad­ing a stock that’s two cents, it gets tricky.

Tony  45:47

So, I would still work out the rule one based on 10% to three dec­i­mal places. That’s the first ques­tion. The sec­ond ques­tion is, I’m guess­ing if this stock — I’m not famil­iar with EVO — is with a small ADT, it might be volatile.

Cameron  45:59

Yeah.

Tony  46:00

And so, they’re ask­ing if it cross­es dur­ing the day, will I sell? If you’re pay­ing atten­tion, yes, but like you I’ll get alerts at night after its closed.

Cameron  46:08

Yeah, I’ve set up all my Stock Doc­tor alerts now just to alert me at the end of the day. You’re get­ting alerts in the mid­dle of the day, it’s just too dis­rup­tive.

Tony  46:17

You want to live your life, too.

Cameron  46:20

And, you know, two years ago I did have them going in the mid­dle of the day.

Tony  46:25

And you’d send them to me.

Cameron  46:28

Yeah, what should I do, Tony? What should I do?

Tony  46:33

Did you get my email?

Cameron  46:35

If you did­n’t reply with­in five min­utes. And now I’m like, it can wait until tomor­row. It does­n’t mat­ter. Like, if it goes down to 12% or 13% in the inter­im, like it does­n’t real­ly mat­ter. As you always say, 10% of one out of twen­ty stocks is noth­ing, right?

Tony  46:56

Cor­rect, 0.2%

Cameron  46:57

So, don’t stress over it. I’m not exact­ly out play­ing golf, but I’m busy. I don’t have time to stop doing what I’m doing.

Tony  47:05

I think all the lis­ten­ers here, invest­ing’s their hob­by or their sec­ond…

Cameron  47:09

Not chair­man Mabb, he’s just sit­ting around, you know, going out to lunch from what I can tell. But every­one else, yeah. All right. Hope that helps, Kazi. No, we don’t change it, we stick to the rules. Alex asks, “if you already have sev­en­teen to twen­ty hold­ings and the rule is to always be invest­ed, what do you do in a mar­ket like this where your cur­rent hold­ings are Josephine’s and are no longer on the buy list but you have cap­i­tal to rede­ploy?

Tony  47:38

Okay, so they’ve got a full port­fo­lio? So, in that sit­u­a­tion if new cap­i­tal came in, I would nor­mal­ly just allo­cate it across the cur­rent stocks in the port­fo­lio. They’re say­ing they can’t do that, because it’s off the buy list?

Cameron  47:51

If they’re Josephine’s or off the buy list and there’s noth­ing else to buy.

Tony  47:55

Yeah, look, it’s hard, because I don’t know how much new cap­i­tal there is. If there was a, like, you know, 5% new cap­i­tal, it’s only one stock so I’d prob­a­bly by the top of the buy list and have twen­ty one stocks in the port­fo­lio. And then…

Cameron  48:07

What if there’s noth­ing on the buy list?

Tony  48:09

Well you can’t buy any­thing. Just sit on cash.

Cameron  48:12

Okay.

Tony  48:12

I think what they’re say­ing is they’ve got a port­fo­lio, it’s ful­ly invest­ed, they can’t add to it because it does­n’t meet the rules, but they’ve got new cap­i­tal, right? If they had, like, if they dou­bled their cap­i­tal, I’d prob­a­bly stay in cash until they sold some­thing and buy in. Because oth­er­wise, if you buy anoth­er twen­ty stock port­fo­lio, you’ve got forty stocks.

Cameron  48:33

Yes. If you’ve got $100 grand invest­ed and you get anoth­er $100 grand, you don’t want to put $100 grand into one stock when you’ve got five grand in each of the oth­er stocks.

Tony  48:42

Cor­rect, you’d be too out of whack.

Cameron  48:43

So… is that right? Twen­ty times five… So, you don’t want to buy twen­ty stocks.

Tony  48:54

Mm-hmm, twen­ty new stocks so you’ve got forty.

Cameron  48:56

So, you’d wait. You’d rede­ploy it.

Tony  48:57

Its prob­a­bly more like­ly that they’ve got $100 grand in the port­fo­lio, and they just got $10 grand. I’d buy anoth­er stock.

Cameron  49:05

Right. You’re allowed to go over twen­ty if you can’t do any­thing else.

