QAV 408 Transcript

Episode: QAV 408 Club

Length: 1:13:44


Cameron Reilly [0:05]: Welcome back to QAV. TK, how was your tiny second holiday in as many weeks?

Tony Kynaston [0:12]: The minnie break was good. We went up to Shoal Bay for a few nights, which is on the water north of Newcastle.

Cameron Reilly [0:19]: Newcastle whenever I had to say that.

Tony Kynaston [0:24]: Seems like it’s a test of your working-class credentials, but everyone up they call it Newcastle. So, I don’t know which is right.

Cameron Reilly [0:32]: Newcastle.

Tony Kynaston [0:37]: But It was nice. Yes, good. And we had a friend who had a 60th over the weekend. So, it’s been a big sort of five or six days.

Cameron Reilly [0:44]: Is that why you were away? Was that for that or it was a separate thing?

Tony Kynaston [0:47]: No, just coincidental we arrange it to follow up.

Cameron Reilly [0:51]: What did you do in, was it Shell Bay?

Tony Kynaston [0:55]: Shoal Bay.

Cameron Reilly [0:56]: Shoal Bay. What did you in Shoal Bay?

Tony Kynaston [0:58]: Not a lot to do there. It’s just a nice little place. We had a nice dinner in an old-style pub. We had sort of a plantation-style, which was nice, and went for a long walk. And then we spent a day up in the wineries in the Hunter Valley doing some wine tasting, which was nice.

Cameron Reilly [1:17]: Lovely. I was just looking at some, a website for Shoal Bay looks very pretty. I’ve never heard of it before. I’ll have to check it out.

Tony Kynaston [1:24]: Yes, there’s a port Steven Nelson Bay in Shoal Bay, they’re all on the same sort of area, different sort of buyers coming in off the ocean. Pretty. Reminded me a bit of a museum it’s got a very narrow, rocky inlet with almost a mountain on the side of it.

Cameron Reilly [1:45]: Add this to my list of things for my new travel podcast places to go, Shoal Bay. Well, a couple of people on the Facebook group was sort of surprised. I think Phil Muscatello was saying, Tony told me that reporting season is his busiest time of the year is going away and another holiday and I’m, well, for Tony, the busiest time of the year, see, he’s coming from a low base. He can take four days off in a week, work half of the last day, still the most work he’s done. Living the dream, as somebody said. Good for you. That’s good.

Tony Kynaston [2:34]: Thank you.

Cameron Reilly [2:36]: All right. Well, we’ve got a lot on this week. So, let’s get into it. We sold [cross-talking 2:45].Well, we sold us we truly sold something [inaudible 2:48] that happens.

Tony Kynaston [2:51]: Yes. [cross-talking 2:52] right thing on that one. But anyway.

Cameron Reilly [2:55]: Really?

Tony Kynaston [2:55]: Well, it was going down and down. And we knew that this is portal resources. And we knew that Chris Corrigan, I think he was a 30% shareholder had sold out, which was sending the share price tumbling. But as soon as we sold it, it went up 10%. It was a 50/50 call. And we could have held on because it hasn’t crossed the three-point trendline yet for a sell was using the rule that if there’s a major shareholder selling that could be assigned to sell. And I think it dropped from about 10 cents down to seven cents a share when that happened. And I think our sell prices maybe sort of four or five, six, maybe five, so I did look to me, like it was going to break it and why to hang around for that last two cents to drop, but it stabilized after that.

Cameron Reilly [3:53]: Anyway. Well, we replaced it with VUK. It’s done okay. It’s all been made up for by good old Copper Mountain. I’m not even going to try and say the code because I always get it wrong. Copper mountains up 190%. Since we bought in October, it’s done as well as FMG has in two years in like three months.

Tony Kynaston [4:26]: It’s incredible. And it was a good article on the fin review. I think I sent it through to you about copper, and how it’s going up?

Cameron Reilly [4:35]: Well, you called it for those people that are relatively new. A couple of months ago, I think it was back in October, Tony was looking at index Mundi, which charts a lot of things but commodity prices amongst them. And notice that copper was ticking upon the commodity price and had a look at our buy list and we had a copper stock that was on the buy list C6C there I got it right and say, let’s buy some of that and it’s gone gangbusters. You also said Allah minimum was going up. So, we bought Capral, CAA and hasn’t done as well. It’s not bad. It’s up 23% since then, so it’s alright, but it’s not up 190% That’s crazy.

Tony Kynaston [5:16]: No, I also bought some sand fire resources for myself which is on the buy list. And that jumped about 10% during the week because of copper. So, it’s up a little bit but not C6C.

Cameron Reilly [5:28]: Yes, right. Good call. Well, speaking on I won’t get into that I might jump ahead that much. GME, the whole rated GME Keith Gill, aka deep effing value, aka roaring kitty. I think is his YouTube name, he’s a millionaire. He’s the guy that started the whole thing. He’s a millionaire who testified in front of Congress, as the price was going up, he sold a bunch of options on the way up that he had and ended up getting 13 million in cash, took some of the cash, and bought more stock with it hasn’t sold a single share, but sold a ton of options on the way up. He’s testified in front of Congress about the whole thing, but he’s also being sued. What didn’t reveal to people during this whole process that he’s a registered stockbroker which he should have done really for full transparency. But anyway, so that’s the latest there, he’s being sued. But he did make millions out of the whole thing, as you predicted.

Tony Kynaston [6:56]: Yes. And hopefully, he was telling people, he had options on the way up as well. And he was a stockholder. Otherwise, it is just pumping and dumping isn’t just using YouTube and read it instead of the telephone from 10 20 years ago.

Cameron Reilly [7:12]: Yes, maybe. I don’t know. What’s the difference between pumping and dumping and just saying I like this; I’m going to buy it?

Tony Kynaston [7:21]: Well, my understanding is he didn’t say that he pulled it both options, is actually a wall street broker, or if he’s not Wall Street as a broker, and then started pumping it, and then started to sell out of the options as the share price rose. None of that was disclosed. That’s a pump and dump.

Cameron Reilly [7:39]: But he also bought more shares on the way up.

Tony Kynaston [7:43]: Yes, okay. [Inaudible 7:44] I suppose. So, maybe it’s a fudge pump and dumps?

Cameron Reilly [7:48]: I guess they probably have to look at the timing of events. What did he own? When did he own it? When did he buy it? When did he tell people to buy it? And if you’re just an average punter, and you say, I like this stock, and then people jump on and you do well over it. Is that different to you being an average punter, who also happens to be a stockbroker? Who tells people to do that? I’m not sure what the legalities are in the United States around that kind of stuff. But I imagine it would be frowned upon.

Tony Kynaston [8:22]: Yes, well, its market manipulation, isn’t it? But I bought something and I pumped it as big an audience as I can. And I’ve sold something, some of it anyway. To my benefit.

