Transcript for QAV 426

Title: QAV 426 Club

Length: 2:06:06

Cameron Reily [0:04]: Wel­come back to QAV, this is Episode 426; Sea­son Four Episode 26, record­ed on Tues­day, the 29th of June 2021. I just want­ed to give you a lit­tle bit of a warn­ing, par­tic­u­lar­ly for club mem­bers, this is going to be a huge episode, I think this is about a two-hour-long episode. Tony and I talk about some stuff, news of the week for about an hour, we do about half an hour of Q&A and then we’ve got an inter­view with QAV club mem­ber, James Oliv­er who’s an audi­tor with a big four account­ing firm, help­ing us under­stand what we should look for when we’re look­ing at audit. So, we’re look­ing for these qual­i­fied or mod­i­fied or red flag audits, so you might want to do this in sev­er­al sit­tings prob­a­bly a lot longer than our reg­u­lar episodes but we just had a lot to get through this week. So enjoy, sit back, pour your­self a negroni, and let’s get into it. TK you’re in lock­down?

Tony Kynas­ton [1:14]: I am yes. Again, does­n’t change my life a lot, prob­a­bly the only dif­fer­ence this time is, it’s in our area. So I’m ret­i­cent to leave the apart­ment at all at the moment at least for a cou­ple of days, see what the case num­bers are like, where they’re hap­pen­ing but as you know, we had some­one vis­it their local cafe on Mon­day of last week that was infect­ed. So I got to expe­ri­ence con­tact trac­ing first­hand, which was good. I was impressed.

Cameron Reily [1:50]: You got a test?

Tony Kynas­ton [1:54]: I did. I got a text, they did­n’t find out until Thurs­day that the per­son was infect­ed and where they’d been. But by lunchtime Thurs­day, I got a text say­ing you vis­it­ed a site go and get test­ed. The text orig­i­nal­ly said quar­an­tined for two weeks, regard­less of the result so, iso­late for two weeks, regard­less of the result. So that was all I was like, went and got test­ed by the time I got home, jumped in the show­er, just to try and wash all the COVID off me, I got a phone call from a con­tact trac­er and we spent prob­a­bly 20 min­utes on the phone going through every­thing. I had all my data she said are now you’re in the store from 12 to 12:03, which is out­side of the per­son­’s vis­it time so you’re fine, just get test­ed when it comes back neg­a­tive, you’re fine so that was good. So that cafe that I’m talk­ing about is at the bot­tom of our build­ing so just has­n’t felt safe walk­ing around the build­ing so I’m just hun­ker­ing down at the moment.

Cameron Reily [2:55[: Down­side of being a rich guy liv­ing in a flashy part of Syd­ney with lots of peo­ple in your build­ing in a cafe down­stairs.

Tony Kynas­ton [3:03]: Cor­rect that is a down­side.

Cameron Reily [3:05]: No cafe down­stairs in my house, Tony unless it’s Chris­sy on the cof­fee machine.

Tony Kynas­ton [3:12]: That’s the thing, isn’t it? We’re a ver­ti­cal cruise ship, so that’s made me very wary.

Cameron Reily [3:19]: Well, in brighter news. Saw my car­di­ol­o­gist last week, did all the stress tests. He said you’re 100% fine, get out of here, don’t wor­ry about it just go back to the life you’re great. You’re a super­man, super­hero, immor­tal. So, that was nice.

Tony Kynas­ton [3:38]: That’s great he gave you immor­tal­i­ty. That’s fan­tas­tic.

Cameron Reily [3:41]: I thought it was gen­er­ous of him. No, he said, look, no signs of block­ages, heart func­tions, great; your cho­les­terol lev­els are where we want them to be, blood pres­sures where we want it to be just keep­ing doing what you’re doing. So, that’s excit­ing.

Tony Kynas­ton [4:02]: That’s good news, isn’t it?

Cameron Reily [4:03]: It was a very sur­pris­ing piece of news. I went in there ful­ly expect­ing him to go, look, you’re not going to fall over tomor­row but you got sig­nif­i­cant block­ages, and we’re going to need to keep an eye on it, etcetera. And he was like, no, it’s noth­ing, you’re great, 100% fine.

I just want­ed to thank Steve Mabb again today for giv­ing me the prompt­ing to go and get my test done a cou­ple of months ago, which scared the liv­ing day­lights out of me but all for the bet­ter­ment I think of my next 20 30 years at least I’m tak­ing some of this stuff way more seri­ous­ly than I had pre­vi­ous­ly.

Tony Kynas­ton [4:46]: And thanks to Steve he dropped by when he was in Syd­ney for the ASA meet­ing and shout­ed me din­ner which was very nice. We had a good chat.

Cameron Reily [4:54]: I believe you invit­ed him up to the sky palace.

Tony Kynas­ton [4:57]: We did. We have a cou­ple of negro­nis before we went out and we add a few more and some nice Mex­i­can.

Cameron Reily [5:03]: That’s good. Good guy.

Tony Kynas­ton [5:06]: We’re talk­ing about ail­ments, that remind me of the quote, I think Jere­my Clark­son said, when you think about death more than you think about sex, it’s a sign you’re get­ting old.

Cameron Reily [5:16]: Well, I’m not there yet, because let me tell you, I think about sex con­stant­ly, and death only half that time.

Tony Kynas­ton [5:24]: Based on our con­ver­sa­tion this morn­ing, it’s been fair­ly mor­bid.

Cameron Reily [5:30]: Well, let’s move on to invest­ing stuff. Com­ing up lat­er on in the show, we’ve got an inter­view that we record­ed last night with QAV club mem­ber and audi­tor, James Oliv­er.

Tony Kynas­ton [5:41]: James Oliv­er, the naked chef.

Cameron Reily [5:44]: The naked audi­tor, we’re call­ing that part of the show so thanks James; we’ll get into that a lit­tle bit lat­er on. I also want to shout out to Cos­min and James and every­one else on the Face­book group in the last week who has been shar­ing their score­cards and their charts. And there’s been a huge amount of ter­rif­ic dis­cus­sion in the Face­book group from every­body else, look­ing at the score­cards and ask­ing ques­tions, why this? Why that? Look­ing at the charts and cor­rect­ing them or com­ment­ing on them and that I think, is a great step in the QAV com­mu­ni­ty.

We want to see every­one con­tribut­ing their work, their results, and their score­cards so we can all sort of refin­ing our process­es and it’s the group­think of the com­mu­ni­ty I think, which is where we’ve always want­ed to get to, and we seem to be get­ting there, which is great. So shout out to Cos­min and James, who I think was the first to have the colonies to put some of this stuff out there last week, so good on you guys. I know oth­er peo­ple have done it before, have shared stuff but that’s great. Keep it up, it’s great.

Tony Kynas­ton [7:01]: Here, please do keep it up because apart from the fact that will make you bet­ter at what we’re doing but I’m only putting out my score­card month­ly at most, so peo­ple might need more access to score­cards in between, it’s a good way to do it.

Cameron Reily [7:21]: And as we’ve talked about before, we don’t want this to be the thing where peo­ple are wait­ing for you to do stuff. You’re here to teach your sys­tem not to put out score­cards for peo­ple but hope­ful­ly, from time to time, you’ll be able to com­pare your score­card with what peo­ple are post­ing on the Face­book group and say, I’m not sure about that one, you might want to look at that a sec­ond time or some­thing like that.

Tony Kynas­ton [7:51]: So, we do the down­load when we record­ed that three-hour intro­duc­tion ses­sion. Has that gone up as the lat­est score­card?

Cameron Reily [8:01]: No, because we did­n’t fin­ish doing every­thing, we just did a down­load; we did­n’t fin­ish doing all the analy­sis. Well, I’m doing one today, which I’ll post up so peo­ple can use that to com­pare to the oth­er ones that are up there and I guess ide­al­ly, we would hope that if two or three peo­ple do a score­card each week and post the results up, they should pret­ty much match the top 20, should be very sim­i­lar depend­ing on how you score things for a recent three-point upturn or how you’re doing your 3PTLs and that kind of stuff, or how you fil­ter for aver­age dai­ly trade but they should be the same. So if two or three peo­ple get the same result, every­one else can do their own, and if it does­n’t match that you’ve prob­a­bly stuffed some­thing up some­where along the line.

Tony Kynas­ton [8:56]: Or ask ques­tions. Go into the group and ask ques­tions about why it does­n’t match.

Cameron Reily [9:00]: Good stuff. Speak­ing of results, shout out to Gary Mar­tin aka Mae­stro now on a straw­man. Steve Mab again, for­ward­ed to us the oth­er day, the week­ly straw­man email that the CEO there puts out and it was a list of peo­ple who had great results and the top of the list was QAV, had the QAV logo in it and we were like, well, nei­ther of us is using straw man reli­gious­ly. I should have, just been one thing I haven’t got around to this year, but I just did put my port­fo­lio up in it yes­ter­day as a result of see­ing this but it was Gary Mar­t­in’s account Mae­stronow is the name of the account, 64.7 returned for one year he knocked it out of the park and was nice enough to attach QAV to it, a lit­tle bit of brand­ing there. So thanks very much, Gary for doing that, and con­grat­u­la­tions, well done. I hope that’s a reflec­tion of your real port­fo­lio in the last year and that you’ve had a good year.

Tony Kynas­ton [10:05]: Bril­liant, that’s good. Thank you for doing that and I guess giv­ing us a prop because we talked about putting up the dum­my port­fo­lio on a straw­man, and we just haven’t done it.

Cameron Reily [10:14]: I for­got all about it. We even had the CEO on the show and Buf­fett has resigned from the Gates Foun­da­tion, well from the Board of it, Tony, did you see that?

Tony Kynas­ton [10:30]: I did. That’s clas­sic War­ren Buf­fett isn’t it, try­ing to avoid con­tro­ver­sy? It’s a dif­fi­cult sit­u­a­tion for him, Bill and Melin­da are going through a divorce and he does­n’t want to take sides.

Cameron Reily [10:45]: So, he tipped anoth­er $4 bil­lion into it but he is step­ping out of it. So that’s the end of an era, I guess, in some ways but I read that he has con­tributed, I think 100 bil­lion in what­ev­er it’s been 10 years or 15 years since he has been part of the Gates Foun­da­tion.

Tony Kynas­ton [11:09]: And he’s pledged to give me think it’s 95% of his for­tune away too, at least 90%, so that’s a huge amount.

Cameron Reily [11:16]: He gave away 100 bil­lion already and he’s only 90. He’s got 90 years left. Who knows what he could do?

Tony Kynas­ton [11:24]: He should see your car­di­ol­o­gist.

Cameron Reily [11:29]: I want to say his car­di­ol­o­gist what­ev­er he’s doing its work­ing. I got to eat more seed can­dy, I think is the prob­lem.

Tony Kynas­ton [11:38]: That’s right. For all this stuff about sug­ar being new smok­ing, the guy chomps on peanut brit­tle all day, drinks Coke, not Diet Coke, Cher­ry Coke all day and he’s in per­fect health at 90 years of age.

Cameron Reily [11:56]: It’s being rich. Are you scratch­ing or some­thing in the back there?

Tony Kynas­ton [12:01]: No, it’s rain­ing

Cameron Reily [12:03]: Is that what it is? I can’t do much about that then.

Tony Kynas­ton [12:07]: No, it’s not hard to be locked down today

Cameron Reily [12:12]: Stock doc­tor pric­ing is going up by 50 bucks on July 1. They sent me an email yes­ter­day just want­i­ng to advise every­body. So if you want to save your­self 50 bucks and you haven’t got to stock doc­tor sub­scrip­tion yet, go to QAVPodcast.com.au/stockdoctor and you will get our dis­count on that? Well, it’s near­ly the end of the finan­cial year, Tony so we should talk about what our port­fo­lio looks like. I know there’s what a day left, tomor­row is the last day of the year, and I think so?

Tony Kynas­ton [12:44]: Two more days.

Cameron Reily [12:45]: 30 days has Sep­tem­ber, April, June, and Novem­ber

Tony Kynas­ton [12:47]: One more day. Sor­ry, today’s the 29th.

Cameron Reily [12:51]: Cur­rent­ly, accord­ing to Navexa, our port­fo­lio is up 46.97% for the finan­cial year ver­sus the ASX 200 bench­mark which is up 28.31% out­per­formed by 18.66%. So not a bad year, as it stands for the QAV port­fo­lio.

Tony Kynas­ton [13:18]: Pret­ty bloody good all around it’s been an out­per­form­ing year. I don’t want to sound like Scrooge, it does­n’t often hap­pen two years a row. So we may see some cor­rec­tions in the mar­ket going for­ward in the next 12 months but any­way we’ll sail through those like we did dur­ing COVID, we’ll work our way through them any­way. But it’s just one of the high­lights when you’re up 46 47% in a year, don’t expect it to con­tin­ue at 47%.

Cameron Reily [13:53]: No, I know we did. We did an episode a long time ago where you took us through your annu­al results over 30 years. And some years were bon­za years and oth­er years that were ter­ri­ble years and oth­er years that were aver­age. So it just aver­ages out over time but there’s seems to be one or two good years, every 10 years and if you miss that, that would take a big chunk out of your aver­age returns.