Tony  49:10

Yeah. And then, as you nat­u­ral­ly sell off the twen­ty first, if you can allo­cate that into the port­fo­lio using the buy list with­out Josephine’s, then do that.

Cameron  49:21

So, you buy one or two more, you might get up to twen­ty-two, and then when you need to rule 1 or three point sell a cou­ple of things, you would try and spread that cap­i­tal even­ly across the port­fo­lio.

Tony  49:35

Yep. And by even, like, you’ll prob­a­bly find that you may only have four or five things you can buy, so you do it across those.

Cameron  49:42

Yeah. So, the idea is to try as best as you can to main­tain an equal amount of cap­i­tal invest­ed across your fif­teen to twen­ty. Some­times it’ll vary because of cir­cum­stance, but you’ll try and bal­ance it up when you can.

Tony  49:58

Cor­rect.

Cameron  50:00

Hope that helps, Alex. Dave asks, “hi Cam. Re: the lat­est pod­cast and Tony’s not­ing of a strong cor­re­la­tion between div­i­dend yield and the QAV buy list, I’ve exper­i­ment­ed with a cou­ple of fil­ters that also cor­re­late with the buy list. The screen­shot exam­ple below,” which obvi­ous­ly you can’t see, lis­ten­ers at home, close your eyes and con­cen­trate real­ly hard — I’m beam­ing it to you now Uri Geller style — “the screen­shot exam­ple below you can sort by price change,” this is, the screen­shot is Stock Doc­tor fil­ters here. “You can sort by price change, low to high five years and then three years, or price to NTA low to high, lots of QAV stocks sen­ti­ment not includ­ed. Oth­ers I’ve exper­i­ment­ed with are ROIC high to low,” Return on Invest­ed Cap­i­tal, “and EV, enter­prise val­ue, over EBITDA low to high, both with an ini­tial cull of price to cash flow less than sev­en. EV over EBITDA is Tobias Carlisle’s start­ing point, I think. Not sure if that’s of any inter­est, but it’s a qui­et arvo in Newy,” is there any oth­er kind of arvo in Newy, Dave? I’ve only been to Newy once, seemed pret­ty bloody qui­et I got­ta tell you. “It’s a qui­et avo in Newy so I thought I’d send it through.” What do you think about Dav­e’s… Oh, and he says, “thanks for final­ly cov­er­ing PTL as your pulled pork.” What do you think about Dav­e’s fil­ters, Tony?

Tony  51:34

Yeah, they’re good. I mean it’s sim­i­lar to the Lit­tle Book that that Beats the Mar­ket, the Tobias Carlisle book.

Cameron  51:43

Thats not his book.

Tony  51:44

Oh.

Cameron  51:45

Yeah, Lit­tle Book that Beats the Mar­ket is by some oth­er guy.

Tony  51:50

Any­way, sim­i­lar to that in terms of a sim­ple fil­ter you can apply. They’re all real­ly good fil­ters, and that’s, you know, the basis of of this style of invest­ing.

Cameron  52:06

Yeah, no, Lit­tle Book of Behav­iour­al Invest­ing, that’s James Mon­tier. Christo­pher Brown…

Tony  52:11

So, we’re just googling “who wrote Lit­tle Book…”

Cameron  52:13

Not googling. I’m look­ing through my list of books.

Tony  52:17

Any­way, so, Dave, real­ly good analy­sis. Gen­er­al­ly, what I find is doing a sort like that on one met­ric — and the one I start­ed off with was price to oper­at­ing cash flow — will get you above aver­age returns. And then, all the oth­er things on the check­list will add the cream or the bub­ble to that and take it from maybe 15% to 19%.

Cameron  52:39

It’s not that book that you’re think­ing of? No? Okay.

Tony  52:41

Cameron’s just opened a Not Safe for Work book…

Cameron  52:45

Safe for my work. My boss saw this book and went, “yeah, alright!” It’s an art book. It’s by Taschen, it’s classy.

Tony  52:55

Okay. Yeah, so, sor­ry, Dave…

Cameron  52:59

This is why we do it over Zoom.

Tony  53:07

I can’t nor­mal­ly see Cameron’s lap­top. Any­way.

Cameron  53:12

And I’m wear­ing pants this time, too.

Tony  53:13

Yeah. So, Dave, they’re all good exam­ples. What would be real­ly good as if you can tell me whether those stocks — because we’re doing sta­tis­ti­cal analy­sis here, so if any of those met­rics are per­form­ing bet­ter than the check­list, then let’s wrap those into the check­list.