Cameron Reilly [8:34]: But the flip side of that argument is we’ve talked about what about the hedge funds who, buy a bunch of puts and then go around pumping up why it’s such a sucky business? Brought the price down and you profit from it. They do that all the time, apparently, and get away with it.

Tony Kynaston [8:51]: They do. That’s right.

Cameron Reilly [8:52]: Let’s call it selling your book or something like that.

Tony Kynaston [8:55]: Or talking your book.

Cameron Reilly [8:57]: Talking your book?

Tony Kynaston [9:00]: No, I think that does happen. And that’s pretty much standard practice for any investment bank, they’ll put big stars on the stocks that they either own or they’re doing work for Sega was be aware of that. But I understand what you’re saying. I think it’s a difficult one. I think it’s market manipulation. He held the position and went out through YouTube to pray that to a large audience and pumped it and then sold on the way up to the game. He did buy some more back so it’s not all bad, but to me, that’s market manipulation.

Cameron Reilly [9:36]: Well, again, I feel sorry for the poor punters that are still holding on.

Tony Kynaston [9:43]: I don’t feel sorry for them, they are all greedy and didn’t know what they were doing.

Cameron Reilly [9:49]: Yes, but they were dumb. Don’t you feel sorry for dumb people?

Tony Kynaston [9:56]: Because they dumb, dumb things happen to them. They completely duped. Yes, I feel sorry for them.  But if the shoe was on the other foot, and they were now crying about the million dollars they all made out of GME. I wouldn’t be going around patting him on the back on it. So, don’t feel too sorry for them.

Cameron Reilly [10:22]: Wow. You’re a hard man, Tony. What’s your deal? Why are you so cold and bitter?

Tony Kynaston [10:33]: I’m not cold and bitter. Hopefully, these people didn’t put all their life savings into it. I don’t think they did.

Cameron Reilly [10:44]: No. Well, I don’t know. People who know what people did but reminds me of something I put in our newsletter. Last week. Well, this week, yes, this is from James Montier’s book, The Little Book of Behavioral Investing he a little table in it. A good process the delivers a good outcome is deserved success. A good process that delivers a bad outcome is a bad break. A bad process that delivers a good outcome as dumb luck, and a bad process that delivers a bad outcome as poetic justice. I was thinking about putting that on a coffee mug. And he goes on to say in the book, people often judge a past decision by its outcome rather than basing it on the quality of the decision at the time it was made.

Given what was known at the time. This is outcome bias. Psychological evidence also shows that focusing on outcomes can create all sorts of unwanted actions. For instance, in a world in which short-term performance is everything, fund managers may end up buying stocks they find easy to justify to their clients, rather than those that represent the best opportunity. In general, holding people accountable for outcomes tends to increase the following focus on outcomes with the highest certainty which is known as ambiguity aversion, collection and use of all information both useful and useless.

Preference for compromise options, selection of products with average features on all measures over a product with mixed features, i.e., average on four trades preferred to good on two and bad on two degrees of loss aversion that people display. None of these features is likely to serve investors well, together, they suggest that when every decision is measured on outcomes, investors are likely to avoid uncertainty chase noise, and herd with the consensus. Sounds like a pretty good description of much of the investment industry to me, he writes.

Tony Kynaston [12:52]: Yes, that’s right. So, it’s all groupthink and index hugging to use that risk aversion.

Cameron Reilly [12:58]: Index hugging I like that. It’s a good process. You follow a good process sure. It’s not going to work all of the time, but you’re following a good process. And you hope that because it’s a good process, it’ll work more times than it fails.

Tony Kynaston [13:18]: Well, and I think that’s right. And I think the point of the article is that I’m not going to measure myself on quarterly earnings, or even six-monthly earnings, or even potentially yearly earnings. It’s got to be over the long term. But if you’re a fund manager, and you are being monitored monthly, on your performance, you do tend to try and mitigate risk, and that mitigation of risk takes you away from your process. And they can’t survive, say two or three bad quarters, well look at all of the value funds, which are out there which have lost mandates and lost money that was invested in them. That’s why people keep saying value investing is dead. Because it’s the funds out there that hold themselves up as value investors, which people taking money out of for growth funds instead. Because the people are doing what that article says they shouldn’t be doing, which is looking at short-term results.

Cameron Reilly [14:20]: Speaking of accountability and outcomes, you sent me this article about disclosure changes.

Tony Kynaston [14:28]: Yes, so it was a bit annoying when I saw that it’s just a summary over COVID-19. The government loosened up disclosures but tightened up the law around a director board being able to be sued or companies being able to be sued by shareholders, who had suffered adversely because the company hadn’t either disclosed everything or had been selective in its disclosures and as a general rule of the law, say as soon as the company comes into information that might affect the share price, they need to disclose that to the public. And that law was watered down a little bit during COVID. Because the government listened to the company directors who said, this is such an uncertain time, we don’t want to be liable if we know something happens out of the left field, and we don’t follow the disclosure rules appropriately. And we want to be the slack.

And so, they are given that slack. But the government then came out last week and said, we’re going to keep this as a permanent watering down of disclosure laws. Now, the problem that’s happening out there with listed companies is that because over the last, say, five years or so, there’s been a lot of class actions against directors of companies around continuous disclosure. And if I think about some of them, Coles, sorry, Myer had a class action that they had the several because this previous CEO came out and said one thing, and then a few months later, the share price went down dramatically. And the prospects for the company were very different from the guidance he was giving a month earlier. And so, there was a class action about that. Companies like AMP, have faced class actions over whether they’ve been disclosing everything that’s going on inside the company. Because the share price is going down, and shareholders have lost money because of that

The flow-on effect from that is that directors are finding it hard to get directors liability insurance, the premiums are going through the roof. And generally, that insurance is taken out by the company for the director. But it’s becoming a prohibitive cost. And so, the government was trying to solve that problem. And did it by making the disclosure laws a little bit looser, therefore making it harder for class actions to happen. I think that was a pretty weak sort of solution to the problem, I would have rather have seen something to address directors’ liability premiums, and or class actions, rather than continuous disclosure, because continuous disclosure needs to happen in a share market. Otherwise, we either don’t get the information or someone gets it before we do, which are both bad things for investors. And just on that, I think the directors are being sued, because they haven’t always acted in the way they should. And just to say that’s a problem, and therefore making it harder to be sued isn’t addressing the problem. The problem is the directors need to improve their game a little bit, too. So, as we all know, it’s the big end of town.

I guess it doesn’t matter who’s in government, but they’re big donors to the parties. And when they say they’d like to change, it generally happens. So, I think this is the sort of wrong change, but it just tried to solve the right problem. And the broader issue is that the concept of limited liability for companies is an important one if you’re a director of limited liability, publicly-traded company, and something happens that goes wrong in that company, your assets shouldn’t be able to be taken away from you because of that. And that’s where things are heading with class-action lawsuits that are happening, I think there’s only been one, maybe two cases, I can think of that where a director lost personal assets because of their activity on the board. So, it’s got to be a pretty serious thing for that to happen. And it’s generally covered by the liability insurance they take out. But as the liability insurance becomes skyrockets it becomes prohibitive to take it out. And companies and boards try and trim down what’s covered to reduce their premiums. And so that concept of being shielded from personal liability gets lessened as well. So, it’s a real problem that needs to be stopped. I just think this is the wrong way to do it.