Tony Kynas­ton [14:21]: Cor­rect, that’s right, time in the mar­ket. This is why you want to stay as close as you can to ful­ly invest­ed all the time, and don’t try and guess where the stock mar­ket’s going. And just one more thing about finan­cial year-end, I don’t think peo­ple should watch their port­fo­lios tomor­row too close­ly but often­times, the mar­ket does fun­ny things in the last cou­ple of hours of the finan­cial year because a lot of peo­ple in the fund man­age­ment indus­try have invest­ed inter­est in par­tic­u­lar results and they can move the deckchairs around to try and boost their bonus­es in the last cou­ple of hours and then reverse it the next day. We may see some fun­ny moves tomor­row after­noon, but it should­n’t affect us too much.

Cameron Reily [15:07]: Well, it’s been a good year and I hope every­one out there has had a good year and is learn­ing a lot. And it’s been a tremen­dous learn­ing jour­ney for me this year com­ing out of COVID, watch­ing that whole thing, watch­ing the mar­kets rebound in a way that I don’t think any of us thought they were going to go back to March, April last year. We were all think­ing, this is going to be a 6 — 12 months big hole and it just bounced back with all the finan­cial incen­tives that the gov­ern­ment was pro­duc­ing to bail out the econ­o­my, here in the US.

Tony Kynas­ton [15:49]: Well, that’s right. It’s pleas­ing that we’ve had a great year and it’s dou­bly pleas­ing that we know, a lot of our lis­ten­ers have too, but I think the high­light for me in the last year to 18 months was tak­ing peo­ple through the COVID process just show­ing them how you invest in that time of uncer­tain­ty, I think that was a big learn­ing. If we had­n’t have had that and we’d had a good year, I think peo­ple would be so Euphor­ic Dia­by sell­ing their grand­mas and putting their mon­ey into the share mar­ket, which is not the right thing to do. But I think hav­ing seen both the highs and the lows, and now you can nav­i­gate your way through it suc­cess­ful­ly. I think that’s the learn­ing point for the last 12 to 18 months.

Cameron Reily [16:31]: It was tremen­dous for me just to see how QAV as a process, and you guid­ing us in terms of think­ing about stuff, how it played out, it was kind of bor­ing like the sky was falling. I’m talk­ing about from an invest­ing per­spec­tive, it was like, well, you just do the thing that it says to do, you sell it when it hits the line, you buy it when it hits the oth­er line and the scores good, then that’s it, it’s the same as you do any oth­er day. It’s just trust­ing the process, it’ll guide you through and it did, it was great to see not that I doubt­ed it. But I’ve been say­ing to Tay­lor recent­ly and he’s like, watch­ing his port­fo­lio every day, calls me every day a good day, things are up, well it’s down, this is great, he’s into it. That’s great but after doing this, when watch­ing it for two years with Tony, I look at my mine too but I know from expe­ri­ence now, just not from faith in believ­ing you but just from expe­ri­ence that it just works long term, it will pens out. So don’t wor­ry about it.

Tony Kynas­ton [18:02]: Turn off the noise, turn off your emo­tions and fol­low the process. I remem­ber just after COVID last year I went on Phil Mus­catel­lo’s shares for begin­ners pro­gram to com­ment on what was hap­pen­ing in the mar­ket and he fin­ished up call­ing the episode sit­u­a­tion nor­mal because it is; the mar­kets going to go up and down by those huge swings at some time, it’s how you deal with it that’s the impor­tant thing. That’s what mar­kets do.

Cameron Reily [18:29]: And it’s great. As I’m sure every­one has been around for a while lis­ten­ing to this will agree it’s a machine. I think of QAV like a machine, you just keep it run­ning and set the dials and the knobs and switch­es and then just let it do what it’s got to do, any­way, a tremen­dous achieve­ment. Mr. Kynas­ton.

Tony Kynas­ton [18:51]: Thank you and thank you for putting togeth­er the pod­cast. It’s been a great jour­ney; we’ve been going for more than two years now. Some­thing popped up in my Face­book feed last week; it’s been just over two years.

Cameron Reily [19:05]: No, it’s been way more than two years.

Tony Kynas­ton [19:08]: I think we start­ed in March, so prob­a­bly a bit more than two years.

Cameron Reily [19:10]: March! So, two years and a few months, so what else have I got on the news list here, your stock of the week?

Tony Kynas­ton [19:21]: I’m going to call out a com­pa­ny called Bea­con Min­er­als as stock of the week, code is BCN, and all the usu­al dis­claimers. This is by no means a rec­om­men­da­tion for peo­ple to buy it but it’s on our score­card with a good score. I think the QAV score for Bea­con is .34 and the rea­son why it’s scored as well as it’s a gold min­er out Cool­gar­die way and it’s mov­ing from the explo­ration phase to the pro­duc­tion phase. So, if you have a look at its oper­at­ing cash flow, up until 12 months ago, it was neg­a­tive, that’s what while they were explor­ing, and then the June half in 2020, it made 7 mil­lion bucks and in the Decem­ber half, it made 39 mil­lion bucks of oper­at­ing cash flow.

So that dri­ves our QAV score in a big way, that improve­ment in oper­at­ing cash flow but it’s a clas­sic exam­ple of how com­pa­nies in the min­ing sec­tor can work. They go from being a sink­hole of fund­ing to being just like a cash fly­wheel, just throw off cash as they start to pro­duce. So, it’s pret­ty high up on our score­card. I looked at the graph for it. So it is get­ting pret­ty close to its sell line. It’s one of those graphs, if you look at it in a macro sense, its low on the left; it’s high-ish on the right, although it’s been trend­ing side­ways for a long time. So def­i­nite­ly not say­ing some­one should go out and buy it, last month was a down­trend but cer­tain­ly one to watch and if it turns up and con­firms pos­i­tive sen­ti­ment, it might be some­thing of inter­est to peo­ple.

Cameron Reily [21:19]: Sell line is pret­ty obvi­ous on this one. How would you draw the buy line for this? Where would you start? And I’m think­ing prob­a­bly June 2017, and then through ear­ly 2018 and it’s been in the buy since then, I think.

Tony Kynas­ton [21:36]: So, if you just looked at the high point on the chart of Sep­tem­ber 19, it’s cer­tain­ly been a buy after that but I think if we went back and iter­at­ed, but the last sell, I think, before the cur­rent sell, would have been some­where about June 17 prob­a­bly or even a bit before that, so you’re right, I think maybe April 17. But it would have been buy­ing and sell­ing all the way along there, I think. So one of the things I tend to do is look at the cur­rent sell line, and then moves the ruler up through the past troughs. So the cur­rent sell line, this is anoth­er flat bot­tom one, so the low point is flat, there are three months at the end of 2016, where the price was 27 cents and did­n’t move.

So I’m tak­ing the Decem­ber 16 point, the last of those three points as my first low and then let’s have a look at April 2019, even­tu­al­ly, it would have cycled through find­ing that as a sec­ond low point and that gives us our cur­rent sell line, which is just going to be below where the cur­rent price is now but that whole way along, it did a big uptick after Decem­ber 16 so the whole way along from prob­a­bly April 17 it was going through a whole series of buys and lows, buys and sells sor­ry. So that’s why I’m going to go for­ward, I think pos­si­bly August 18 would have been the last time it was a buy with­out hit­ting a sell, but def­i­nite­ly by the high point there Sep­tem­ber 19, and then the sec­ond point to the right would have been Decem­ber 19, high point Sep­tem­ber 19, sec­ond high point Decem­ber 19 and draw a buy line through there.

Cameron Reily [23:44]: Well, on my down­load I did this morn­ing, I haven’t done the man­u­al data for that yet but I can give it a pos­i­tive here for sen­ti­ment check, that just pumped it up. I had a score of .19 with­out the man­u­al data done.

Tony Kynas­ton [24:07]: This one has in my down­load has a qual­i­ty score of 104% so it’s not only got good oper­at­ing cash flow but it’s scor­ing well on the oth­er met­rics, too. So let me just have a look at the man­u­al into data I have for it, it’s a record low 6 PEs, which is giv­ing it a two. It’s not a new three-point uptrend, and it does­n’t have con­sis­tent­ly increas­ing equi­ty, so that’s how I’ve scored the man­u­al entered data.

Cameron Reily [24:37]: Well, if I do that, it gets it up to .33 for me, which is pret­ty good.

Tony Kynas­ton [24:44]: I have .34 and my down­load would have been last week, so the share price might be out of date a bit too.

Cameron Reily [24:52]: You’ve checked it for a qual­i­fied audit.

Tony Kynas­ton [24:55]: I have.

Cameron Reily [24:57]: Okay so that’s a big jump .19 to .33. I often stopped doing my man­u­al data’s when I have a list of 20 above that but look­ing at what I’ve done today, I’ve got a lot of no’s in sen­ti­ment today, tak­ing out a whole bunch of the ones that have a native high QAV score, a lot of them are fail­ing on sen­ti­ment.

Tony Kynas­ton [25:27]: Is that your sen­ti­ment checks, or is that the SDMAX and six months and five year price.

Cameron Reily [25:37]: That’s mine. I’ve just been going through and recheck­ing the top 20 or 30 on my list. Okay. Bea­con. Now let’s talk about Dylan, and flat tops and peaks, and troughs.

Tony Kynas­ton [25:53]: So he’s done some analy­sis for me, if we were look­ing at a flat top or look­ing at a flat bot­tom, what’s our tol­er­ance for flat in terms of the share price? So that last one we spoke about, there were three points at the bot­tom, which were all 27 cents, but in some cas­es, we’re see­ing cas­es where the first point might be 27, a sec­ond might be 27 and a half, and a third 28. So it’s when do we stop say­ing it’s a flat bot­tom or a flat top? We’re doing this analy­sis. So he’s run some back test­ing for me and orig­i­nal­ly, it came through and said that he thought a 4% tol­er­ance gave the best result? I think it does but he then came back and said, if you go out to 8%, it does­n’t make a whole lot of dif­fer­ence, it’s slight­ly worse but it’s prob­a­bly with­in the mar­gin of error for his analy­sis. So I think I’ll be using 8% going for­ward as the dif­fer­ence between the prices in that flat bot­tom or flat top before we say it’s not a flat top or a flat bot­tom.

Cameron Reily [26:59]: And with­out want­i­ng to be a dick about it, two weeks ago you told me they had to be close togeth­er. Last week, you said you nev­er said that but then I went and checked the footage and in fact, you did say that, your cur­rent thoughts now?

Tony Kynas­ton [27:18]: You were assum­ing when I said close togeth­er, I meant tem­po­ral­ly. I may have meant price-wise. Don’t want to be a dick about it. Check the tape on that one.

Cameron Reily [27:37]: I’m going to go check the tape on that one. Let me, hold on.

Tony Kynas­ton [27:44]: We’ll do a slow-motion replay.

Cameron Reily [27:49]: I post­ed it on Face­book and you just said fake news. It’s the great­est get out of jail line ever, right?

Tony Kynas­ton [28:06]: Worked for the Pres­i­dent.

Cameron Reily [28:08]: Well did it though? I’m not sure, did it? In the long run. Rudy Giu­liani is not allowed to prac­tice law in the state of New York any­more. What a fall for Rudy, my old mate Rudy.

Tony Kynas­ton [28:18]: Yes, it is, isn’t it?

Cameron Reily [28:21]: Here we go; here are your lit­er­al words. So I’m com­ing over to the point of view that we should use the right most peak, when there’s a cou­ple which are near the high point and they’re close togeth­er, they’re almost a flat line. In some cas­es, they are a flat line, etc., and they’re close togeth­er. So you meant price, not tem­po­ral­ly, as you say.

Tony Kynas­ton [28:43]: Cor­rect. That’s my sto­ry your hon­or and I’m stick­ing to it.

Cameron Reily [28:49]: So it does­n’t mat­ter how close they are tem­po­ral­ly. They could be a year apart is what you’re say­ing and it’s just that the prices are close togeth­er. Under 8%.

Tony Kynas­ton [29:0]1: We looked at Gas­coyne Resources recent­ly in the last cou­ple of weeks, and it had a whole flat bot­tom that went on for six or eight months from mem­o­ry but it was at the same price. So we take the right most part of that.

Cameron Reily [29:20]: I know that we’re work­ing on some new word­ing, around 3PTL’s, based on your work with Dylan.

Tony Kynas­ton [29:30]: Dylan’s just fin­ished his exams, and he’s on hol­i­days now. So we’re catch­ing up after this to go through and pri­or­i­tize his work and check what he’s done but he just sent me some stuff through three-point trend lines this morn­ing, so we’ll go through that. But I’m hop­ing that while he’s on hol­i­days, we’ll cut through a fair bit of the work­load.

Cameron Reily [29:52]: So I just want­ed to let peo­ple know that we are work­ing on some new word­ing that’s going to come out of all of this which will go on the Bible and so, at some point we will for­mal­ize all of this into some word­ing for peo­ple to help guide them through.

Tony Kynas­ton [30:13]: As I said, last week or the week before, we’re get­ting pret­ty close to hav­ing an algo­rithm that works, but it does­n’t work in every case, it works in the vast major­i­ty of cas­es, so we’re try­ing to tweak it so it works in every case. But poten­tial­ly, we won’t get there; we may not be able to solve every case. So the algo­rithm we can set it out in the Bible but will still require some man­u­al checks before you rely on it. But any­way, hope­ful­ly, we’ll get to the stage where it’s 100% uni­ver­sal, but we’ll see.