Cameron  53:28

Job for the intern? Dave, you’re the new intern.

Tony  53:33

Only in the after­noons. Great analy­sis, Dave, I like the way you’re think­ing, and we’ll need to do some more analy­sis about whether we can add those to the check­list.

Cameron  53:43

Good stuff. Okay, you want to do Bri­an’s?

Tony  53:48

Yep.

Cameron  53:48

Bri­an says, “I’ve been look­ing into the price to con­sen­sus tar­get fig­ures from Stock Doc­tor that are used to award — or not — a point in the QAV spread­sheet. Based on a down­load from the 23rd of May, the price to con­sen­sus tar­get aver­age is 70%, medi­an is 73.7%. A few months ago was 84%. There are 578 stocks less than or equal to 100% and only 37 stocks greater than 100%. With our hur­dle of 100%, almost every punter gets a prize. 94% of stocks get a point, so the test is not doing much. Fur­ther, look­ing at the num­ber of ana­lysts there seems to be a strong cor­re­la­tion and makes me doubt the val­ue of a con­sen­sus tar­get when there are only a few ana­lysts.” And he’s got a graph here which sort of maps both of these things out, a num­ber of ana­lysts and Stock Doc­tor price to con­sen­sus tar­gets, and they seem to match fair­ly close­ly. “Based on the above, I favour alter­ing my spread­sheet to give one point only if there are more than, say, five ana­lysts, and the con­sen­sus tar­get is less than, say, 80%, which would give about 50% of stocks pass­ing the test rather than 94%. Is this fuzzy think­ing? If so, please enlight­en me, Bri­an.”

Tony  55:10

I think you’ve enlight­ened us, Bri­an. So, a bit of back­ground. The con­sen­sus tar­get got into the spread­sheet because I had found doing my own analy­sis that my IV cal­cu­la­tions, IV1 and IV2, weren’t as good at fore­cast­ing where share prices were going to go to com­pared to the con­sen­sus fore­cast. At the time, Stock Doc­tor was doing their own IV fore­cast — or cal­cu­la­tion — and so was Scaf­fold, which isn’t around any­more, that was anoth­er ana­lyt­i­cal ser­vice that I use. They also had their IVs. And so, I took all of those par­tic­u­lar things and put them in the check­list as a radar map of val­ue, of val­u­a­tion, because no one gets it right and it was good to have dif­fer­ent ways of doing it. Stock Doc­tor don’t do it any­more and Scaf­folds gone, so we’re real­ly just down to con­sen­sus tar­get plus IV 1 and IV 2 that I cal­cu­late. So, I mean, Bri­an’s analy­sis shows that if you have lots of stock­bro­kers work­ing out what they think the con­sen­sus tar­get is, they usu­al­ly get it close to the cur­rent price or slight­ly above.

Cameron  56:22

Is that because they’re set­ting the mar­ket for the price, they’re telling the mar­ket what it should be worth?

Tony  56:27

Yeah, well, I think there’s two things at play. One is you’re get­ting the aver­age of a larg­er num­ber. So, you know, if you have two stock­bro­kers and one says it’s worth $10 and one says it’s worth $1, the con­sen­sus is $5, and that that could be wrong sta­tis­ti­cal­ly. Where­as, if you have fifty stock­bro­kers and they have a range, you’re gonna get an aver­age which is prob­a­bly more usable. So, it’s part­ly that, but part­ly what you’re say­ing, like, if there’s ten stock­bro­kers analysing a stock it’s going to be a large stock and they’re going to have a to and fro of con­ver­sa­tion — it’s going to be like Com­mon­wealth Bank or BHP — but with whole divi­sions of share­hold­er depart­ments who are talk­ing to the ana­lysts all the time about what’s hap­pen­ing in the bank. And so, the stock­bro­kers, they do have a bet­ter idea of what is going on with the com­pa­ny and can pro­vide a bet­ter con­sen­sus fore­cast, and then look at the oth­er stock­bro­kers and say, “what’s he think­ing, or she think­ing? I’ll change my mind.” So, that’s going on. So, I agree with Bri­an’s analy­sis. I think also at play with stock­bro­kers’ con­sen­sus tar­gets is the need to get busi­ness from the com­pa­ny. So, I mean, they’re inher­ent­ly con­flict­ed. Even if I thought BHP was worth half what the cur­rent share price is, I’m not going to pub­lish that if I’m a fund man­ag­er or banker because I might want to get invest­ment bank­ing busi­ness out of BHP. So, there’s def­i­nite­ly that. Or, I might just want to get access to the BHP CEO. If I keep crash­ing, the com­pa­ny’s not gonna let me talk to him. So, there’s that going on, too. So, don’t know where that leaves us, because Bri­an’s right; his analy­sis is say­ing that most stocks get a point, so I need to go away and think about that. Whether we invert it and say that we give it a neg­a­tive one, you know, if it’s above the con­sen­sus tar­get because that’s a small num­ber of stocks then that might be more mean­ing­ful, but I’ll have to go through and think about it.