Cameron Reilly [19:13]: When you say the cost of liability insurance is prohibitive, how prohibitive, we’re talking about the director class that is making a ton of money from being senior executives and board members of these companies. The companies are making money hand over fist how prohibitive isn’t really?

Tony Kynaston [19:32]: Probably not for the big companies. A couple of things have happened. I know that the number of insurers who are offering directors liability insurance has shrunk. So, for example, some of the big insurers out of London won’t even touch Australia anymore. For director’s liability insurance. And I think the risk that is worrying directors is that they’re paying sometimes up to 10 times more for directors’ liability insurance now than they were. But there’s a smaller pool, and the pool is whittling away the benefits of directors’ liability insurance, which I think is that you need to have director’s liability insurance you if I went on the board of, XYZ Corporation, I’d only do so if I knew that if something went wrong at XYZ Corporation, they wouldn’t come and take my house away from me. If that doesn’t work, then you stop having directors. Who would want to risk it going on a board? And then you have, either no directors or very poor-quality directors, and we don’t want that either.

Cameron Reilly [20:39]: So, there needs to be a balance here somewhere.

Tony Kynaston [20:41]: Correct. And that loosening disclosure laws, I don’t think is the right way to solve this problem. The government couldn’t, for example, have set up their pool of directors’ liability insurance. And the same way that says, workers comp works in New Zealand. So, all the companies pay into a fund, it’s monitored by the government. And it covers the liabilities whenever there’s a problem. That’s one way of doing it. Then there are potentially other ways of doing it as well, I could have just changed the law on allowing class actions rather than changing the law on the process of ongoing disclosure.

Cameron Reilly [21:22]: The government’s got tense for running an extortion racket for Rupert Murdoch and Kerry Stokes against Google and Facebook.

Tony Kynaston [21:32]: Did you just call me Ray?

Cameron Reilly [21:35]: No. Did I?

Tony Kynaston [21:39]: Yes.

Cameron Reilly [21:40]: Again?

Tony Kynaston [21:41]: Yes.

Cameron Reilly [21:42]: Holy shit. I did a show with Ray this morning where we were talking about this. [Cross-talking 21:48].

Tony Kynaston [21:50]: You can’t talk in your sleep.

Cameron Reilly [21:53]: Anyway, let’s move on.

Tony Kynaston [21:56]: We did that. Google and Facebook and those companies pay no frigging tax in Australia. Why we are tackling that problem first is beyond me? Rather than propping up Rupert Murdoch, it’s unbelievable.

Cameron Reilly [22:11]: Yes, it’s a whole. We could go on about both of those things. But let’s not get sidetracked, Tony. Now good enough stuff pertinent to what we’re talking about journal entries. You put out a bunch of journal entries this week, in the last week.

Tony Kynaston [22:29]: Yes, last companies company reporting season.

Cameron Reilly [22:31]: There are many highlights that you want to talk about the stock of the week or anything?

Tony Kynaston [22:37]: Yes, stock of the week, I think is worth talking about. And I’m going to make ANZ bank the stock of the week. And last time I looked they have a QAV score of point four, so it’s quite high up the list of a large company, ANZ bank, everyone would know about it unless I guess they’re overseas but a large Australian bank, one of the big four. So, the 20 odd percent market share. I recall going back when the bank started reporting in around August, last year, the cue QAV scores were really good, but the sentiment was still down. So now that they’ve had a very solid uptrend, and we’re getting above the three-point bar lines the uptrend is as a breakout, if you like, it’s pretty clear the banking sector is now doing well. The key for me is they’re writing back the bad debt provisions they took out during COVID. And maybe a little bit before that, but particularly during COVID.

So COVID hasn’t been the big disaster that everyone thought it would be for the banks, and then they are recovering. And those provisions in the share prices are recovering. So, I find this happens from time to time in my investing process. I don’t set out to buy bank stocks. But suddenly we have lots of bank stocks on our buy list. And that tends to happen from time to time. So, it’s been iron ore, it’s been its often commodity base, as we talked about before, it’s copper at the moment, with gold three or four years ago, at one stage it was airline companies. So, industries are cyclical, and they have the day in the sun. And I think banking is just starting to have this. So, the big solar companies, I think people have been gun shy of them for a little while. And just to put some background around that, around the time of the GFC in particular, and maybe a little bit after that. When bank interest rates were, pretty paltry, and they look great now but back then now maybe two or 3% if you put your money on deposit. Now you bugger all, you’ll be getting one if you’re lucky. But people were buying bank shares for the dividends and the bank’s gotten to this kind of trap of pandering to their large retail shareholder.

The biases and paying out 80 or 90% of their profits in dividends, which gave them good yields of sort of six or 7%. And so, the superannuation army supported them for a long time. But you can’t run a business on 10% of the profit. And eventually, under-investment in technology, in particular, started to play out as a theme for them, and the bank share started going down. And that became a vicious cycle as the retirees started selling out. And then COVID came along, and that knocked them down in another run. But now things are looking out for them. And this is probably the change to reset their dividend payout ratios back to a more normal level, they’ll always be high payouts because they did not monopolistic businesses, they don’t need a whole heap to grow because they just chug along. profits to be reinvested to grow, but they need some. So, I think that the banking industry is looking good. And who knows what will happen? I don’t want to forecast but generally when I say industries in this kind of nascent position are trying to turn up. It usually ends up pretty good.

Cameron Reilly [26:12]: Alright. Well, I don’t need to do a chart on it because it looks pretty obvious what the chart looks like. Last week, your stock of the week was Bo Q, I think and we’ve got a couple of questions about that this week in their acquisition’s slashes merger with ME Bank. We’ll get into that a little bit later on. All right. [inaudible 26:34]anything else you want to talk about from the stock journal, anything else, grabs your attention this week?

Tony Kynaston [26:41]: No, I had pizza. It’s a fast and furious week, I was just doing another download. Before that became on the show. And I had to stop because there were so many new results in so I’ll probably put out a journal tonight or tomorrow about it. But people should be doing their downloads quite diligently this week and next week, maybe the week after. Because it will change quickly.

Cameron Reilly [27:03]: All right. Well, let’s get into the questions then. Andrew said hi, Cam and Tony in his book valuable. Roger Montgomery repeatedly suggests the return on equity as a metric for assessing the quality of a company. And as a possible indicator of future changes in the share price. The concept makes sense to me. But I didn’t feel Roger provided anything other than anecdotal evidence to support his argument. As a result, I’ve done my analysis. And I thought perhaps you guys and maybe other listeners might be interested in what I found. I’ve looked at the top 150 companies on the ASX and pulled data from stock Dr. Going back half-yearly to June 2010 were available.