Cameron Reily [30:49]: Lis­ten­er Rowan sent us an email dur­ing the week, talk­ing about qual­i­fied audit reports sug­gest­ing the term mod­i­fied audit report. Some­body else said the flagged audit, red flag audit report; have your thoughts on this changed after our chat with Jamie Oliv­er?

Tony Kynas­ton [31:09]: I think he gave us three to look for; mod­i­fied opin­ions, qual­i­fied opin­ions, and empha­sis of mat­ter. So I’m think­ing if we just gen­er­al­ly say some­thing like a mod­i­fied audit report that might be enough.

Cameron Reily [31:27]: I’m still going with the red flag.

Tony Kynas­ton [31:30]: You don’t like to give up  your posi­tion, do you?

Cameron Reily [31:35]: I’m hap­py; it’s my job here to think like a nor­mal per­son not like a nerd.

Tony Kynas­ton [31:47]: Yes, His­to­ry boy.

Cameron Reily [31:52]:  Any­way

Tony Kynas­ton [31:54]: Any­way, yes.

Cameron Reily [32:02]: Thanks, Rowan for that. Any­way, that’s a good, mod­i­fied, red flag. I’ll set up a poll peo­ple can tell us what they think.

Tony Kynas­ton [32:08]: That’s a good idea and lis­ten to James’s pod­cast before you vote because he had a lot to say about it.

Cameron Reily [32:16]: The inter­view that will be com­ing up after we do the news, I’ll stick that in there. Glenn had some feed­back about your recent com­ments on tech­ni­cal analy­sis; I think it was in last week’s episode. He said the per­for­mance of investors using strate­gies oth­er than the val­ue approach. Tony’s com­ment in last week’s pod­cast about investors using tech­ni­cal analy­sis ver­sus Buf­fett has prompt­ed me to respond tech­ni­cal analy­sis is often viewed as a spe­cif­ic method that usu­al­ly is pre­dic­tive. Where­as for most, it’s anoth­er way of describ­ing quan­ti­ta­tive and rules-based invest­ment strate­gies Jim Simons has returned above-aver­age 50%. Isn’t he the quant guy, Jim Simons?

Tony Kynas­ton [32:57]: I don’t know. I think he might be the guy who set up the com­pa­ny which fund­ed Trump isn’t he?

Cameron Reily [33:03]: No, that was­n’t him, no.

Tony Kynas­ton [33:08]: He might have set up the fund, which then one of the part­ners went off and fund­ed Trump?

Cameron Reily 33:14: That was the Mer­cers, I think that fund­ed Trump but I don’t know if Jim Simons involved with the Mer­cers.

Tony Kynas­ton [33:24]: So the guy I’m think­ing of that quant fund was excep­tion­al but they were doing a lot of detailed work on not just tech­ni­cal analy­sis, far from what they were doing, stuff like look­ing at weath­er pat­terns in Flori­da and all sorts of dif­fer­ent data analy­sis to try and find an edge with every invest­ment which worked out for them.

Cameron Reily [33:49]: I think Renais­sance Tech­nolo­gies and its Medal­lion Fund is Jim Simons.

Tony Kynas­ton [33:56]: One of his part­ners was Mer­cer, I think. I read their book a cou­ple of years ago just after we start­ed doing the pod­cast.

Cameron Reily [34:04]: I remem­ber you telling me about it. So get­ting back to Glen­n’s com­ments, Jim Simons has returned over an aver­age of 50% per annum over 30 years in his bil­lion-dol­lar Medal­lion Fund using a non-Buf­fett approach. Jack Schwa­ger in his mar­ket wizard’s book details the long-term pub­lic records of many investors using both val­ue and non-val­ue approach­es. These books are edu­ca­tion­al and are seen as Bibles to many.

Tony’s won­der­ful suc­cess and his three pil­lars of analy­sis can be described as a quan­ti­ta­tive QAV score in brack­ets rules-based approach using fun­da­men­tals e.g. priced oper­at­ing cash flow, and price three BTL. It’s Tony’s use of price sen­ti­ment that first attract­ed me to QAV. The study of price sen­ti­ment is often called tech­ni­cal analy­sis and the con­cen­tra­tion on the 3PTL in our dis­cus­sions is a great exam­ple of TA, which does­n’t mean T and A. With a more T and A, I think, in QAV, but I think its tech­ni­cal analy­sis. So what do you think about Glen’s com­ments, Tony?

Tony Kynas­ton [35:11]: All very valid com­ments, some­times I say things that are glib, but I was­n’t try­ing to say that val­ue investors were the only peo­ple who do well on the mar­ket and the points that were just made back that up, there are plen­ty of peo­ple out there who’ve made lots of mon­ey from all dif­fer­ent ways of invest­ing. My point was that I can’t think of a suc­cess­ful tech­ni­cal ana­lyst. So just some­body who looks at the lines on the graph and applies all the var­i­ous method­olo­gies, which we talked a lit­tle bit about last week, like the MACD and the RSI indi­ca­tors, and mov­ing aver­ages and all this, I could go on and on, roman can­dles, chan­de­liers, triple heads, head and shoul­ders, there’s been a whole library of books writ­ten about how to inter­pret share graphs and then use that to invest. But, as I said, I can’t think of a sin­gle tech­ni­cal ana­lyst who has made lots of mon­ey out of it, there’s pos­si­bly some­one out there, I haven’t heard of.

Peo­ple tend to be either quant based or fun­da­men­tal investors or val­ue investors or growth investors, all those kinds of things. So that’s my point and I made that point not to pick a fight with peo­ple who are tech­ni­cal ana­lysts but to under­line what my expe­ri­ence is, and I’ve read dozens, if not hun­dreds of books, prob­a­bly dozens of books on tech­ni­cal analy­sis because, like every­thing else, when I was start­ing out, I was try­ing to find my way through the invest­ing uni­verse and none of that stuff worked for me. And it seemed like every time, a bit like with a three-point trend line some­times, there are always excep­tions. As soon as you try and apply some rules, then you’ll encounter the excep­tions and you got to work your way through a deci­sion about whether you ignore the rule or whether you apply the rule.

So my point is, learn from my expe­ri­ence and don’t go down the rab­bit hole with tech­ni­cal analy­sis too far. And that’s why I like sim­ple as using a sim­ple ruler on paper or on a screen to do my tech­ni­cal analy­sis, which was a three-point trend line because it’s high lev­el, it’s sim­ple. Even though we have lots of ques­tions about it, I still find it fair­ly sim­ple and it does­n’t need to go into all the math and com­plex­i­ty of the whole his­to­ry of tech­ni­cal analy­sis, which is inter­est­ing to read about, but its appli­ca­tion, I found, has­n’t been all that use­ful. So that was my point. So save your­self the trou­ble, peo­ple.

Cameron Reily [38:02]: When you’re run­ning down that list of all the dif­fer­ent tech­ni­cal analy­sis approach­es, it sound­ed like a list of ecsta­sy brand names at a For­ti­tude Val­ley night­club on a Sat­ur­day night to me. You want some Roman can­dles? You want some MACD? I just watched Wolf of Wall Street again the oth­er day. Hadn’t seen it since it first hit the cin­e­mas and liked it a lot more this time around.

Tony Kynas­ton [38:32]: Fun­ny, isn’t it? It’s very clever.

Cameron Reily [38:34]: It is. But it just remind­ed me of that scene where DiCaprio is talk­ing about the drugs that he has to take to wake him­self up in the morn­ing and then the drugs he has to take to bring him down off of the drugs that he took to get him­self up in the morn­ing and has this strict reg­i­men of bal­anc­ing get all of his drugs so we can func­tion dur­ing the day?

Tony Kynas­ton [38:56]: Did I tell you that I got called by the Boil­er Room guy from the States once?

Cameron Reily [39:01]: No.

Tony Kynas­ton [39:02]: 20 years ago, when I was run­ning Myer Direct, I’m sit­ting in my office and the phone rings. And it’s this guy from the States and now I’ve seen Wolf of Wall Street, he did that clas­sic “Do you like to make mon­ey? Would­n’t you like to make mon­ey? I can make mon­ey for you? Have you seen this stock? It’s guar­an­teed to go up by 100%, you’d be fool­ish not to, how much can I buy for you?” And I just sat there let the guy go through his whole spiel and said thanks but no thanks. But it’s an inter­est­ing expe­ri­ence; they have a very slick sales­man.

Cameron Reily [39:32]: Fas­ci­nat­ing, alright, just fin­ish­ing up for the news stuff. I was doing my score­card as I said before we start­ed our call this morn­ing I got stuck on the chart for MIL. Would you mind walk­ing through the MIL chart with me and telling me what you think? This is Mil­len­ni­um Ser­vices group, in light of our new flat-bot­tom rules.

Tony Kynas­ton 40:11: So the low point is April 19. And then you’ve got June and July are both pret­ty close to that and so is Sep­tem­ber. So if I have a look at those points, the low point is 16 cents on April 19 and then we go to the right and it gets out to 17.5 so we apply that 8% rule I’m just going to pull out a cal­cu­la­tor.

Cameron Reily [40:45]: Do I need to buy a cal­cu­la­tor?

Tony Kynas­ton [40:47]: No, you can use Excel or what­ev­er. So I’ll just dou­ble-check that 16 cents times 8% is 17.28. So I’m going to sug­gest the 8% is that point on the July 19 part of the flat bot­tom?

Cameron Reily [41:11]: So this graph has a fair­ly flat bot­tom, isn’t it?

Tony Kynas­ton [41:15]: For the sell line?

Cameron Reily [41:17]: Yes.

Tony Kynas­ton [41:20]: If we did use 17.5, what dif­fer­ence is that? So 17.5 minus 16.15 that’s 9%. So it’s tricky, isn’t it? Hav­ing just said we’re going to use 8%, of course, I am tempt­ed to use a Sep­tem­ber num­ber which is 9% above, and that gives us a sell line, which is prob­a­bly a bit more use­ful but either way the share price is way above both of those any­way.

Cameron Reily [41:52]: So what about the byline for this?

Tony Kynas­ton [41:55]: So we have a look at the byline. So high point looks like its March 17 $1.68 and then to the right, $1.675, so we prob­a­bly use that point next. So $1.68 is March 17.

Cameron Reily [42:16]: The one right next to it is a $1.675

Tony Kynas­ton [42:18]: Cor­rect.

Cameron Reily [42:18]: April 17.

Tony Kynas­ton [42:21]: And then there’s a bit of anoth­er one there in June of $1.645, and then one in Octo­ber the $1.615. So the first one is $1.68, so let’s just see what per­cent is on there. Sor­ry, $1.68 time’s point eight is 13.44. So a $1.68 minus 11 that’s not right. I’ve done some­thing wrong there.

Cameron Reily [42:51]: Start pro­gram­ming here, ladies and gen­tle­men.

Tony Kynas­ton [42:53]: Go play with the cal­cu­la­tor; $1.68 what per­cent of $.168 8% 13 cents, 1344 so $1.68 minus .1344. For $1.5456 is 8% below so we can use that, most peak on Octo­ber 17 there to start draw­ing our byline? That’s with­in the 8% tol­er­ance; the sec­ond high point would be Jan­u­ary 18. And putting the ruler across those gives us a buy, going to say May 2020. So let’s see, going to go down through there, and then we’re doing that one through there.

Cameron Reily [43:52]: Well, that’s good. So that’s got pos­i­tive sen­ti­ment.

Tony Kynas­ton [43:59]: Thanks. I haven’t checked out this com­pa­ny before. What are my new ser­vices do?

Cameron Reily [44:04]: I don’t know

Tony Kynas­ton [44:07]: Secu­ri­ty ser­vices spe­cial­ist.

Cameron Reily [44:11]: I haven’t fin­ished all the man­u­al data but they’ve now got a 1.03 QAV score. Is that a new three-point turn? Let’s see, the last peri­od ana­lyzed was Decem­ber 2020. Got a new uptick? We do it since the cross of the buy line, right?

Tony Kynas­ton [44:40]: So I’m say­ing the Buy was about May 2020 and the last results were released in Feb­ru­ary 2020.

Cameron Reily [44:52]: Feb­ru­ary 2020?

Tony Kynas­ton [44:54]: Feb­ru­ary 2021, sor­ry.

Cameron Reily [44:56]: I’ve got last peri­od ana­lyzed Decem­ber 20.

Tony Kynas­ton [45:01]: So they were released in Feb­ru­ary 21.

Cameron Reily [45:05]: I see what you mean and it start­ed to an uptick in Novem­ber 20, 2020.

Tony Kynas­ton [45:13]: May, I think, was prob­a­bly the Buy.

Cameron Reily [45:15]: The price start­ed to pop up in Sep­tem­ber 2020 it’s when the price start­ed to go up. So the upturn is well before the last results came out. Let me look at the rest of the stats while I’m here. P/E… June 20 107 no, P/E’s four half’s before that and then a 1225 and a 1487, Decem­ber 20 — .87, cur­rent .75 So it is the low­est P/E?

Tony Kynas­ton [45:54]: Cor­rect. We don’t have a full series, but it is the low­est.

Cameron Reily [45:58]: Gets a two for that. And let me look at the equi­ty, Decem­ber 20, minus 2.7 mil­lion, minus 19 mil­lion, minus 37 mil­lion, minus 36 mil­lion, minus four. Okay, so it’s not con­sis­tent­ly increas­ing equi­ty. So it gets to zero. Well, that gives me a QAV score of 1.26 which is cur­rent­ly con­sid­ered num­ber two on my lit­tle chart here on my score­card. I mean, he got

Tony Kynas­ton [46:39]: I did­n’t pick it up the last time. I just have a quick look at my last down­load. So it was there.