Tony  57:03

Okay. Smart peo­ple. I was say­ing this on the Zoom call last night, we have smart peo­ple.

Tony  58:32

A cou­ple of good insights there. Yeah, it’s good.

Cameron  58:36

James has a ques­tion. “Sum­it­o­mo…”

Tony  58:39

We spoke about it.

Cameron  58:40

Yeah, we’ve done that, sor­ry, James. Anoth­er James. That was James O. James L: “I have some ques­tions for the show. For IV 2 the for­mu­la is the future EPS over the mar­ket hur­dle rate. In the Bible, the mar­ket hur­dle rate is giv­en by adding the RBA cash to risk pre­mi­um of 6%. Should we be updat­ing this to be 6.3% giv­en the recent rate rise? If that’s the case, could it be set up like the mort­gage rate, i.e. a vari­able and not a fixed val­ue in the for­mu­la?”

Tony  59:08

We did that two or three weeks ago.

Cameron  59:10

That’s what I thought you did, yeah.

Tony  59:14

Oh yeah, we can do that. No. Check your inbox.

Cameron  59:19

Yeah. I was­n’t sure because I don’t use your sheets, I was­n’t quite sure. “Two: Tony might have cov­ered this before, but is there any rea­son why we use ME close,” month-end close, “for deter­min­ing the Josephine. I don’t think it would be too dif­fer­ent from price change one month.”

Tony  59:40

Yeah, I’d have to see how easy it is to get a hold of a rolling month price change. It’s just ease of data, real­ly. Stock Doc­tor on a chart gives us the month end price and then the cur­rent price, so you can com­pare them.

Cameron  59:55

I think they give us, there’s a price change one month fil­ter.

Tony  59:58

You can do a fil­ter, yes. So we could do it on the fil­ter, you would­n’t see it on the graph though.

Cameron  1:00:02

Yeah. Right.

Tony  1:00:04

Or on the Bret­te­la­tor. But yeah, it’s a good, good ques­tion again.

Cameron  1:00:07

There’s no par­tic­u­lar rea­son why we use month end.

Tony  1:00:10

Ease of just being able to see it on the graph. Yeah. But rolling month might be bet­ter.

Cameron  1:00:17

Well, now we have David Plants’ code in the score­card every week that tells us if it’s a Josephine. Don’t need to wor­ry about it any­more, it’s all tak­en care of.

Tony  1:00:26

Well — was it David, was it?

Cameron  1:00:28

David.

Tony  1:00:29

Can he also put a col­umn in, then, which tells us the rolling month — per­cent rolling month?

Cameron  1:00:37

David can do any­thing.

Tony  1:00:38

And then can he analyse it and see which is the best one to use?

Tony  1:00:40

Well, David, that’s great! I’ll buy him a beer.

Cameron  1:00:40

Yes. You’re the oth­er new intern, David. He’s also, he offered on the Zoom call last night to port his work to Google Sheets for peo­ple who don’t have Office 365, so they don’t have access to Office. He’s gonna have a crack at that.

Cameron  1:01:01

Tony  1:01:02

Oh, okay.

Cameron  1:01:03

Yeah. Are we allowed to go to WA yet?

Tony  1:01:04

We are, right.

Cameron  1:01:06

I told him we will be over at some point to do an event in WA. Last­ly, from James L, a for­mu­la ques­tion: “if I’m using an old ver­sion of the check­list, please let me know, this might have been fixed.” I don’t know, just down­load the lat­est ver­sion James, like, it’s pret­ty easy. But any­way, he says, “for col­umn S, is the PE less than the div­i­dend yield cell type for­mu­la,” and then he’s got a long for­mu­la, “which way should we go if the PE is equal to the div­i­dend yield?” So, it seems to say…

Tony  1:01:40

I have to go and look at that for­mu­la in detail, Sor­ry, James. I’ll get back to that one.