I looked at return on equity net debt to equity and revenue growth one year with a corresponding share price a couple of months later, I then put the data into a statistical software package and looked for correlation, and ran a multiple regression analysis. To summarize the findings, there is no significant correlation between net debt to equity and share price. There is a weak correlation between revenue growth, but it does not have a significant influence on subsequent share prices. However, there is a significant correlation between ROE and share price. Across all the top 150 companies with other factors remaining equal a 1% increase in ROE was associated with a 42-cent increase in share price over the next five months.

For the subset of companies with a share price above $20, The effect was more pronounced in this group, a 1% increase in ROI was associated with a $1.40 increase in share price over the same timeframe. Statistically speaking, I think the results are significant enough that I’ve amended my spreadsheet accordingly. I know we already look at increasing equity. However, there are examples example BHP, where are we are increasing along with share price, while the equity of the business has decreased. I think in these cases ROE might be a better metric to use. So, for the time being, all of us both and see how it goes anyway, I thought you and the other listeners might find this interesting and hopefully even useful. Kind regards, Andrew. What do you think of all that, Tony?

Tony Kynaston [29:24]: Well, lots to talk about there isn’t there? Let me start with a general overview of my thoughts on return on equity. And basically, everyone who teaches about share market investment starts with return on equity. And the basic premise that you should be investing where the returns are the best. And if you think about it’s what we do, when we seek, someone to listen to or someone to put money into if we’re looking for a farm manager, we’re looking for the person with the best return.  So, that’s a kind of return on equity. So, my return on equity as an investor is 19 and a half percent over 25 years. And which is basically, the starting equity for the yield on any equity minus or starting equity and the difference is more increased, which is the return put over the equity, gives a percentage.

So, fundamentally, we should be putting our money with the high ROE companies, all things being equal. And that’s how I started out investing. But what I found pretty quickly was, every person in the share market is looking for high ROE companies, and guess what happens, the price goes up. And so, the high ROE companies tend to be the higher-priced stocks. And if you’re paying too much, even for a really good company, your returns on the price you’ve paid aren’t that great. And I even developed a metric that I use for a while called return on purchase equity. So basically, if a company was getting, 30% return on equity, I had to pay $2, for every dollar of equity, when I paid for the share price, then I wasn’t getting 30% on the piece of equity I purchased it was I was getting 15%. And so that’s an important thing to understand that there’s a difference between a good company and a good investment.

So, there are a few things that play out there. And that’s one of the reasons why I became a value investor. So, the idea is to find a company that is a high ROE low price, or that you can buy for less than dollar equity. So might be sort of medium ROE, but you’re paying less than $1 for a dollar’s worth of equity. So, you’re getting a bit of a boost on the ROE that you’re getting for your purchase of equity. Or trying to find companies where you think the ROE will increase. And that’s part of the process of looking at increasing equity, and doing the quality side of our checklist. So, I don’t use ROE, I’m interested in what Andrews saying know about the growth of ROE that might be something that we could look at. So, similarly, I think what Steve Mab said was a metric that he was looking at, which was growth in gross profit percentage, that this growth in ROE percentage might also be worth looking at.

So, I’m happy to look at that. I wouldn’t mind seeing Andrew’s data if he’s able to summarize it and send it through. That’d be great. Thanks, Andrew. And I’m interested in how you did your regression because I’ve struggled to be able to pull historical data out of stock doctor without having to copy it out by hand. So really interested in how you got access to your historical data. So, if you could at least let me know that and it’d be great. A couple of comments on what he said about his findings. He saying that there was no significant correlation between net debt to equity and share price. So, I get that. And I have seen a correlation between increasing equity or consistently increasing equity in the share price. And that’s pretty logical to me, if the equity is going up, then the share price should go up as well. All things being equal. So, I’m not sure if that’s what he means there. But certainly, we look at net debt to equity as a risk factor. So once the debt gets big, you’d expect the share price to go down because the company would be viewed as risky. So, I’d be interested in knowing what Andrew’s analysis was leading him to think there.

Cameron Reilly [33:46]: [cross-talking 33:46] interrupt for a second. You say we look at that as a risk factor, is that in the checklist somewhere net debt to equity?

Tony Kynaston [33:53]: It’s in the checklist if you don’t have a stock doctor. Remember we said we look at the quick ratio, the current ratio, and debt to equity.

Cameron Reilly [34:02]: But when we use stock doctors, we just take their financial strength.

Tony Kynaston [34:06]: So, you wouldn’t find a company with a high debt to equity having any sort of financial strength rating that was high in a stock doctor. Or anybody else. A couple of other points about return on equity to be careful of because it’s such an important KPI for businesses guess what businesses game it to make themselves look good. So, one way to increase your ROE, for example, is to decrease your equity. And one way to do that is to take on more debt. And assets minus liabilities and debt is liability gives you equity. So, if you’re increasing your liabilities, your equity is going down because the company makes the same profit, the ROE goes up because the return put over the equity on a decreasing equity number looks better.

So that’s one thing to be careful and sometimes companies do that. Other tricks they can play us, they might, for example, undertake what’s called a sale and leaseback program. So, if it’s, for example, a supermarket, or a retail chain, or somebody who has lots of bricks and mortar assets, then they could sell those assets to a real estate investment trust or a fund that buys assets and then takes the rent. And then they don’t have that those assets anymore. And they have to pay rent on them back to the person they bought them. This means their equity goes down and all I’ve done is maybe take on a sort of three to 5% parental liability, so maybe their income isn’t affected too much. But there are egos through the roof. So, because they’ve reduced their assets. So, there are a few ways around manipulating ROE. So, in general, it’s a very important metric. But be careful. It’s not being gained. But yes, Andrew, please send me some more data, particularly about how you got the historical stock doctor data, it would be great to know, and also whether you’re not quite sure, from your comments, whether you’re talking about ROE or growth in ROE. So, I’d like to know that too.

Cameron Reilly [36:23]: Okay, thank you, Andrew. Chris, hi, cam, I’m wondering whether the VUK score of 0.7 is an outlier in terms of the typical score range? And if so, should it get a greater portfolio allocation? As an example, assuming I have 20 stocks in a $200,000 portfolio and a further $50,000 to spend when it makes sense to put all $50,000 into VUK? I would be interested in Tony’s view, generally on the significance of a high score for portfolio allocation. Can I take a guess?

Tony Kynaston [36:57]: Yes, go for it.

Cameron Reilly [36:59]: I would guess that you would say no, because the QAV score at the end of the day, it’s kind of a heuristic. We don’t know that a company with a high QAV score is going to outperform a company with a lower QAV score. It may do it should in theory, but may not always play out that way.