Cameron Reily [46:46]: I haven’t checked it for a qual­i­fied audit yet. The CEO resigned in May of 2021. It’s inter­est­ing.

Tony Kynas­ton [46:58]: I did not pick it up. Let me have a look. Mr. Dar­ren Boyd resigned sounds like it was a lit­tle bit sud­den. I can see why did­n’t pick it up in the cal­cu­lat­ed sen­ti­ment line and show­ing it as a down­trend. So I nev­er checked the sen­ti­ment on it, there you go. Good pick up Cam.

Cameron Reily [47:17]: Thank you, Tony. That’s why I’m here.

Tony Kynas­ton [47:31]: The hive mind, isn’t it?

Cameron Reily [47:33]: It is part of the hive mind, full-year results pre­sen­ta­tion, no half-year results pre­sen­ta­tion.

Tony Kynas­ton [47:46]: You’re look­ing for the red flag

Cameron Reily [47:48]: I am. Here we go half-year accounts which sound about right. Here we go. The finan­cial state­ments were sub­ject to review by the audi­tors and the review report is attached as part of the half-year finan­cial report with an empha­sis on the mat­ter con­cern­ing going con­cerned in COVID-19.

Tony Kynas­ton [48:05]:  Empha­sis of mat­ter. That’s one of the text strings that James Oliv­er said we should look for.

Cameron Reily [48:12]: This will be com­ing up soon. Scrolling down to the bot­tom, here we go more Aus­tralia audit. The empha­sis of mat­ter relat­ed to grow­ing con­cern, we draw our atten­tion to note one grow­ing con­cern in the finan­cial state­ments, which iden­ti­fies that the group is cur­rent­ly in a net asset defi­cien­cy of 2.7 bil­lion, no 2.7 mil­lion, and its cur­rent lia­bil­i­ties exceed its cur­rent assets by 22.26 9 mil­lion. The prepa­ra­tion of the finan­cial report is a going con­cern basis is based on the events and then the empha­sis of mat­ter relat­ed to COVID-19. The unique and ear­ly eco­nom­ic impact may have a sig­nif­i­cant bear­ing on the oper­at­ing envi­ron­ment as the com­pa­ny’s major cus­tomers oper­ate, but in par­tic­u­lar, not lim­it­ed to retail and com­mer­cial their opin­ion is not mod­i­fied. So based on peo­ple who haven’t heard the chat yet, but based on our chat with James yes­ter­day, is this a red flag or not?

Tony Kynas­ton [49:18]: That’s a huge red flag. It’s a qual­i­fied audit. You did­n’t just con­tin­ue from what you’re read­ing their empha­sis of mat­ter relat­ed to going con­cerned is the one that I think is the red flag it says after you read out but the fact that they did­n’t have pos­i­tive cur­rent assets, says the prepa­ra­tion of the finan­cial report on a going con­cern basis is based on the events and con­di­tions along with oth­er mat­ters as out­lined in note one going con­cerned, the out­comes of which are uncer­tain nar­row opin­ions are not mod­i­fied in respect of this mat­ter. So what they’re say­ing is that as you’re hear­ing the James Oliv­er inter­view peo­ple is that the audi­tor is draw­ing peo­ple’s atten­tion to note one going con­cerned.

So the finan­cial state­ment has been not­ed. And often­times, if you ever do read a finan­cial state­ment, you’ll see some­times there are 20 25 notes, where the CFO or the board or the CEO have made cer­tain assump­tions or deci­sions about how things are record­ed, and then they note them in the finan­cial accounts. One of the rea­sons why I like oper­at­ing cash flow rather than prof­it is because you have all these inter­pre­ta­tions that go into cal­cu­lat­ing prof­it. And they’re set out in the notes and the first one is say­ing that the com­pa­ny may not be able to con­tin­ue oper­at­ing. Just a fine note one.

Cameron Reily [50:46]: I’ve got it. The con­sol­i­dat­ed finan­cial state­ments have been pre­pared on a going con­cern basis, which assumes the con­ti­nu­ity of nor­mal busi­ness activ­i­ties and the set­tle­ment of lia­bil­i­ties in the nor­mal course of busi­ness dur­ing the peri­od end­ed 31 Decem­ber 2020. The group’s prof­it after income tax expense amount­ed to 17.05 1 mil­lion, Decem­ber 2019, loss of 823,000. And at that date, the group’s cur­rent lia­bil­i­ties exceed­ed its cur­rent assets by 22.26 9 mil­lion, the group’s net defi­cien­cy amount­ed to 2.7 mil­lion as of 31 Decem­ber 2020. The results for the cur­rent peri­od includ­ed 7.83 net gov­ern­ment COVID-19, job keep­er grants, and wage sub­si­dies in Aus­tralia.

After tak­ing into account the incre­men­tal wage top-ups paid to employ­ees and the recog­ni­tion of 4 mil­lion of deferred tax assets, not pre­vi­ous­ly rec­og­nized the net cash gen­er­at­ed from oper­at­ing activ­i­ties for the cur­rent peri­od was 29.15 6 mil­lion com­pared to 5.7 4 mil­lion of net cash used in the pre­vi­ous com­par­a­tive peri­od, there were non-recur­ring cash out­flows of 4.41 8 mil­lion in the pre­vi­ous com­par­a­tive peri­od. They’re relat­ed to wages to employ­ees due to his­tor­i­cal errors in the appli­ca­tion of employ­ee instru­ments. Well, that’s all a bunch of mum­bo jum­bo to me. Tony, can you turn that into Eng­lish?

Tony Kynas­ton [52:08]: We’ll keep read­ing in a minute. So basi­cal­ly, when lia­bil­i­ties exceed assets, you have neg­a­tive equi­ty, which is, the basis of the bal­ance sheet. So it’s say­ing that they owe more mon­ey than they have assets avail­able. They’ve said that they’ve received $17.3 mil­lion of job keep­er sub­si­dies. So that’s great. That might be an issue if they don’t get more job keep­er sub­si­dies, but com­pa­nies are still expe­ri­enc­ing prob­lems relat­ed to COVID. And they’re also say­ing they had a bit of cash pay­ment, I had to make the employ­ees in the past $4.4 mil­lion because they did­n’t pay them prop­er­ly. So there are a few things is going on there but it’s the neg­a­tive equi­ty, which is the real issue, then goes on to say in the notes con­tin­ued.

The direc­tors have had regard to the debt facil­i­ties with the ANZ bank, which were refi­nanced in Octo­ber 2020 for a fur­ther two-year term expir­ing in Octo­ber 2022 with­out tak­ing on any new bor­row­ings. The group has access to $22.8 mil­lion of unused financ­ing facil­i­ties as of 31 Decem­ber 2020. The group’s cash flow fore­cast and bud­get for the next 12 months show pos­i­tive oper­at­ing cash flows and an improve­ment in prof­itabil­i­ty respec­tive­ly. So I con­tin­ue to talk about their plans to cut costs. The con­sid­er­able improve­ment in the group’s cur­rent oper­at­ing results com­pared to the pri­or cor­re­spond­ing peri­od is pri­mar­i­ly due to the Strate­gic Ini­tia­tives for­mu­lat­ed and imple­ment­ed by the board and senior man­age­ment team.

The group’s abil­i­ty to con­tin­ue as a going con­cern is depen­dent upon the items list­ed above should these events not occur as antic­i­pat­ed, the group may not be able to pur­sue its busi­ness objec­tives and will have dif­fi­cul­ty con­tin­u­ing to oper­ate as a going con­cern, includ­ing real­iz­ing its assets and extin­guish­ing its lia­bil­i­ties at the amount shown in the finan­cial state­ments. So that’s prob­a­bly the impor­tant one. So in a nut­shell, what they’re say­ing is that they’re improv­ing their prof­itabil­i­ty, and they’re improv­ing their oper­at­ing cash flow. And I guess my ques­tion there is, I’m not sure where that job seek­er mon­ey goes, if it goes into cash flow or not, that might be a job seek­er monies might be record­ed and oper­at­ing cash flow, I’d have to dig fur­ther and see if it is but any­way, they received 17 mil­lion in Job Seek­er last year and they had 22 mil­lion and sor­ry, they had oper­at­ing cash flow. I can’t find it quick­ly. But any­way, it was not much more than that.

So that’s the first ques­tion I want to dig down into a look at. But any­way, what they’re say­ing is they think they’re going to try their way through this prob­lem. Notwith­stand­ing fur­ther COVID prob­lems they’ve got access to some debt. But the last thing I think a com­pa­ny like this needs to do is to bor­row more mon­ey, giv­en that they already have lia­bil­i­ties exceed­ing assets. And if every­thing goes, right, they tried their way through. So in terms of risk mit­i­ga­tion, I’d be call­ing this a red flag, they may well try their way through, they may well come out look­ing like a good com­pa­ny. But let’s wait until some more results come out before you invest. So I’m call­ing it as up and the old pilots a qual­i­fied audit or new pilots, a red flag.

Cameron Reily [55:42]: And the CEO abrupt­ly resigned in May

Tony Kynas­ton [55:47]: Haven’t even looked at that yet as to the rea­sons for that.

Cameron Reily [55:50]: Well, I’ve read the announce­ment, which was that he said, he did do every­thing he came to do which is run up more lia­bil­i­ties than the head assets. It’s time to go, short mis­sion. For George W. Bush’s mis­sion accom­plished ban­ner put it on top of the bat­tle­ship.

Tony Kynas­ton [56:15]: Men fly [inaudi­ble 56:16] but­ton.

Cameron Reily [56:23]: Well, there you go. That’s inter­est­ing so good. School looked good for a minute there but then a bad red flag on that.

Tony Kynas­ton [56:32]: And I may has­ten to add, and Jamie talked about this in an inter­view. It’s not nec­es­sar­i­ly say­ing the com­pa­ny’s going to go broke. It’s say­ing there’s a risk and there are plen­ty of oth­er com­pa­nies we can invest in. So why take the risk?

Cameron Reily [56:48]:  Well, we’re an hour into this. And we haven’t even gone to Jamie’s thing and done any ques­tions yet. So, what do you think?

Tony Kynas­ton [56:59]: Well, I’m hap­py to keep going but there’ll be a big episode for peo­ple. Why not?

Cameron Reily [57:05]: I think peo­ple think they can lis­ten to it slow­ly over a week [inaudi­ble 57:09].

Tony Kynas­ton [57:10]: Just take a break and get your­self a cup of tea or some­thing and then do the ques­tions.

Cameron Reily [57:18]: Meet you back on here in five. Wel­come back, all togeth­er. This is a long seg­ment, Tony. But let’s talk about ATL I noticed yes­ter­day, it was down I think about 16% from when we bought it.

Tony Kynas­ton [57:58]: Get­ting close to it, so align­ment.

Cameron Reily [58:00]: I don’t know. Let me bring it up.

Tony Kynas­ton [58:03]: But while you’re doing that, we can just talk a lit­tle bit about qual­i­fied audits again or red flag audits again. So fol­low­ing our dis­cus­sion with James last night, one of the issues we were talk­ing about is and peo­ple will hear it is what hap­pens if when an audi­tor mod­i­fies their opin­ion or points out a note in the finan­cial state­ments about a mat­ter of con­cern? And yeah, James said that it’s usu­al­ly a full and frank dis­cus­sion and that the direc­tors will try and fix the prob­lem. And he said, In a lot of cas­es, the prob­lem is fixed before the annu­al report goes out, or the half-year­ly accounts go out and so that can be old news, but he also said that the direc­tors may well take what­ev­er oth­er means they can to remove the qual­i­fied audit or the red flag and one of those ways poten­tial­ly is chang­ing audi­tors.

And so hence the call out of Apol­lo tourism and leisure because back in Decem­ber, it had a mat­ter of con­cern raised by its audi­tors, a red flag, about its abil­i­ty to con­tin­ue as a going con­cern and clear­ly, it has con­tin­ued as a going con­cern because it’s six months from when that was raised and that they qual­i­fied, all that went away in the cur­rent half-year­ly results announce­ment back in Feb­ru­ary. But there’s a new set of audi­tors so they’re dif­fer­ent from the ones in Decem­ber. So, it’s a bit of a tricky sit­u­a­tion. I’m going to say that was a bit of a con­cern for me now. Again, in terms of risk mit­i­ga­tion, I think we should prob­a­bly take it off the QAV list and call it out as a red flag.

Again, not because we nec­es­sar­i­ly think there’s a prob­lem with ATL and we don’t know, but just for the fact that there was one, and it’s gone away, but the audi­tors have changed, which could poten­tial­ly be noth­ing prob­a­bly is, but it could also be a prob­lem. And again, it’s just high­light­ing anoth­er sit­u­a­tion where this could be risky and so why take the risk? Why not invest in some­thing else? And I think it is get­ting pret­ty close to its sell line now, isn’t it?