Cameron  1:01:44

Is the PE less… Okay, I don’t know.

Tony  1:01:51

What cell is it?

Cameron  1:01:53

Oh, col­umn S. Excel for­mu­las are above my pay­grade, James. Okay, thats that. Dave, last ques­tion: “Tony has men­tioned in the past that he usu­al­ly uses the exact pro­ceeds of a sale when buy­ing into a new stock. Are there excep­tions to this? For instance, when a stock has done excep­tion­al­ly well, say dou­bled, would he instead use the pro­ceeds to pur­chase two stocks? Does he add the pro­ceeds from recent div­i­dends into the next pur­chase, more broad­ly acknowl­edg­ing his approach to rebal­anc­ing. Does he aim to keep the size of the new pur­chas­es with­in cer­tain bounds?”

Tony  1:02:32

So, a cou­ple of ques­tions there. So, I gen­er­al­ly sell some­thing and buy some­thing with the pro­ceeds, even if it’s a big sale. So, if it’s dou­ble the size of the oth­er stocks, I just buy one.

Cameron  1:02:43

You just buy one stock with it, you don’t spread it even­ly?

Tony  1:02:46

I don’t spread it even­ly and I don’t split it, because then I’ll start get­ting more than twen­ty stocks in the port­fo­lio.

Cameron  1:02:52

No, but you could spread it even­ly across ten stocks.

Tony  1:02:56

I could, I just don’t. I just buy one. I find that over time there’ll always be one out­per­former like that, and if you wait enough time the port­fo­lio adjusts.

Cameron  1:03:03

Oh, okay, so you just let it, sort of, breathe and it’ll get there in its own time.

Tony  1:03:07

Yep. So, I do that. In terms of what I do with div­i­dends, they’ll sit in the bank account until they get used to buy stocks in the future or there’s enough cash for a posi­tion.

Cameron  1:03:21

I thought you said before you use div­i­dends to pay your CGT bill.

Tony  1:03:24

Yeah, so there’s mon­ey com­ing in and going out. There’s inter­est pay­ments which I can use div­i­dends for, but there’s also some­times new cash com­ing in — like tax refunds. So, there’s gen­er­al­ly always 1 or 2% of cash in the accounts. So, for exam­ple, as I’ve said before, I have shares invest­ed in a Super­an­nu­a­tion fund, some in a fam­i­ly trust, some in our own names. The Super­an­nu­a­tion fund, the mon­ey can’t leave. So, again, you can’t — well, you can gear it, but I don’t gear it. So, when that builds up to 5%, buy a share. But it’s more like­ly that I will have rule 1d some­thing, and then I’ve got, like, nine tenths of a posi­tion, and so I’ll just add the cash that was sit­ting in the fund to that and then get a full posi­tion out of it.

Tony  1:04:09

Right.

Cameron  1:04:10

Yep. Okay. Was there any more to this? Do you aim to keep the size of new pur­chas­es with­in cer­tain bounds? No.

Tony  1:04:19

No. Well, my rule is one fif­teenth of the total port­fo­lio val­ue if I have a new pur­chase.

Cameron  1:04:26

One fif­teenth. Right.

Tony  1:04:30

You could say one twen­ti­eth, but I use one fif­teenth. I pre­fer to err on the small side. You’ve got room to move if you need to add one and make it six­teen shares, not fif­teen shares.

Cameron  1:04:41

Right, but this is dif­fer­ent to what you said before. If you sell some­thing, you just buy one share with all of the cash, but you’re say­ing if you have new cash…

Tony  1:04:50

Yes.

Cameron  1:04:51

Right.

Tony  1:04:51

Yeah, which I think was a ques­tion there.

Cameron  1:04:53

Yeah, prob­a­bly. Well, that’s it.

Tony  1:04:56

Good. Well, a spe­cial record­ing today.

Cameron  1:04:59

Yeah.

Tony  1:05:00

Get to do it in per­son which is nice.

Cameron  1:05:02

Yeah. We haven’t done after hours yet.

Cameron  1:05:04

Oh, sor­ry.

Cameron  1:05:05

Oh man, I’ve had a great week of after our stuff…

Cameron  1:19:07

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