Tony Kynaston [37:29]: True, but I think it’s a little bit broader than that. Generally, I find that things that are high up on the QAV score performed better, but I don’t know where they’re a score of point seven, the likely UK does would perform twice as good as a score of point three, five, which is not a stock might have. So, I’m not sure how to wait, the allocations. So, you’re right, that it’s more of a quantum thing. If it’s above the cutoff, it’s generally good buying. I always buy from the top down. And that’s that served me well. But I wouldn’t allocate. I always take equal allocations. Because I don’t know if point seven is twice as good as point three, five, and therefore, I wouldn’t buy twice as much necessarily, I wouldn’t know how much more to buy. And point three, five is my point. And it does require further research on my part. But I’d rather go to Shoal Bay for a few days. So, I’ll add it to the intern list.

Cameron Reilly [38:30]: Can you remember what C6C score was when we bought it?

Tony Kynaston [38:37]: I think it was towards the bottom.

Cameron Reilly [38:40]: It was point one six?

Tony Kynaston [38:44]: Yes, there you go.

Cameron Reilly [38:45]: Hold on no, that’s not right. That was the Coventry group. Let me see C6C.

Tony Kynaston [38:56]: I don’t recall it being near the top Cam. I think it was down the list of [inaudible 39:00].

Cameron Reilly [39:05]: Yes. It’s not as easy to find as I thought it would be. Well, it wasn’t very high for memory.

Tony Kynaston [39:13]: And look at what’s been high on the list recently, Hawthorne resources, for example, which we just sold so directionally I think it’s better off buying from the top down, but I don’t know how much to wait, the top down. So, I buy equal percentages.

Cameron Reilly [39:30]: The way I often think about it is, the QAV score is the result of us supplying a fair amount of science to try and to find companies that are performing well and that are undervalued, and then ranking those according to a list of metrics, but it’s not high science here. It’s not that much of an accurate prediction necessarily, he said tends to be pretty good. But I think it would be a mistake to think of it as being anything more than a clever attempt at guessing.

Tony Kynaston [40:14]: Well, I’d rather call it statistics, we get double or not, if we buy above this, QAV score. But look, it’s a really good question. All jokes aside, I should add it to the list of things to research because if we can correct that, how much to allocate if there is a correlation between QAV score and it’s an allocation in our portfolio that might give us some more outperformance. So, I haven’t cracked it yet. Just by I guess, living with it and working with it. But I’m not saying it’s not there.

Cameron Reilly [40:51]: Okay, here we go. Copper Mountain Mining Corporation has become a buyer with a QAV score of point one six, I was right about the point one six.

Tony Kynaston [41:03]: And that’s a good point, too, is that we bought Copper Mountain because of another factor because the index was going through all the copper price was going through a three-point buy period. So, there are other things at play besides just the strike-you QAV score.

Cameron Reilly [41:19]: Thank you, Chris. The next question is from Eric, who was a new subscriber and an old school friend of Brett’s. So, thank you to Brett for sending Eric our way, and welcome, Eric.

Tony Kynaston [41:30]: Yes. Welcome, Eric. Hi.

Cameron Reilly [41:31]: Eric says I do have a question or maybe a point of discussion that I want to put to you and Tony I found in my experience, the breakouts of upper and lower trend lines are very strong indicators of change in sentiment. This is particularly true in the Forex market as opposed to the fosters market. That’s not true just in the Forex market. However, I’ve found that trend lines mostly lower trend lines when it comes to forex, I think very low socio-economic trend lines in the Forex market. I found the trend lines can also be self-fulfilling prophecies in the currency market, you can trade long up or short down, which in financial terms is really which currency you’re buying relative to the other in the currency pair.

If there’s a well-established upper trend line trader tend to sell or short when it is close, or on the trend line or the train line because they expect it will bounce off the ceiling resistance. Likewise, on the lower trend line traders tend to buy or long as they expect the price to bounce what the call support. If enough traders follow this technical analysis approach it becomes self-fulfilling and pushes the price back unless one of the big institutions decides its value is different. And mass trades pushing the price through the line and past it, creating a new sentiment. I note in T K’s process that if the price touches or just goes above the upper three-point trend line just a little it is highlighted as a buy, there is a risk that the price could bounce back down due to the behavior I described above.

Wouldn’t it be better, less risk to call it a buy once the trend line break is confirmed? Maybe five to 10% of the five-year price range difference could be used as a buffer. For example, if a stock traded between $15 and a five year high to $5 at a five-year low then the range is $10. So, 5% is 50 cents, call it a buy if the price breaks above the trend line by a margin of 50 cents. We’d like to hear your thoughts kind regards, Eric. And I pointed out to Eric that there have been several instances where we bought something when it’s picked it head up or Groundhog Day-style and then you know pulled it back in and decided we were up for another six weeks of the winner. What do you think Eric’s rationale, Tony?

Tony Kynaston [43:52]: I think it’s quite useful. I’m not sure if the Forex market works the same as the stock market. My experiences that generally when something breaks through the trendline it keeps going which might be different for the currency market is probably not this plays in the currency market. I don’t have a problem if people want to wait for 5% above the buy line, I wouldn’t do it on a cell line because I think oftentimes what I’ve seen is when the price goes through the cell line it just drops and it keeps going quickly so you could get caught and you’re waiting for a 5% below the sell line but then it went down 20 or 30% before you had a chance to sell it and you’re selling push it down. So, that’s something I wouldn’t do I’d rather on caution on the side of caution on the sell list and sell straightaway. On the buy list I think I still would do that as well because you know this is if you think about the stocks, this is something that which we like to do has a QAV score which is worthy of buying it.

And it’s probably been going up anyway before it crosses its byline. Almost by definition, it has to do that. And so, we’ve already seen the establishment of a trend. So, once it crosses that line, I’m still a firm buyer in that market. I agree it can retrace. And if you wait for five or 10%, you might be even more certain that the uptrend but you’ve also lost 10% of the upside. So, given that it’s caused well, for us, it’s in an uptrend, we’re just waiting for the confirmation, which is to go above the byline, then I’m still happy buying when it crosses, looks, the whole field of what’s called technical analysis, which a separate section of which was just described by Eric about trend lines and resistance and support. And there’s a whole heap of other things about triple peaks and moving shoulders, and Dow Theory and oscillations and all sorts of things. It’s a whole chapter of investing by itself, but I’ll cut it short for you, it doesn’t work.

It’s my experience with it. It’s almost a pseudo-science and that’s why I try and use this share price graph as sparingly as I can, and as broad away as I can, as simply as I can, just to try and confirm sentiment one way or the other, and not try and make any sort of more intelligent guesses than that based on what the share price is doing. Because after all, it just lines on the graph. It’s that’s the QAV score, it’s important. And we want to make sure that people are out there buying something that we want to buy because that pushes the share price up. And if they’re selling it, then we want to be added as well. And so, we need to put some rules around that. But I try and keep it as simple as possible. Because I know you don’t think it’s simple. But believe me, it is as simple as possible.