Cameron Reily [1:00:27]: Yes, well, I just looked at it. So, it’s got a cou­ple of low points here, the first one is March 2020, the COVID cough, at 16 cents, then in July 2020, close to 21 and a half cents, and then Octo­ber 2020, close to 23 and a half cents. I did my lit­tle spread­sheet up. So 16 cents plus 8% would be 17.2 cents. So the next low­est line is above that. So I think we do start with the COVID cough and then draw a line through that. Draw a line through the next low point. Well, if you did that, if you went through the July 2020 line, it’s on that line. But if you took the trough at March 2021 26 and half cents is Alto.

Tony Kynas­ton [1:01:34]:  That’s the one I would use.

Cameron Reily [1:01:36]:  Then it’s still a lit­tle bit above the sell line but it head­ing towards it pret­ty quick­ly.

Tony Kynas­ton [1:01:45]:  It looks like it going to be sell­ing around sort of 30 31 cents and it’s cur­rent­ly 36 and drop­ping. So, I’m going to call it as a sell. Most­ly for the fact that as James point­ed out, that a change of audi­tor fol­low­ing mate­r­i­al con­cern about going con­cern with what’s called a mate­r­i­al mat­ter. The empha­sis of mat­ter raised about going con­cern might be an issue. I guess I’m choos­ing my words wise­ly here because I don’t know that it is, again, why take the risk?

Cameron Reily [1:02:26]: So does this mean every time we an audit check, we have to go back and check the pre­vi­ous audit as well to make sure that the audi­tor has­n’t change.

Tony Kynas­ton [1:02:40]: It’s hard, isn’t it?

Cameron Reily [1:02:41]: Yes.

Tony Kynas­ton [1:02:49]: I guess so but hav­ing said that, we’ve got half a dozen also qual­i­fied all that’s in the spread­sheet already. I think it’s going to be more of an issue that when we see one of those improve, we should look and see whether the audit has changed or not.

Cameron Reily [1:03:06]: If you’re already flagged it, and then it comes out of it just check.

Tony Kynas­ton [1:03:13]: I think so. And again, prob­a­bly con­ser­v­a­tive audit has changed for all sorts of rea­sons. But I think it’s just one more lev­el of risk that we don’t need to take.

Cameron Reily [1:03:29]: Okay. Well, I told you, ATL, bloody ATL they nev­er fail to fail. Alright, so we will be sell­ing ATL out of the QAV port­fo­lio today, then.

Tony Kynas­ton [1:03:53]: So, you’ve done a down­load have you? We need to replace it with some­thing.

Cameron Reily [1:03:57]: Yes, I will share the 3d when I fin­ished. I’m still halfway through doing the man­u­al data but I’ll send a 3d when I’m done and we can pick some­thing. Well, let’s get into some ques­tions. This is going to be a real­ly long episode, by the way, folks, because we got to put the Jamie Oliv­er in there thing so strap your­selves in. Okay, with some of these ques­tions are get­ting pret­ty old we haven’t got to them over the weeks; apolo­gies again to every­one. So we get to your ques­tions in order that they come in as quick­ly as we can with the time that we have avail­able.

So any­way, these are few that are get­ting a lit­tle bit hairy, lit­tle bit of green mold on these ones in the past the use by date, but as my moth­er would say, there are fine did­n’t have used by dates when I was your age, you just did a sniff test. And if it seems like you just eat it and then if you get food poi­son­ing at 3 am, you prob­a­bly should­n’t have eat­en it but apart from that, we’re all fine.

Tony Kynas­ton [1:05:04]: And you’ve got sib­ling, so it does­n’t mat­ter if one of them takes [inaudi­ble 1:05:07].

Cameron Reily [1:05:09]: That’s why Catholics had 12 Kids. Andrew, this is Andrew one thing Andrew want­ed to men­tion is the use of a 52 week sim­ple mov­ing aver­age, as an addi­tion­al buy sell indi­ca­tor, have a play around with using a five year week­ly three point trend line and a 52 week sim­ple mov­ing aver­age, both as an indi­ca­tor for buy­ing and sell­ing just some­thing that works for me, he says, no doubt you’ve looked at this before?

Tony Kynas­ton [1:05:40]: I haven’t looked at this one in detail I did­n’t have a look at it when the ques­tion came in and I think I went back to Andrew and said which one takes prece­dence that five year week­ly 52 week, sim­ple mov­ing aver­age, or three point red line? So, I think he came back and said you just sort of look at all three but I could have that wrong. I don’t want to miss attribute any­thing to Andrew, if it works for him that’s great. The ques­tion I have about using any­thing oth­er than a five year month­ly is my expe­ri­ence of using week­ly graphs is that I was trad­ing out of stocks too soon and they turned around.

That was my expe­ri­ence, I can remem­ber very clear­ly own­ing a stock called NWH, NW Hold­ings], I think it was the name of the com­pa­ny NWH might be the code or vice ver­sa. Con­sul­tan­cy or con­trac­tor to the min­ing indus­try. And it was get­ting close to its three point sell line and so I start­ed play­ing around with week­ly graphs to see if I could finance the exit point and I got out based on that and it prompt­ly turned around and shut up. So if I had stuck with the five year month­ly, I would have made a lot more mon­ey than I did using the week­ly. And that’s just the gen­er­al obser­va­tion that when­ev­er you’re deal­ing with week­ly data, it’s very volatile and it can have that kind of whips or effect on your shares.

Cameron Reily [1:07:20]: Well, I’ve got Andrews reply here, when you asked which takes prece­dence he said sure the answer is nei­ther takes prece­dence. I found in the past that if I rely on just one indi­ca­tor, it can get me in or out of a stock too quick­ly. I.e. not let­ting the price go through the nor­mal ups and downs of the mar­ket, I try to use two indi­ca­tors to con­firm sen­ti­ment. If either two of the three list­ed below hap­pens, then that con­firms sen­ti­ment for me, the buy­ing indi­ca­tors one break­ing above an accu­mu­la­tion peri­od usu­al­ly break­ing above a trad­ing range and or to break­ing above the 52 week SMA and or three break­ing above the three point trend line five year week­ly buy sig­nal.

If two of the above indi­ca­tors are met, then I buy at a sort of the reverse for the sell­ing indi­ca­tors.  So, two he says I assume Tony uses a five year month­ly chart because it cuts out a lot of mar­ket noise and allows him a long term hold strat­e­gy. I have a sim­i­lar long term out­look. I also use the month­ly chart when I’m look­ing at a price chart; I just pre­fer to man­age the invest­ment using a week­ly chart. As I found I can react a bit quick­er to any sig­nif­i­cant move­ments in the price. Hope this helps and have a great day.

Tony Kynas­ton [1:08:35]: Thanks, Andrew; I’m glad it works for you. I’ll have a look again, using two out of three. But my expe­ri­ence using week­ly charts was it was too volatile for me.

Cameron Reily [1:08:4: Maybe it’s some­thing we can get Dylan to look at, at some point. Do some analy­sis. Thanks, Andrew. Great, here’s the hive mind again, com­ing up with new things to look at new things to think about, which is the point lots of real­ly smart peo­ple think­ing about how do we even improve QAV even fur­ther. Here’s one from Simon again regard­ing the three point train line. So I’m won­der­ing if Tony is con­sid­ered using mov­ing aver­age crossovers or chan­de­lier stops using ATR what’s ATR?

Tony Kynas­ton [1:09:21]: I have for­got­ten like to Google it to get it right. It was basi­cal­ly a log­a­rith­mic graph.

Cameron Reily [1:09:30]: Aver­age True Range.

Tony Kynas­ton [1:09:33]: It was using much can­dle­stick graphs. So, you got not only the share price for par­tic­u­lar day, you got the high­est price, it got to the low­est point price it got to and it was feed­ing that into the cal­cu­la­tion to work out The Aver­age True Range.

Cameron Reily [1:09:55]: Sor­ry. The rest of Simon’s ques­tion is, or even a com­bi­na­tion of say one ATR below 150 day mov­ing aver­age. Obvi­ous­ly, the trick is to find the right bal­ance of not get­ting stopped out too ear­ly and watch­ing a bounce after the stop is trig­gered ver­sus giv­ing back a lot of win­nings.

Tony Kynas­ton [1:10:15] I’ve nev­er used ATR, I think some of these are avail­able if you go into the study’s drop down box, if you’re using the stock doc­tor graph, the advanced graph, so you can over­lay these kinds of trend lines and make your own deci­sion. I haven’t used it so I can’t real­ly com­ment on it. We can do some back test­ing on it, I guess. Okay, as I said, I’ve used mov­ing aver­ages in the past, and they have a rea­son­able cor­re­la­tion with the three point trend line. But they don’t cor­re­late com­plete­ly and they do have issues. Some­times they work bet­ter, and a lot of times they work worse. But look­ing at it Simon’s com­fort­able with that, please use it go ahead.

Cameron Reily [1:11:10]: Dun­can had a ques­tion about VUK being close to sell line, but I think we’ve already con­clud­ed that he was prob­a­bly right, we’ve already got out of VUK and then we got back into VUK.

Tony Kynas­ton [1:11:28]:  I had an inter­est­ing week last week, after I declared I was going to sell my ANZ and VUK and then I wait­ed for a day or two to get that mes­sage out before I did. I lost mon­ey sell­ing ANZ two days lat­er, but I man­aged to hold on to VUK, so it was swings and round­abouts.

Cameron Reily [1:11:47]: You’re like Jer­ry Sein­feld, Even Stevens. So, Dun­can, that was. Thanks, Dun­can. Sor­ry, might have been a lit­tle bit late get­ting to that but sounds like you were on the right track there. This is from James. Here’s some­thing I’m strug­gling to get my head around I’m here to keep Tony’s thoughts on a please. If 60% of the stocks one holds is to deliv­er an annu­al return of 20% of the total port­fo­lio. Each stock that deliv­ers must increase on aver­age by 33% per year, or 33.3% CAGR. That’s quite a sober­ing thought. So with that in mind, I strug­gled to under­stand why Berk­shire Hath­away still holds KO, Coca-Cola.

Tony Kynas­ton [1:12:38]: I’m sor­ry; I bumped the micro­phone reach­ing for my pen. Just mak­ing a long ques­tion I’m mak­ing some notes on it.

Cameron Reily [1:12:45]: I thought you’d fall­en over and…

Tony Kynas­ton [1:12:48]: Well, let me talk it through then just there’s two parts of this ques­tion. The first one is about 60% of the stocks deliv­er­ing all the returns, which is true. I’m not sure about the math of 33% CAGR for those because the 40% under­per­form, and straight loss­es, we might only lose, we might break even we might lose one or 2% on them. So, well, we actu­al­ly might get out with­out los­ing mon­ey. So, I’m not sure about the math on that. Cer­tain­ly the 60% that we hold, deliv­ers our returns has to be greater than 20% because the over­all port­fo­lio goes up by 20% but it may not be 33% for each of those 60% of stocks.

Cameron Reily [1:13:38]: Okay. So, the sec­ond part of his ques­tion is, I strug­gle to under­stand why Berk­shire Hath­away still holds KO, Coca-Cola, which has a 10 year CAGR of only 5.5%. And I’d love to hear Tony’s thoughts of it, please. I under­stand they get more in div­i­dends now than they paid back in the day, but they’re only 2.15%. What about putting the 21 bil­lion they have in kayo and 5.5% per year into some­thing that’ll give them 15% a year? Does War­ren share with you these thoughts on why is Coca-Cola?

Tony Kynas­ton [1:14:13]: Does­n’t even share with me who his car­di­ol­o­gist is. No it’s a good ques­tion and I think that should be put to the Berk­shire Hath­away AGM. I haven’t heard this ques­tion asked before and I think it’s very good. I sus­pect that there are a cou­ple of things at play here. Buf­fet may well think coke will improve that’s a pos­si­bil­i­ty; he may also think that he would have trou­ble sell­ing a big steak like that. So, you would have to do it slow­ly and not depress the price so that could also be an issue. But I think James’s analy­sis is spot on, if it’s not going to improve if you can Hang­ing out of the stock over time with­out the press­ing the price, then what was a good idea 40 years ago is prob­a­bly not a good idea these days, and you could prob­a­bly put the mon­ey some­where else and use it bet­ter.

So I agree with James. And I just read that the Zell book, biog­ra­phy, Am I Being Too Sub­tle? And he said in there some­thing like every day, if you’re hold­ing an invest­ment, you should con­sid­er whether you’d be buy­ing that invest­ment because hold­ing it as like buy­ing it. So that’s the ques­tion is Coca buy at the moment and if it’s not why you’re hold­ing it? So, I think it’s a very good ques­tion and I can’t defend War­ren on that one.

Cameron Reily [1:15:46]: Well, I just read a lit­tle bit of his­to­ry on this. So he bought a bil­lion dol­lars in Coca-Cola shares in 1988, just after the crash of 87, which then was equiv­a­lent to 6.2% of the com­pa­ny. As of March 2021, he held 9.2% worth more than $22 bil­lion so, done okay.

Tony Kynas­ton [1:16:20]: Cor­rect. I don’t know what the num­bers are on trust­ing James’s analy­sis is cor­rect at 5.5% per year. [Cross-talk­ing 1:16:27]. Okay, Buf­fett would say it’s a great com­pa­ny with a big moat, and you can’t com­pete with Coke around the world. And it’s expand­ing into third world coun­tries at a good rate and all those kinds of things. So, it’s a good place to be invest­ed but it’s not return­ing the types of returns we want our­selves.

Cameron Reily [1:16:51]: But they give him free Coke. So, you need to take that into your analy­sis, I guess.

Tony Kynas­ton [1:17:00]: It’s good point, James rais­es, because I remem­ber read­ing it, I think it’s in the War­ren Buf­fett work­book or some­thing like that. And the author goes through an analy­sis of why he thinks Buf­fett bought Coke, and not just because it was after the crash of 87. So the price would have been low, but Buf­fett thought they were over pro­vid­ing for depre­ci­a­tion. And that would be able to write that back to prof­it and use that for oth­er things, which they even­tu­al­ly did. So, he did some detailed bal­ance sheet analy­sis, which was behind his invest­ment the­sis but that was 40 years ago. So, and that would have played out maybe over the first five or 10 years, not the remain­ing 30. So, I think James is spot on.

Cameron Reily [1:17:44]: Well, we should get him on the show. War­ren that is not James, get War­ren on the show and ask.

Tony Kynas­ton [1:17:50]: I’m assum­ing that’s a dif­fer­ent James, with one we had on last night.

Cameron Reily [1:17:53]:  I don’t, I don’t write their names down here but we have lots of James’s so pos­si­bly. Good analy­sis, James. Daniel says, I’m look­ing to add posi­tions in my port­fo­lio, one of which is [DSK], which is [DSK] I think from mem­o­ry tak­ing a fur­ther deep dive into its mas­sive sell­ing down of stock from direc­tors that’s on mar­ket trades, the mar­ket trades, do we sim­ply ignore this? Or is this classed as a warn­ing sign and we skip to the next stock?

Tony Kynas­ton [1:18:27]: Good ques­tion. I don’t know the details of [DSK] when it comes to peo­ple sell­ing down. I’ll leave an analy­sis of it to answer the ques­tion as much as I can. And [DSK] is a recent addi­tion to the ASX, so I went through an IPO and I think that’s nine months ago. And I think sale the sale or the sell down of some of the founders was part of that IPO. And it’s also pos­si­ble that they had an escrow pro­vi­sion. I don’t know what the case is here but often­times, founders and man­age­ment will be told at the IPO, they can sell some down, but they have to remain invest­ed to a cer­tain posi­tion for a cer­tain peri­od of time, six months, nine months, 12 months or what­ev­er it is. And then they can sell some more.

So it’s pos­si­ble that they had always planned to sell down this time as part of the IPO I’m not sure. I think it is sus­pi­cious that these peo­ple are sell­ing down but I did notice that they still have a large share­hold­ing in the com­pa­ny and that was the oth­er point I need to make as it some­times again, deals are done with the insti­tu­tion­al investors that the founders will sell the ANOVA time to improve liq­uid­i­ty in the stock. So a lot of times, insti­tu­tion­al investors can’t invest in a com­pa­ny if the founders still hold a large per­cent­age because there’s not enough free float. And they asked the founders to sell down so they can buy into it, just like we’ve been talk­ing about, it makes it eas­i­er to buy in or sell it out of a com­pa­ny if it’s got freer float.

And so insti­tu­tions don’t want to be trapped in a com­pa­ny which has, if the founders still held 30 or 40%, and they then hold 10 or 20% them­selves, it can become a very crowd­ed exit, if it comes time to sell. So that could be an issue here I don’t know the case with doe­skin but they’re gen­er­al­ly around IPOs these things are an issue. I’d be more afraid of invest­ing in [DSK], if I’d seen that the founders sold out com­plete­ly into the IPO and they did­n’t. So, the man­age­ment still retains a rea­son­able share­hold­ing so I’m not as con­cerned at this stage. But Daniel should do some more analy­sis and try and work out why they’re sell­ing down. Is it just to get free float up? Was it part of the IPO deal? Did they have some escrow­ing and exer­cis­ing and all those kinds of things are in play?

Cameron Reily [1:21:06]: That’s the sort of stuff you would think about before you invest­ed in some­thing like this?

Tony Kynas­ton [1:21:10]: Yes, I think Daniel spot on. You saw some sell­ing down have a look at the rea­sons behind it. Which I haven’t dug down into at this stage, but it will be out there and some of the ini­tial IPO doc­u­ments I would have thought.

Cameron Reily [1:21:26]: Just inter­est­ing­ly, it was your stock of the week back in April at one point.

Tony Kynas­ton [1:21:36]: We did talk about it because it was a new float. I think from mem­o­ry is get­ting close to it sell line any­way, isn’t it?

Cameron Reily [1:21:46]: Man, it’s an inter­est­ing one. It’s a very sheer, straight up sort of chart float­ing float­ed in Novem­ber. I don’t even know how to draw a sell line on this. Where would you start in Jan­u­ary 21 and draw it through March 21?

Tony Kynas­ton [1:22:12]: Yes, dif­fi­cult one, I’d prob­a­bly start with the float so Novem­ber 2020, and then use Jan­u­ary 21 after that which puts you pret­ty close to the cur­rent price. A lit­tle bit below it are 361 now it’s prob­a­bly going to be around 350 or so. [Cross-talk­ing 1:22:34] the byline is a hard one, isn’t it? You’ve only got two points, the high­est point and the one to the right. And that’s been the case all the way along.

Cameron Reily [1:22:54]: So, it’s prob­a­bly been a buy for six months. Would you say, has­n’t breached a sell line?

Tony Kynas­ton [1:23:03]: Yes, I would say it’s been a buy since uploaded, prob­a­bly. This is a good exam­ple of why the three point trend line analy­sis. If you try and make it an algo­rithm, it does­n’t take this into account, but he does­n’t.

Cameron Reily [1:23:20]: It’s tricky.

Tony Kynas­ton [1:23:24]: And maybe that’s like some of the peo­ple have sug­gest­ed maybe bet­ter off going back to a two year graph. If you look at the two year graph in stock doc­tor, it’s much eas­i­er to form an opin­ion, isn’t it?

Cameron Reily [1:23:36]: How?

Tony Kynas­ton [1:23:38]: Well, the sell line I think it’s going to be formed by those first three troughs. Let me get some dates here, Novem­ber 2020, through to Decem­ber 2020. So, you’re get­ting your sell line much low­er than where the cur­rent price is now.

Cameron Reily [1:23:58]: Decem­ber 2020, or Jan­u­ary 21. We’re still talk­ing about [dusk]?

Tony Kynas­ton [1:24:05]: Yes. I’m just going back to the front page of stock doc­tor.

Cameron Reily [1:24:12]: Okay. I see. Sor­ry, you’re not using a five year chart here, but you’re using a two year chart on the front page.

Tony Kynas­ton [1:24:20]: Stock doc­tor using a two year chart.

Cameron Reily [1:24:22]:  Mine isn’t I have it set up dif­fer­ent­ly on the front page. Okay. So a two year, what is this week­ly?

Tony Kynas­ton [1:24:31]: Yes.

Cameron Reily [1:24:34]: No, it’s dai­ly.

Tony Kynas­ton [1:24:37]: Okay, let’s just go [cross-talk­ing 1:24:38]; let me click on what­ev­er I got set up here so I can get this right. I’ve got a week­ly graph and I’ve got it set as five years but it’s only giv­en us week­ly from the float. And so the three low points after the float were 13th of Novem­ber 2020, 4th of Decem­ber 2020 and 25th of Decem­ber 2020. And they’re sit­ting at a sell line at around $2.50. And, again, it’s kind of being pret­ty hard to find a buy, but it’s been sort of buys all the way along, has­n’t it? Because if you took, for exam­ple, the sort of first peak, where it fell away in 22nd of the 01st 21, it then falls away and then goes high­er.

So again, we’re not get­ting three points, we’re get­ting two. If you go up to March 2021, 5th of March, you’ve got three points there, which would have been a buy. But I think its com­mon sense here it’s like­ly the graph is going up. The only con­cern I’ve got is, if you look at the month­ly graph in the last month, it’s gone down but this month, it’s turn­ing up.

Cameron Reily [1:26:15]: Which is a good thing, right?

Tony Kynas­ton [1:26:17]: It is a good thing yes. [Cross-talk­ing 1:26:19] good to raise I think, good ques­tion.

Cameron Reily [1:26:25]: Does­n’t have a very high score in terms of my raw scores but if I give it a pos­i­tive sen­ti­ment, let’s see, pumps it up to .19, new three points up turn. Well, no, real­ly? It’s been going up all the way. Let’s have a look at the PE’s record low. PE’s what? Only one PE what’s the new rule, if it’s only one PE?

Tony Kynas­ton [1:27:05]: Good ques­tion.

Cameron Reily [1:27:10]: Let me bring up the Bible because you just did some [cross-talk­ing 1:27:14] on that.

Tony Kynas­ton [1:27:16]: I have it scores as a blank but we should check the Bible on that one.

Cameron Reily [1:27:22]: The cur­rent word­ing in the Bible says where the QRP ratio is the first and only P ratio in the last six hours then leaves the score is blank.

Tony Kynas­ton [1:27:33]: That’s what I had in mind any­way, but that’s make sense.

Cameron Reily [1:27:37]: Okay, and let me look at increas­ing equi­ty. Well, there’s only one equi­ty; we had a new rule on this too.

Tony Kynas­ton [1:27:48]: Well, I called a blank two, so I applied the same rule as [inaudi­ble 1:27:52].

Cameron Reily [1:27:55]: Net equi­ty one entry leaves the score as a blank. Okay. So, that gives me a score for dusk at point one, nine, which is not bad, but not great. I haven’t checked it for an audit though. A lit­tle bit wor­ried if they’ve only been around for a few years I’ve got a flag.

Tony Kynas­ton [1:28:20]: I checked it back in April and there’s no mate­r­i­al con­cerned, no red flag.

Cameron Reily [1:28:26]: So point one, nine not too bad. They’re prob­a­bly mak­ing on my top 20 after I fil­ter every­thing out at the end of the day.

Tony Kynas­ton [1:28:33]: I’m get­ting a high score, but I just check if I got the right price so hang on. What’s the cur­rent share price Cam?

Cameron Reily [1:28:43]: It is $3.62.

Tony Kynas­ton [1:28:49]: So, I’m get­ting a score of point two, six.

Cameron Reily [1:28:57]: Cameron in the edit­ing booth here. So, to cut a long sto­ry short, Tony and I com­pared our scor­ing on this, and I found that there were a cou­ple of prob­lems on my end. Num­ber one, I was­n’t using the lat­est ver­sion of the flip­ping sheet. I was still using 1.7 point four because I’m lazy and I had­n’t done the changes to get to 1.7 point five which fixed these errors with the PE his­to­ry and the con­sis­tent­ly increas­ing equi­ty that we picked up a cou­ple of weeks ago and Tony had fixed his ver­sion of the sheet Andrew fixed the AF ver­sion. I also through the process of this though, real­ize there’s anoth­er change that Tony had made on his ver­sion in late May, regard­ing future IV, get­ting a blank, which is in the mas­ter ver­sion, but I blogged about it, but I for­got to send Andrew an email.

So, he had­n’t made the change in 1.7 point five either, so I’ve let him know today and there will prob­a­bly be a 1.7 point six in the next day or so it should­n’t be a big change with the scor­ing with these things. I think with Tony’s mas­ter spread­sheet; he said it did make a big dif­fer­ence. But if there’s no future APS, then the col­umn that asks if the future IV is greater than twice the share price it should get a blank if there’s no future APS, basi­cal­ly. So, it’ll make a slight scor­ing dif­fer­ence in the sce­nar­ios where there’s no future APS but not a huge dif­fer­ence. Thank you, Daniel for dusk and I know you had anoth­er ques­tion, but I think we’re going to have to draw a line under this one. Tony, we’re an hour and a half into this. Then we got to add James, it’s going to be already a two hour show.

Tony Kynas­ton [1:30:48]: I only got one more ques­tion to go, though, from Daniel. You want just fin­ish it quick­ly.

Cameron Reily [1:30:54]: The Daniel one. Okay, sure?

Tony Kynas­ton [1:30:57]: Yes. And then we’ve caught up, I think.

Cameron Reily [1:31:01]: Well, no, I’ve got 1 2 3 more ques­tions

Tony Kynas­ton [1:31:07]: Have you, did they come in today?

Cameron Reily [1:31:10]: No, yes­ter­day, prob­a­bly. Okay, any­way, that’s alright, we can get to them next week.

Tony Kynas­ton [1:31:18]: [Cross-talk­ing 1:31:17], next week, if you’re like, that’s fine.

Cameron Reily [1:31:20]: No, we’ll just fin­ish Daniel. Part two of Daniel’s ques­tion, he says, with some com­mod­i­ty graphs trend­ing down as with most of QAV lis­ten­ers hold­ing com­mod­i­ty stocks, we’d love to know, Tony’s thoughts on the whole com­mod­i­ty cycle. The last thing we want to be doing is trad­ing too much, but if they car­ry on trend­ing down, do we want to start think­ing about some of our posi­tions in these resource stocks? Well we’ve talked a bit about this over the last month, haven’t we?

Tony Kynas­ton [1:31:46]: Yes. So first of all, if they cross their three point sell lines, like these com­mod­i­ty graphs, then sure, we should be sell­ing the under­ly­ing stocks. But I checked the com­mod­i­ty graphs using both stock doc­tor and index Mon­day, and they are all doing okay. So, gold, iron ore, cop­per, oil, and nick­el are all in long term, upward trend. So, if there are some sort of short term down­ward trends, they’re not that con­cern­ing. I know, gold’s pull­back from 2000 an ounce to 1700 and while iron ore and oil store on the way up, so, I’m not sure about the com­mod­i­ty graphs trend­ing down.