Cameron Reilly [47:03]: Tony Kynaston – it just doesn’t work. I’ll summarize it for you. It just doesn’t work.

Tony Kynaston [47:13]: I’ve looked at technical analysis, read lots of books, followed people. They call chartists. And they go into really deep, deep dives around what the share price graph is doing. But generally, I find to take the macro view and keep it as simple as possible.

Cameron Reilly [47:31]: Steven Moriarty will be coming after you, Tony. Doesn’t work. What right?

Tony Kynaston [47:40]: I don’t think Steven was a technical analyst but anyway.

Cameron Reilly [47:44]: No, you just saying stuff doesn’t work. That’s what got you into trouble.

Tony Kynaston [47:50]: Anyone wants to come on to the debate me I’ll be happy to have that debate. But be prepared.

Cameron Reilly [48:06]: Somebody sent me a thing about PEs, but I don’t know who it was. Oh, I don’t have a name in there. Hold on. Let me see if I can find this email.

Tony Kynaston [48:15]: You’re right. There’s no name in there.

Cameron Reilly [48:20]: Brett. This is Brett. Eric’s friend, Brett.

Tony Kynaston [48:24]: All right. So, Brett had two questions this week. But he gave one to Eric. Did he? Get around our one question rule.

Cameron Reilly [48:31]: Yes. Well, that’s how you do it. If you want to get around the one question rule, sign up for free to get them to ask the other question. This is from Brett. These relate to the manually entered scores for record low six PEs and consistently increasing equity using stock doctors as the source. He’s got three questions in here. So, he should have signed up two other friends and split it up, come on Brett, what are you doing? Number one, there will often be a column called latest, which is normally after the last reporting period. Is this the last reported value adjusted with the current share price? Does TK consider it for the manually entered scores?

Tony Kynaston [49:15]: I do I take the lower of the lightest or the last results. As the PE that we use to test.

Cameron Reilly [49:24]: Sorry. But I can’t ask the other two questions. Brett. You got to sign up some more friends and get them to ask them for you.

Tony Kynaston [49:31]: No, the reason I do that is that if the share price is going down, the PE gets better. So, I use the lightest. If the share price is going up. I use the last results one just because I don’t want to necessarily punish a company if the share price is increasing, which is a good thing for us.

Cameron Reilly [49:50]: Part Two of Brett’s question.

Tony Kynaston [49:53]: There’s a part two. It’s a stream of consciousness question. all one big question.

Cameron Reilly [49:59]: I think when you recommend Eric to QAV, you get to ask a three-part question. That’s his reward. I often see NA for PE, how does Tony treat these when either the current PE is missing or the previous PEs or missing does he ignore them or automatically score a zero or a negative one,

Tony Kynaston [50:20]: I ignore them. So, for example, if a company was listed 18 months ago, we get three PEs. And if we have nothing before that, I just take the three PEs. If the current PE or the latest results, PE, whichever is lower is the lowest for those three periods, it gets a score of one or two, I think four PE isn’t its lowest and the six is two. And likewise, sometimes companies fall into a loss-making situation. So, you might find that there’s an NA, you might have PEs for some parts of the period, and then nothing, and then they restart again. Again, I just ignore the nothings. And look for the lowest in that range of the other three or four whatever’s there.

Cameron Reilly [51:04]: Part Three for consistently increasing equity. Does this mean each report must be greater than the previous? Or are we looking for good trend examples? WBC and BRI, both had one report in the last six where it went down.

Tony Kynaston [51:20]: I’m looking for every six months going up. But I take Brett’s point, sometimes I’ve wanted to fudge it myself. And in the case of Westpac bank, where you see it just might have gone negative for one half, and you think, there’s still a good company, they can probably get a score, but now I tend to just look for those which are continuously going up. And we want companies that are resilient and have good management. So that’s why I do that. But again, I think that’s probably a question for regression testing to compare both of those options.

Cameron Reilly [51:59]: Thanks, Brett. Hope that helps. Okay, now we get to the BOQ questions. I think this was initially posted by Petra, and then Ben jumped on as well. So, Petra bought BOQ, and then they ended up in a trading halt. When they were announcing the whole ama acquisition. She said, happily, the now trending up, which is just beginner’s luck. No, not really. [cross-talking 52:28] week. I would like a discussion on what to do about the extra share offer they’ll be put to shareholders and perhaps how these things might end up. I know, we just monitor cell lines, but I’m just curious, particularly about the outcome of shared delusions. Does Tony watch for some news a little more closely when this happens to a holding he has?

Tony Kynaston [52:52]: Good question. So yes, I do watch for sentiment and I do read articles that I come across about it. And I’ve read a couple about the EMI acquisition and I think it’s making a fair bit of sense for Bank of Queensland to diversify its customer base away from Queensland, EMI’s got a lot of Victorian customers. And also, they bring on a lot of retail lending customers, which helps us to skew the mix of the bank of Queensland’s loan book back towards retail, which is good. So, there are some convincing arguments to do it, the question will come down to price because they’re raising a lot of money to pay for it. Now, they come out of a trading halt tomorrow, and we’re recording this on the 24th of February. So, we’ll know pretty quickly which way the markets going on this one.

That’ll be a big guide for me. But basically, my rule of thumb for this kind of situation is that they’ll put out a document which allows retail shareholders to take up the offer of buying new shares in the company at a particular price, that price has to be less than what the share price is. And usually by sort of a reasonable amount to represent the dilution that you’ll have in the shares. There aren’t issues so more shares are an issue, your share of the earnings of the company goes down a little bit. So, you want to buy in at a lower price to reflect that. It’s up to you whether you want to try and put together a combined me Bank of Queensland pro forma report and then run it through the QAV checklist and decide whether you want to take up the rights or not. Again, I’d rather go to law and or to show by and have a holiday. The offer document for the retail and title will contain a pro forma set of accounts and that’s usually a pretty good one.

So, you can run those numbers through the QAV checklist and see if the merged company is a good one in terms of the QAV process. I’ve done that occasionally, if I’m a little bit worried about the acquisition at this stage, I’m not, I might get worried about it if the sentiment, starts to go down dramatically. Tomorrow when it relists, but I don’t necessarily expect that. So, the process I normally adopt is if the retail entitlement allows me to make a little bit of money because it’s, I’m being offered shares in the company at a lower price than the share price. I’ll take it up. And then I’ll watch sentiment and see if we get a three-point scale. And I’ll wait until the next results come out. Which is the next checkpoint for deciding on the company.

Cameron Reilly [55:53]: So, it’s doesn’t come out of a trading halt until the 25th of February. But when I look at the chart, it sorts of went sort of flatline there for a couple of days at $8.16. And then it spiked up to $9.10. If it’s been in a trading halt, what caused the share price to jump up?

Tony Kynaston [56:15]: I don’t know. I have to have a look. Sorry. It shouldn’t be. Let me just have a quick look.