But the gen­er­al point is that when the com­mod­i­ty graph reach­es that three point sell line, we should be out of those under­ly­ing stocks that mine or refine or sell those com­modi­ties. But I think we’re a long way from that with the com­mod­i­ty graphs, there’ll be oth­er issues, and it’s poten­tial­ly the case that iron ore might retreat. And it still might be pos­i­tive sen­ti­ment ter­ri­to­ry, but a share, like for the scheme met­als; it’s a sell line before the com­mod­i­ty does. So, we have to watch both the min­er in the com­mod­i­ty and those kinds of exam­ples. But I think things are look­ing good on the com­mod­i­ty front at the moment.

Cameron Reily [1:33:17]: But we are think­ing or you are think­ing about what to do when they turn down.

Tony Kynas­ton [1:33:24]: Yes, well, I think one of the things that came out of those thoughts was the flat bot­tom graph, rather than hav­ing a flat sell line for some of these min­ing stocks, which they often do, is to take the right low­est trough and use that as now one to draw a line. And that that gets us out of Fortes­cue from mem­o­ry at $17.50 or some­thing like that cur­rent as opposed to if you do the flat line, which is back at 11 bucks or some­thing.

Cameron Reily [1:33:59]: Okay. Cool. Well, thank you, Tony. Thank you, every­body for your ques­tions. We will be throw­ing in a sec­ond to the inter­view with the naked audi­tor give you the nit­ty-grit­ty on how to read an audi­tor’s state­ment. Thank you to James for tak­ing time out of his day to talk us through that we appre­ci­ate it. Again, it’s part of the brain trust, the QAV brains trust, it’s great, and it’s excit­ing, lots of smart peo­ple who bring a lot to the table.

Tony Kynas­ton [1:34:31]: It is, I enjoyed that inter­view with James just to learn more about that whole process and what to look for it was good, and I’m sure there’ll be oth­er brains, we can pick one of the things in the future too, which is great.

Cameron Reily [1:34:44]: Okay, so that’s the reg­u­lar part of the show com­ing up now, James Oliv­er. We’d like to wel­come to the show, QAV club mem­ber and pro­fes­sion­al audi­tor works for a big account­ing firm who will remain anony­mous because he’s appear­ing today, part­ly under wit­ness pro­tec­tion and part­ly as a pri­vate indi­vid­ual. James Oliv­er, wel­come to the show, James.

James Oliv­er [1:35:17]: Thanks, Cameron. Thanks, Tony.

Tony Kynas­ton [1:35:19]: Thanks for com­ing on.

Cameron Reily [1:35:20]: This is not his real voice, we’ve had to mod­i­fy his voice and pix­i­lat­ed his image. Tell us a lit­tle bit about your­self, James?

James Oliv­er [1:35:30]: Well, I’m from the UK orig­i­nal­ly, I stud­ied Eco­nom­ics at UNI and whilst I loved eco­nom­ics, I did­n’t know or put any thought into how to make a career of it. And so, almost by default, and I think, quite a few peo­ple end up doing this is, I applied to one of the big four firms and with a promise of get­ting a fur­ther qual­i­fi­ca­tion, in this case, the Char­tered Accoun­tan­cy qual­i­fi­ca­tion under my belt, and so I did that it took me three years and spent an extra year in Lon­don and then came over to Syd­ney, where I dis­cov­ered the world of Super­an­nu­a­tion Funds Man­age­ment actu­al­ly in an audit capac­i­ty and sort of delved into that indus­try and loved it, and saw how the Aus­tralian com­pul­so­ry super sys­tem has gen­er­at­ed quite an indus­try behind it. I spent 10 years in Syd­ney, and then I’m now in Mel­bourne, and I’ve been here eight years now. And still audit­ing and I actu­al­ly do a few oth­er things as well more sort of Reg­u­la­to­ry and Risk Man­age­ment relat­ed, but cer­tain­ly I do finan­cial audits still.

Tony Kynas­ton [1:36:49]: Fan­tas­tic.

Cameron Reily [1:36:50]: And how did you end up lis­ten­ing to QAV James, tell us that sto­ry quick­ly.

James Oliv­er [1:36:54]: Well, just dur­ing Mel­bourne’s big lock­down last year look­ing for  pod­casts to lis­ten to dur­ing my one hour of exer­cise, and you must have done some good adver­tis­ing Cam, because it just popped up in my feed. And I real­ly quite enjoyed it. So, it’s been a great source of infor­ma­tion, fun and laugh­ter at the same time. So it’s been real­ly enjoy­able.

Tony Kynas­ton [1:37:28]: That’s good. How’s your share port­fo­lio going?

James Oliv­er [1:37:31]: Well, it’s 28th of June, Tony. I’ve made a few cap­i­tal gains this year, and I’m just look­ing to see what I should be off­set­ting them with so it’s been a good year and pri­or to QAV, pret­ty shock­ing to be hon­est. I had some healthy tax loss­es too, but we’re get­ting big­ger every year, every sil­ly idea I just jumped into. So, it’s good to have a bit more struc­ture around it.

Tony Kynas­ton [1:38:06]: Good, well done. Well, we’re here to talk about audits. So, a lot of ques­tions, we get are around qual­i­fied audits, maybe you could tell us what that term means and what it means to you?

James Oliv­er [1:38:21]: And look, it’s not easy, I can under­stand why a lot of peo­ple will get very con­fused read­ing any col­lec­tion of audit reports, par­tic­u­lar­ly of the com­pa­nies they own and what to wor­ry about or what not to. So, if I can apply how an audi­tor talks and thinks about these reports and they’re gov­erned by audit­ing stan­dards, the ter­mi­nol­o­gy and the for­mat and how the audi­tor needs to treat cer­tain things. So, first of all, we start with the term ‘mod­i­fied opin­ions’. So, an unmod­i­fied opin­ion is what you might describe as a clean opin­ion, every­thing else is effec­tive­ly a mod­i­fied opin­ion. And one of those mod­i­fied opin­ions is actu­al­ly a ‘qual­i­fied opin­ion’.

And that qual­i­fied opin­ion is where the audi­tor has dis­cov­ered some­thing, or been told about some­thing, that is mate­r­i­al to the users of the report, but it’s not so per­va­sive to the whole finan­cial report that they’re basi­cal­ly cast­ing a black mark on the whole set of accounts, it’s just some­thing spe­cif­ic, and the word­ing you look for there is “except for”, so, it’ll say “except for”, let’s say, “the com­pa­ny’s treat­ment of leas­es under the account­ing stan­dard”. Effec­tive­ly, every­thing else, we’re say­ing, is fine, except for this thing, and when we refer to a qual­i­fied opin­ion, that’s the instance we’re refer­ring to. The next mod­i­fied opin­ion, I’m hap­py to put some notes down, and you can put it on the site, if you want.

Tony Kynas­ton [1:40:20]: I’m just furi­ous­ly tak­ing notes myself.

James Oliv­er [1:40:23]: The next one is the ‘adverse opin­ion’, that is when some­thing has been dis­cov­ered that real­ly is per­va­sive to the whole set of accounts. And it casts that on the all the books and records. And so that’s when the audi­tor says, no, the finan­cial report does not fair­ly rep­re­sent the Cor­po­ra­tions Act, and the account­ing stan­dards and the like. So that’s what I would describe as prob­a­bly the worst, although I think there are oth­er bad ones from an investor’s point of view so we’ll get to those. The third mod­i­fied opin­ion is called a ‘dis­claimer of opin­ion’. And this is when the audi­tor just does­n’t have enough infor­ma­tion, to enable it to form an opin­ion on a cer­tain mat­ter.

And it might be, for exam­ple, where there’s been a large acqui­si­tion of a pri­vate busi­ness, where there has­n’t been a pre­vi­ous audit, and the books and records are in a ter­ri­ble state. So, you don’t see that very often in this coun­try, but you do over­seas and so there are var­i­ous rea­sons why the audi­tor might dis­claim that opin­ion, they just don’t have the evi­dence so, they just can’t see the way. So, there are three types of what we call mod­i­fied opin­ions. But there is one that I know that’s impor­tant to us, that is not a mod­i­fied or qual­i­fied opin­ion, but it’s what we call an ’empha­sis of mat­ter’ para­graph in the audit report. And that’s where there’s some­thing that is so mate­r­i­al to the users of the report, that the audi­tor feels fit to empha­size that mat­ter, through the audit report so that the read­ers can see how impor­tant it is from the audi­tor’s point of view as well.

So, these are mat­ters that are typ­i­cal­ly well dis­closed already in their report. So the audi­tor is com­fort­able with the way the com­pa­ny has dis­closed a cer­tain mat­ter and the key one that I know, it gets a lot of atten­tion, as it should, is this mate­r­i­al uncer­tain­ty relat­ing to going con­cern. So, the com­pa­ny will dis­close often in that one or two to the accounts that it could be that they’ve breached their loan covenants with their banks, might be that they are seek­ing refi­nanc­ing. And that has­n’t been signed up to yet. So, they’re talk­ing to their bank still. It might be that there’s some mate­r­i­al lit­i­ga­tion going on and it’s just not cer­tain yet. So, the com­pa­ny will dis­close those mat­ters but the audi­tor sees them as so fun­da­men­tal that they empha­size that. And so it’s not that the audi­tor some­how has some crys­tal ball, that they know that there’s an issue and they’re call­ing it out any dif­fer­ent­ly to what the com­pa­ny is call­ing out, it’s just they are want­i­ng to empha­size the impor­tance of that mat­ter.

Tony Kynas­ton [1:43:50]: But it is that mate­r­i­al uncer­tain­ty word­ing that is usu­al­ly the one that I look for, it’s usu­al­ly the one that has the most neg­a­tive con­no­ta­tions for a com­pa­ny.

James Oliv­er [1:44:02]: Absolute­ly. And it’s kind of a, alright, you need to then go do your research; you need to get com­fort­able that the com­pa­ny will be able to pay its debts and con­tin­ue trad­ing. And some­times what we see is, two weeks after the audit report has been signed, they refi­nance, and they issue that notice to the mar­ket. Well, in which case, you’re sort of out of date already, that mate­r­i­al uncer­tain­ty. In oth­er cas­es, obvi­ous­ly not and the com­pa­ny does­n’t man­age to get out of what­ev­er issues it’s got itself into.

Tony Kynas­ton [1:44:49]: So, all those oth­er types of qual­i­fi­ca­tions you spoke about, is there any­thing else we should be search­ing for in terms of scor­ing the com­pa­ny and whether we think it’s impaired or whether it’s going to go ahead robust­ly?

James Oliv­er [1:45:10]: An adverse opin­ion, it would be incred­i­bly rare in a list­ed com­pa­ny envi­ron­ment to get that, I can’t think of exam­ples in the list­ed envi­ron­ment.

Tony Kynas­ton [1:45:21]: I can’t either, that’s why I was try­ing to do when you were talk­ing about it.

James Oliv­er [1:45:26]: And if it’s a com­pa­ny of any sig­nif­i­cance, it would cer­tain­ly get a lot of press relat­ed to that. A qual­i­fied opin­ion, it sort of depends what it is but the audi­tors con­clud­ed that it’s not per­va­sive to the Finan­cial Report. So, you just have to look at what is that qual­i­fi­ca­tion, it could be that the audi­tors believe that there should have been more of an impair­ment, for exam­ple, of good­will, or there may have been a dif­fer­ence of opin­ion on the account­ing of cer­tain mat­ter, but you need to under­stand it, and then ask your­self, how much I care about that par­tic­u­lar thing? And would it impact my met­rics, etcetera, that I’m mea­sur­ing this com­pa­ny on. So, but it’s cer­tain­ly not as bad as an adverse opin­ion. And if the audi­tor is not able to make a for­mal opin­ion, again, in a larg­er list­ed envi­ron­ment, that would be very rare. And again, you need to have to actu­al­ly read the rea­sons why.

Tony Kynas­ton [1:46:48]: I can’t think of any exam­ples of that one, either, so they are pret­ty rare in the list­ed space, any­way. So, that must put the audi­tor in a bit of a bind, if you want to make that kind of strong rec­om­men­da­tion about the books of a com­pa­ny that you want to call some­thing out that is mate­ri­al­ly impor­tant about stat­ing the future of the com­pa­ny? What kind of pres­sure would you be put under to do that, or not to do that?

James Oliv­er [1:47:18]: Well, it’s inter­est­ing. From the inside, the pres­sure to make sure that you’re doing the right thing is incred­i­bly strong. That you’re fol­low­ing your code of ethics, and char­tered accoun­tants do take that very seri­ous­ly and as part of the pro­fes­sion that you’re part of, and so, but you are deal­ing with human beings, in a com­pa­ny, in a finance depart­ment, some­times the direc­tors, and yes, you have to han­dle these things sen­si­tive­ly. You have to under­stand all points of view and we’ve got lots of very high­ly tech­ni­cal peo­ple in the back­ground, who can pick through the account­ing stan­dards, look at prece­dents and how things should be done and kept and have been done? And ulti­mate­ly, form an opin­ion on that basis, you’re not there to win friends, you don’t want to lose too many unnec­es­sar­i­ly but if you have to, then that’s part of the job.