Cameron Reilly [56:22]: On the 18th went into a trading halt. And it was $8.10 by 16 something like that.

Tony Kynaston [56:33]: Nine. Okay, you’re looking at the front share price graph and stock doctor?

Cameron Reilly [56:40]: Yes.

Tony Kynaston [56:41]: That’s a weekly one. So, it was rising, probably on the back of its results, as at the weekend, the week ending the 19th. So, it was in a trading halt. The closing price then was $8.16 and it’s currently at $9.11. So, I can’t explain why it goes up. It shouldn’t. That’s interesting, isn’t it?

Cameron Reilly [57:07]: Magic stuff going on behind these things.

Tony Kynaston [57:08]:  Yes. Magic stuff, that’s right.

Cameron Reilly [57:11]: Well, Ben had a follow-up question. He says I bought BOQ about the same time. As Petra, it looks like a pretty good value deal only paying about 1.05 times book value. If I’m reading the announcement correctly, I’d be interested in Tony’s thoughts on how this affects the valuation slash QAV score of Bo Q. Well, I guess he just sort of handled all of that.

Tony Kynaston [57:33]: So, if they’re paying $1.05 of EMI bank book value, then it won’t affect it at all. It will be the same. But that’s my point you need to look at the pro forma documents. So, don’t launch when they give you the offer document to buy more shares and see if that’s the case.

Cameron Reilly [57:52]: Okay, thanks, Ben. Thanks, Petra. Alright, homestretch James. Hi, Cam and Tony. I have MXI. I’m sorry, James. Go see a doctor about that. I think there’s a cream topical cream. You have to wear gloves but burn the gloves afterward. Whatever you do, don’t touch anyone. No, sorry. keeps going. I have MXI as a buy now as it appears to no longer have a qualified audit on the latest financials.

Tony Kynaston [58:27]: I had a look at that. Looks like it’s the same thing for me. I know that it’s dropped 6.4% today.

Cameron Reilly [58:39]: MXI is maxi pads. No Massey trains industries. Yes, okay. So, they had a qualified order, but now they don’t.

Tony Kynaston [58:51]: So, it looks like, bearing in mind, it’s a half-yearly report that we get. And the auditors do say that it’s not an audit. It’s just a review of the financials. When I see this happen like that, I’d say it’s not a qualified audit. So, I took it off the list, but if you look at the share price, it’s when its upward trading. It’s a falling knife it’s going upwards through a buy and sell period.

Cameron Reilly [59:21]: Falling knife that’s going upwards.

Tony Kynaston [59:24]: So riving knife. What do we call them a rising Schrodinger bunny boiler?

Cameron Reilly [59:31]: Bunny boiler. Well, let me do a chart.

Tony Kynaston [59:36]: So, it was a buyback towards the end of last year around sort of September. But it had a qualified audit. So, we didn’t buy it. It’s just nudged over the cell line in January and now it’s sort of starting to rise again. So, It’s the trend is upwards. But it’s crossing its buying cell line as it goes.

Cameron Reilly [1:00:03]: It’s still below the cell line.

Tony Kynaston [1:00:07]: It’s still below the cell line.

Cameron Reilly [1:00:09]: Would you say?

Tony Kynaston [1:00:11]: No, I think it’s above the cell line today.

Cameron Reilly [1:00:13]: Well, if you take the low point is into May, and then the end of June is the next low point.

Tony Kynaston [1:00:20]: No, I’ve got the end of June 2020 is the low point.

Cameron Reilly [1:00:25]: End of June? Mine says it’s the 1st of June.

Tony Kynaston [1:00:29]: 30th of June 2020.

Cameron Reilly [1:00:32]: Sorry. Okay, 1st of June. You see that little red graph underneath it says the first of June and I don’t know why does it say the first of June down below there? So, that’s where it starts. Okay. My bad. Okay, so that’s the low point 30th of June then the next one is the 31st of July, right?

Tony Kynaston [1:00:47]: Correct. Yes.

Cameron Reilly [1:00:48]: It’s going to be below that line.

Tony Kynaston [1:00:51]: No, is it below, yes. It’s just touching it, I think.

Cameron Reilly [1:00:57]: You’re just touching it. Get your hand off it, no what?

Tony Kynaston [1:01:05]: It has dropped six and a half percent today so maybe when I had to look at it before it was above it, but it is hugging that so the upward sell on. It’s in an uptrend but it’s hugging the cell line.

Cameron Reilly [1:01:19]: So, bunny boiler meaning too dangerous, looks sexy. But other stocks are just as sexy that isn’t sleeping, don’t bring a knife to bed and slide it under the mattress.

Tony Kynaston [1:01:41]: Don’t bring an ice pick to bed. I think it’s an upward trend although it’s down 6% today and it’s kind of ceases on its way up. So, watching say I think probably.

Cameron Reilly [1:01:54]: All right, James. Good luck with that cream. Let us know how it goes. Mark. Hi, Cam just wondering if Tony can please explain. The MQG Capital notes five raises on the show. I tried to read up on this today. And I went not too hard. Cory group limited capital notes five.

Tony Kynaston [1:02:15]: So, I guess, Mark is like me, I’ve received the email from the Macquarie group during the week saying that they’re issuing capital notes. And did I want to take any out? This is done, particularly by banks, or that doesn’t have to be just done by the bank. But basically, what we’re talking about is a bond. And sometimes they’re called hybrids because they do have slightly different characteristics from a bond that say issued by a government where you put $100 in buy the bond, the government pays you a premium every year, and then say 10 years if it’s a 10-year bond, the government gives you $100 back and you’ve had the benefit of getting the yield every year.

So, in this case, it’s a corporate bond and the Macquarie Group is giving you the same sort of deal. So, you buy the Macquarie note, in this case, it’s the fifth time they’ve done it in recent memory. So, Macquarie note number five, it’s a bond. The difference with this and why these notes is sometimes called hybrids rather than bonds is because the Macquarie group has the right to convert these into shares, as a way of redeeming them. And if it’s not a bad prospectus, I found it reasonably easy to read. But in summary, it’s right up at the start of the prospectus, but this particular offering is a fully paid, unsecured, subordinated, non-cumulative mandatorily convertible note, what all that means, is that you have to pay all the money upfront, you can’t do it in installments, it’s unsecured.

So, that means that if the Macquarie group ever goes into bankruptcy, you’re ranked below or secured creditors, which does mean you’re ranked above the shareholders, shareholders are always lost, which is a bit of a shame, but they are. You’re ranked above them, but lower than the secured shareholders and CSR secured creditors. Because essentially, what you’re doing is you’re loaning your $100 per note to Macquarie Bank for the period. And there are several different redemption dates for this and they’re all dependent on when Macquarie wants to do it, you can’t redeem the note for the cashback or shares. But Macquarie can redeem them for $100 of shares in 2030. And there’s a couple of other dates earlier where they can give you the $100 back as cash, I think in 2028, from memory. So, it’s up to them. So that’s important to know. It’s non-cumulative. So, what that means is if they miss a dividend payment, bad luck, you don’t get to the following year.

And that’s pretty uninsured, which means that, well, if you put $100 into a retail bank, the government ensures that money for you. And so, if the bank goes broke, the government gives you $100 back. But this is not the case with Macquarie groups, they’re just making a dependent liquid. So, it’s a type of bond, it will pay a yield and these types of offerings are always director that’s retirees who can’t get a decent income from putting their money in the bank. In this case, the yield isn’t that great. It’s 2.9% above the reference rate.

So, the reference rate can float in this case, the reference rate is what’s called the BB SW. Bank Bill Swap Rate from memory. It’s a rate that struck between the banks if they want to lend money to each other, which they sometimes do from time to time, oftentimes just to shore up short-term obligations. But the BB SW is currently just a smidgen over point 01 percent. So, it’s bugger all. So, you’re getting 2.91% if you give them a query of $100 for this note, and you don’t know when it’s going to be redeemed because they’ll redeem it on your behalf mandatorily either for cash and 2028 or for $100 worth of work it’s $101 worth of McQuarrie shares in 2030.

The benefit you’ve got on this particular note is it’s going to be listed on the ASX so it’s tradable. So, if interest rates suddenly go up, your note becomes more valuable. And so, you can sell it for more than $100. Depending on you know how high the interest rate goes up. But what you don’t get is eight to 10 years’ worth of improvement in the Macquarie group share price, or if it goes backward, you don’t get the loss either. So, it’s a product that is geared towards retirees. I’ve never bought any of these types of products hybrids or all these kinds of corporate bonds because I don’t need the higher yield.

And just to be clear, the yield on the Macquarie group at the moment is 2.16% as of the 24th of February, so you’re getting an extra what’s that 7.74 three quarters of a percent. If you buy this note, and you don’t get any capital growth then that’s reflected in the growth of the Macquarie group share price, which is plenty of bias at the moment. So, it’s not something I’m interested in. And this is not financial advice. So, if you’re someone who is looking for a bit of extra yield that might suit you, but you know, read the prospectus and do your financial analysis. But that’s a summary it’s a bond with some special characteristics which are all controlled by Macquarie as to how it’s redeemed.

Cameron Reilly [1:08:00]: In the words of the mayor of Colorado city in Texas get off your ass and do your work and stop expecting a handout. The strong will survive and the weak will perish.

Tony Kynaston [1:08:12]: If you won’t pal get on your bike and pedal hook it up to the heating.

Cameron Reilly [1:08:20]: The funny thing about this capital notes five raise is it describes my marriage quite well. fully paid, unsecured, subordinated non-cumulative mandatorily convertible.

Tony Kynaston [1:08:34]: So, should I just call it the Macquarie Cuck notes from now?

Cameron Reilly [1:08:46]: That’s another coffee mug, cuck notes, should be the title of this week’s episode. Finally, and I squeezed this one in for Dave because we went backward and forwards about this on Facebook today. Hi, Cam and TK just been reading the acquirers multiple about reversion to the mean TK have you ever done a checklist to see when stocks in your portfolio become overvalued? So, you could sell and put capital into the undervalued ones Dave?

Tony Kynaston [1:09:17]: I haven’t done a particular regression analysis on it but as you know, I hold them until they become a three-point sell. So, that’s my way of knowing that they’re overvalued and coming down in price. Because what I found is that shares all the time go off the bottom of our buyer list because the price is improving. But the company is still just as good in terms of its quality metrics and now it’s got other people interested in their buying it too so I don’t sell when it comes off the buy list. And I’ve held chairs for several years that keep going up. And so, to have sold out of those and short selling out of those and buying into something else on the buyers may have given me the same Return. But I’m happy to keep holding on to a share, lower the volatility, my portfolio and avoid transaction costs and still get a decent return by holding them until I become a sell.

Cameron Reilly [1:10:13]: I said to Dave on Facebook when this subject comes up, Tony often quotes Buffett, when carried out capably, an investment strategy of that type will often result in its practitioner owning a few securities, that will come to represent a very large portion of his portfolio. This investor would get a similar result if you followed a policy of purchasing an interest in say 20% of the future earnings of several outstanding college basketball stars. A handful of these would go on to achieve NBA stardom, and the investors take from them would soon dominate his royalty stream. To suggest that this investor should sell off portions of his most successful investments, simply because they’ve come to dominate his portfolio is akin to suggesting that the balls trade Michael Jordan because he has become so important to the team.

Tony Kynaston [1:11:01]: Why would you? But I understand. Dave’s point here he’s saying that, are we getting a better return at the start when something is undervalued and the standard trend up? Or are we getting a better return along the way, and generally, I find you get the same return along the way.

Cameron Reilly [1:11:18]: I said to Dave, if you look at FMG as an example, it’s up 220% since we bought it if we’d sold it at 100 and 100%. We would have lost the next 120%. Not many stocks in our portfolio. I think there’s maybe two done better than 120% in the last year. But then Dave rightly pointed out, yes, but FMG still scores well on the QAV metrics. So, it hasn’t reverted past the mean. So, it’s a keeper. But one day will not score well. But I think your point is that just because they don’t score well, doesn’t mean they’re not going to keep doing well.

Tony Kynaston [1:11:53]: Well, just because they drop off at the bottom of the buyer list, it’s usually because their share price is going up. And that’s a good thing. I think what Dave saying is if it disappears off the buyer list should we sell it then because there are things on the buy list that we could, allocate the money to, and there’s an opportunity cost there. But it’s my experience that if you hold them the good companies just keep going. And I’ll use the three-point trend line sell to two sells rather than when it comes off the buy list.

Cameron Reilly [1:12:31]: All right. Thanks, Dave. I hope that helps. Thank you, everybody. That’s a wrap for this week. Tony, what have you got on for the rest of the week? Are you planning any more holidays, vacations?

Tony Kynaston [1:12:42]: No more holidays, hopefully, you’re getting a golfing tomorrow that will that’s been pretty wet in Sydney. A couple of dinners lined up. I’ve got some horse racing on the weekend horses racing on the weekend. So, I don’t know if this goes out in time, but [inaudible 1:12:55] is racing in Melbourne, and Princess raffles, which is a horse we brain is racing in South Australia and Murray Bridge, both in good races too. So, fingers crossed, we might get a good result.

Cameron Reilly [1:13:09]: Well, good luck with that. I’ll put a few bucks on yet again and see, eventually.

Tony Kynaston [1:13:19]: It’ll regress to the mean.

Cameron Reilly [1:13:23]: Exactly. My bank account is regressing [cross-talking 1:13:28] of zero, which is where it’s been for the last 20 years. You trying to regress my bank account back to zero. Well, that’s good. Good luck with that. And enjoy the rest of your week, Tony, and take care of everyone.

Tony Kynaston [1:13:44]: All right. Thanks, Cam


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