Tony Kynas­ton [1:48:37]: I guess the rea­son for my ques­tion. It’s an inter­est­ing top­ic any­way, but of the half a dozen that we’ve come across dur­ing our look through the val­ue into the stock mar­ket, when they’ve had a seri­ous­ly qual­i­fied audit. Are there many more out there that don’t get to that stage, because there’s some kind of dis­cus­sion that’s going on between your audi­tors and man­age­ment or direc­tors?

James Oliv­er [1:49:08]: Most of the time, if the audi­tors find some­thing, the com­pa­ny will cor­rect it. And if they cor­rect it, then the issue goes away large­ly, as long as it’s not indica­tive of some oth­er sys­temic account­ing sort of con­cerns, so, I guess what you’re ask­ing me is how much faith can peo­ple put in…

Tony Kynas­ton [1:49:36]: Not so much that, James, but if there’s half a dozen where the audi­tors have felt so strong­ly that they’ve called them out as either mate­r­i­al uncer­tain­ty or some oth­er kind of qual­i­fi­ca­tion. Are there oth­er tell­tale signs we should be look­ing at for say the next run­down that might devel­op into those kinds of seri­ous finan­cial sit­u­a­tions?

James Oliv­er [1:50:05]: I don’t think so, as it relates to going con­cern. The sorts of things that we look for as audi­tors, it’s where cur­rent lia­bil­i­ties exceed cur­rent assets, bank­ing covenants are real­ly impor­tant. Plen­ty of com­pa­nies have gone under because the banks just decide to pull those levers that they have, let’s say sig­nif­i­cant lit­i­ga­tion, some­times it’s loss of a major con­tract but I think if the com­pa­ny itself is com­ply­ing with its con­tin­u­ous dis­clo­sure require­ments, then the investors should know about these things any­way typ­i­cal­ly.

Tony Kynas­ton [1:50:58]: I guess, where I’m com­ing from, if you might want to just take us through what a key audit mat­ter is. And one of the ques­tions I was lead­ing to is, if we see a com­pa­ny with a con­tin­ued long list of key audit mat­ters, is that a sig­nal that there’s a prob­lem?

James Oliv­er [1:51:14]: No. And it’s a good ques­tion, Tony. These are not meant to be indi­ca­tors of any con­cern that they were brought in to the audit report­ing frame­work a few years ago and they’re still being rolled out to dif­fer­ent types of enti­ties but cer­tain­ly list­ed com­pa­nies were first cab off the rank here in Aus­tralia, so key audit mat­ters or KAMS, as they’re called. They’re the mat­ters that are the most mate­r­i­al ones fac­ing the com­pa­ny from the audi­tor’s point of view. And they’re often the most com­plex and the areas that involve the most judg­ment. So typ­i­cal­ly, you’ve got, let’s put it this way, an audi­tor is most com­fort­able look­ing at his­tor­i­cal infor­ma­tion and check­ing the trans­ac­tions hap­pened in line with how the com­pa­ny say they hap­pened.

So, look­ing at books and records and tak­ing sam­ples and check­ing. But a lot of the items on a bal­ance sheet, for exam­ple, are depen­dent on some sort of mod­el, or some sort of future fore­cast view. So, you look at your good­will, your intan­gi­bles, some of the invest­ments you’ve made, non-cur­rent assets, but they’re based on these mod­els that are based on fore­casts of future sales and cash flows and cap­i­tal mar­ket assump­tions around inter­est rates and etcetera. So, it’s quite dif­fi­cult for the audi­tor to absolute­ly say that these are 100% okay, because nobody has a crys­tal ball, what they do is they will employ cer­tain experts in their respec­tive firms, and they’ll assess the rea­son­able­ness of those mod­els and those assump­tions going into the mod­el, etcetera. But that’s all it is, it’s just check­ing rea­son­able­ness and so this is a way to give trans­paren­cy to users of those finan­cial reports.

What are some of the areas where the audi­tors have to apply its own judg­ment? And so they are very much worth read­ing, I’d sug­gest, if you’re inter­est­ed in us invest­ing a com­pa­ny, read them for infor­ma­tion, don’t read them think­ing the audi­tors are par­tic­u­lar­ly con­cerned unless they actu­al­ly say they are con­cerned. Just read them to say, well, actu­al­ly, if the audi­tor is say­ing that this is an area that is quite com­plex and uses a lot of judg­ment, then well, maybe  I need to make my own judg­ment as to whether I’m com­fort­able with the way that the com­pa­ny is doing things in that respect. So, if there’s a huge amount of good­will, okay, am I com­fort­able that there’s enough cash com­ing into that busi­ness to actu­al­ly cov­er that going for­ward?

Tony Kynas­ton [1:54:40]: Okay. And I’ve noticed, too, that when I’m look­ing for audit reports that the half year­ly report can be a lot dif­fer­ent to the annu­al report. Could you just maybe tell us what the dif­fer­ences are, and maybe give us an indi­ca­tion of what we can rely on in the half year report in terms of audit qual­i­ty.

James Oliv­er [1:55:01]: So, all list­ed com­pa­nies have to do half year reports and typ­i­cal­ly in Aus­tralia, as we know, that’s it Decem­ber and the full year is 30th of June, not all com­pa­nies, but that’s the gen­er­al trend. So the half year report is what we call a lim­it­ed assur­ance opin­ion, it’s based on review pro­ce­dures, not audit pro­ce­dures. So, in lay­man’s terms, the audi­tor does just a bit less than it does for the full year audit. And so what you get is an opin­ion that says noth­ing has come to our atten­tion, that will indi­cate that the finan­cial report isn’t in line with the corps act, etcetera. So, it’s say­ing noth­ing has come to our atten­tion, it’s not say­ing that the audi­tor believes that it IS in line, it’s just not NOT in line.

So, the full year is an audit and we call that rea­son­able assur­ance and the audi­tor states cat­e­gor­i­cal­ly what his opin­ion is, so it’s a dif­fer­ent stan­dard of assur­ance, the half year is less, the full year is more. So, it’s a dif­fi­cult ques­tion to answer as to what the investor needs to think about in that respect. Typ­i­cal­ly, though, I could say that most major mate­r­i­al mat­ters would be dis­cussed quite ful­some­ly at the half year. So, and if going con­cern issues or val­u­a­tion issues, it’s just that the extent of test­ing by that audi­tor to val­i­date all of the books and records is less at half year.

Tony Kynas­ton [1:56:59]: I’ve seen cas­es where have an annu­al report will have a mate­r­i­al con­cern qual­i­fi­ca­tion in it. But then by the half year it’s gone. What does that mean James? Is that mean that the audi­tors now think the com­pa­ny’s full of sun­shine and ros­es or some­thing else has hap­pened? Or what does it mean?

James Oliv­er [1:57:18]: No, I think, my best guess as to what it would mean, in the cas­es you’ve seen, Tony, is that no com­pa­ny, and no Board of Direc­tors want­ed to see a qual­i­fi­ca­tion and a set of accounts that they’re sign­ing off. And so, there’d typ­i­cal­ly be a lot of strong action to fix what­ev­er needs fix­ing, between the full year and half year, that’s cer­tain­ly one rea­son that you might see that trend. But there’s no require­ment for the audi­tor at the half year to sort of refer to the full year and say, by the way, this has changed, and there­fore, we haven’t flagged this as an issue. So, I can’t see any real oth­er rea­son for that trend, nec­es­sar­i­ly.

Tony Kynas­ton [1:58:15]: Could a board decide to solve its qual­i­fied audit prob­lem by boot­ing the audi­tors and replac­ing before the half year result?

James Oliv­er [1:58:26]: Well, what I’ll just say to that is the investor should prob­a­bly seek to under­stand whether it’s rais­ing a ques­tion at the AGM or through some oth­er means, why an audi­tor changes, and it could be just part of every­day good gov­er­nance and a com­pet­i­tive process that goes on. But yeah, that could be a poten­tial flag just to raise ques­tions as to why has this audi­tor changed? And did he just not like that the opin­ion of that audi­tor. You’d very much hope that’s not the case.

Tony Kynas­ton [1:59:16]: But there are some rules around how long an audi­tor can do audit­ing for a com­pa­ny aren’t there and whether the oth­er arm of the con­sult­ing firm you work for can do busi­ness with the com­pa­ny?

James Oliv­er [1:59:28]: Look, there are var­i­ous rules in Aus­tralia and there are also var­i­ous rules glob­al­ly and they are a lit­tle bit dif­fer­ent. It’s a top­ic of con­ver­sa­tion with reg­u­la­tors and gov­ern­ments around the world. So in Aus­tralia, there is manda­to­ry rota­tion of audit part­ners so, for exam­ple, in the list­ed space, you can’t be the audit part­ner of the same com­pa­ny for more than five years, it can be the same com­pa­ny, and you tran­si­tion that over to a new audit part­ner. Some juris­dic­tions, not in Aus­tralia, not yet at least, force manda­to­ry ten­der­ing of the audit firm and that manda­to­ry ten­der­ing does­n’t nec­es­sar­i­ly mean that the incum­bent won’t be appoint­ed again but there has been a com­pet­i­tive process that’s been under­tak­en. And then some go fur­ther enforce manda­to­ry rota­tion.

So, you get a cer­tain peri­od as the audi­tor and after that you just can’t re-ten­der for that. And there’s lots of argu­ments either way, pros and cons of the dif­fer­ent approach­es, maybe not worth going too far into those here. But I think from a con­flicts per­spec­tive, that there are pret­ty strong process­es and gov­er­nance steps that we have to go through as audi­tors, par­tic­u­lar­ly where there’s a full ser­vice firm behind us doing var­i­ous dif­fer­ent things, but it’s right­ful­ly an area that gets reg­u­la­tors inter­est­ed. And, I think the per­cep­tion of those con­flicts is as impor­tant as whether or not there is a real con­flict just to main­tain that con­fi­dence in the audit process. And so, it’ll con­tin­ue to be debat­ed hot­ly.

Tony Kynas­ton [2:01:37]: As investors, is it some­thing we should be aware of, if we look at the his­to­ry of a com­pa­ny that’s had the same audi­tors for 10 years, is that an issue, do you think?

James Oliv­er [2:01:46]: I think it’s prob­a­bly oth­er things that the investors can spend their time on? It would be my sense; I’d leave that to the reg­u­la­tor for it’s a very high­ly reg­u­lat­ed pro­fes­sion, the audit pro­fes­sion. And that like I said, there’s pros and cons. There are some com­pa­nies, some on the ASX that have had the same audi­tor for over 100 years. Does it mean that they’re get­ting some sort of com­pro­mised audit? I doubt it, I don’t believe so. But the counter argu­ment, Tony, is that the audi­tor, the audit firm  has built a lot of knowl­edge about those busi­ness­es and par­tic­u­lar­ly very large busi­ness­es can be very com­plex to get your head around and to see every nook and cran­ny where there could be an issue. So again, I’m not going to express strong views either way, but there are def­i­nite­ly counter argu­ments to that 10 years or more being a con­cern, as an audit firm being in place.

Tony Kynas­ton [2:03:06]: I think I’ve come to the end of my ques­tions, Cam, but before we cut the inter­view, you could just dish some dirt for us, James and tell us what com­pa­nies to avoid or tell us where the skele­tons are buried in some of the big com­pa­nies out there?

James Oliv­er [2:03:20]: I def­i­nite­ly can’t do that unfor­tu­nate­ly, Tony and the information’s out there. One of the ques­tions, Tony, I know that you’ve asked before at one of the din­ners was whether or not an investor can down­load infor­ma­tion on mass about the nature of any audit qual­i­fi­ca­tions, or of such things. I’m not aware that those data­bas­es can exist but it cer­tain­ly if there’s an enter­pris­ing soul out there who can use tech­nol­o­gy in some nat­ur­al lan­guage pro­cess­ing, look­ing for key­words, etc. I’m sure you can scan the ASX or scan the asset data­base of com­pa­nies for issues. I’m sure there’s some­one who can put their mind to that but it does­n’t exist as far as I’m aware.

Tony Kynas­ton [2:04:15]: If we were going to do a nat­ur­al lan­guage search, are we look­ing for ‘mate­r­i­al uncer­tain­ty’? What are the words we’re look­ing for?

James Oliv­er [2:04:25]: So, ‘mate­r­i­al uncer­tain­ty’, I think is a good one,  I’d do the ‘except for’, is anoth­er one and then ‘dis­claimer of opin­ion’.

Tony Kynas­ton [2:04:38]: Good.

James Oliv­er [2:04:39]: You might want to ’empha­sis of mat­ter’ as well.

Cameron Reily [2:04:41]: Thanks, James. Last ques­tion before we go, why did you leave the chef busi­ness and is it okay if I call this episode The Naked Audi­tor.

James Oliv­er [2:05:01]: It’s not a prob­lem, for many years since that chef you allude to came on the scene I’ve had that from all sorts of avenues in my life includ­ing, call­ing up the elec­tric­i­ty com­pa­ny to pay a bill and they make some joke about the naked chef and…

Cameron Reily [2:05:21]: You must be sick of it.

James Oliv­er [2:05:23]: All good Cam.

Cameron Reily [2:05:24]: Well, thanks very much mate, hope Mel­bourne stays out of lock down and hope to see you at our next Mel­bourne din­ner.

James Oliv­er [2:05:34]: I appre­ci­ate that. Thanks.