Transcript QAV #355 – Andrew Page, Strawman
Duration: 67 mins
Cameron (00:04): Welcome to the QAV podcast. If you’re brand new, I just want to introduce the podcast a little bit so you know what you’re getting yourself into. If you’ve listened to the show before, feel free to just fast forward a minute or two, if you’re brand new, here’s the deal? My name’s Cameron Reilly, Tony Kynaston is an old friend of mine. He’s a very successful share market investor. I’m talking very, very, very successful. He’s been doing it 30 years. He’s one of the best in the country in terms of a private investor, very good track record over 30 years and what this podcast is about is Tony basically teaches me everything that he knows about investing in the stock market and you get to listen. But if you’re coming into this for the first time, you’ll find that the current episodes assume a certain level of prior knowledge.
We assume that you know what we’re talking about, his system, his methodology, which we explained in earlier episodes so, feel free to listen if you want to get the vibe for what’s going on, but some of it’s not going to make much sense unless you understand what the checklist is etcetera. I recommend if you’re brand new, go back and listen to season three episode one, episode three and, episode five where we go into Tony’s background, his system, and his methodology in a lot more detail, and then feel free to listen to the contemporary episodes. The current episodes you’ll understand more of the context of what we’re talking about. With that let’s get into today’s show.
So we want to welcome to the show today, Andrew Page, the founder of Strawman. I’m sure most of you are familiar with Strawman, but if you’re not, it’s an online community of investors that write stocks and share their research and their tips and I think it’s been around a couple of years, but I’m sure Andrew will tell us more of the story. So welcome to QAV Andrew Page.
Andrew (02:07): Thanks, guys, great to be in here.
Cameron (02:10): Where are you coming from you? You’re Sydney based.
Andrew (02:12): I am Sydney based. We’re out in the inner West.
Cameron (02:15): Right and things are going well in Sydney I think still virus-free Sydney, mostly. Is that right unlike Adelaide today, sadly?
Andrew (02:25): It’s kicking around. I heard that they do testing with a syringe and that gives you a pretty accurate read but it’s out there, but the reported numbers are pretty low. So hopefully it stays that way.
Cameron (02:37): I wonder what else they can test via syringe.
Andrew (02:40): A lot.
Cameron (02:40): A little bit worried about them looking at my syringe quite honestly.
Andrew (02:43): Oh yeah.
Cameron (02:45): What they going to find in there.
Cameron (02:48): So before Strawman, we’ll go back to your career a little bit but where I want to start Andrew is Electric Bean. Can you tell me about the Electric Bean?
Andrew (03:01): This is one of those great experiences that teach you a lot but you hope never to repeat. So, man, I’m going back quite a few years now but some friends and I thought we would open up a cafe sort of very hip and sexy and we thought it would be great fun and it was a nightmare, frankly. It’s a very tough business. Anyone who’s run that kind of business or the restaurant hospitality business knows that it’s very tough long hours, very tiring, thin margins, hyper-competitive, it was really tough. We started it from scratch and it’s a horrible name by the way. I just want to say on the record wasn’t my idea.
Andrew (03:47): The name horrible man. We ran it for about a year and then we sold it actually. So we broke even on our start-up costs but it was a waste of time other than what it taught us, what not to do.
Cameron (04:06): What was the Electric part of the bean?
Andrew (04:08): Stupid name. I hate it. I said at the time I hated it. I’ll say it again.
Cameron (04:14): Yeah.
Andrew (04:15): Awkward name.
Cameron (04:17): I said that about QAV as a brand.
Cameron (04:19): Tony yeah, what the, no one’s going to know what a QAV is, but he’s the boss.
Andrew (04:26): You can change it to Electric QAV from there.
Tony (04:35): Let’s stick with just QAV.
Cameron (04:35): The cafe it’s interesting though because one of the big things that Tony did early on when we were doing the show that really helped me start to understand what the hell he was talking about was he would use the cafe analogy to talk about looking at a company and I think a cafe is something that even though most of us haven’t had the Electric Bean experience, we kind of can grasp how a cafe works and so we often do use a cafe analogy when we’re talking about stocks and looking at revenue and how much should you pay for it and how would you value it and capital and all that kind of stuff. So, anyway, it’s interesting and you have a bachelor of science in microbiology too, I believe.
Andrew (05:24): Yeah.
Cameron (05:26): Useful particularly during a pandemic I’m sure.
Andrew (05:29): Well, to be honest with you, I couldn’t get a job if I tried in that industry now. I graduated in the ’90s and that when I was at Uni, the human genome project was, they were doing that. It was a multinational, multimillion-dollar global effort. Now you can sequence a genome in a couple of hours on a little box that sits on your desk so that the field has moved so far beyond what I’m qualified is to be laughable but I know a few basic things about bacteria. Put it that way.
Cameron (06:04): Well, I’m sure that comes in handy at some point with your kids.
Andrew (06:08): Yeah.
Cameron (06:09): So tell us about Strawman. Give us the pitch and I guess tell us where it came from. I think you were at Motley Food before Strawman, is that right?
Andrew (06:21): Yeah. Motley Food and then prior to that was a private investment club called Team Invest and I guess just the big picture here is, is that there’s a lot of value as you guys would know getting together and talking with other investors A- to get ideas but B to get sort of lean in on their experience and their insights and their wisdom. But as you probably know, it’s very hard to do online. If anyone’s tried to join a Facebook group or there’s another very well-known forum company in Australia that I won’t mention and there are some, actually some really high-quality contributors, but on these places, but unfortunately they are buried underneath the mountain of noise and hype and pumping and all of the worst aspects of human nature and investing. So it was really just the desire to, without all the talking about social platforms and technology and all the hype that goes with that. I really wanted an online investment club but one that could bring a bit of transparency and accountability to the process so that when I’m talking to someone, I might not know their real name, but I can have a bit of insight into their track record, companies they like, the investment thesis that backs up their viewpoints, perhaps some valuations and its really trying to put some structure around that.
So, it’s actually been going probably about three years ago we started building it and I’m not a program. I’m not a developer. So I think I made every single mistake that there was to make building the thing and mistakes happen to this day, unfortunately.
Cameron (08:04): Was the original name for the Electric Strawman.
Andrew (08:06): No, it wasn’t, any, any mention of Electric is blacklisted for any venture? The idea of Strawman was I’m really big on the idea of having my best ideas challenged. So I think we’re all susceptible to this confirmation bias problem so if you and I both like a particular company and we talk about it, all we’re going to do is reinforce how brilliant each of us is. And it’s not a very valuable process, but if I can speak to Tony who has the polar opposite view to me, or even just a different view to me, that is super valuable. This is not about stroking ego. This, this is about me being either right or wrong, and if I’m wrong one way or the other, I’m going to find out eventually. Now I can find out by the market telling me or I can find out by a trusted confidant telling me, and one perhaps is a bit more bruising to the ego but it’s also far less damaging to your wealth.
So the idea was that we want people to share their investment insight, their ideas, and their investment thesis if you will, but we want it to be challenged. We just want it to be challenged in a very constructive way where it doesn’t devolve into an argument and end up with someone calling someone else nuts as most internet debates usually devolve into that point. So that’s the big picture idea. We give everyone a hundred thousand dollars in play money. They can build a portfolio with that using real-world price. So you kind of cheat the system here. There’s someone who has built up a good track record, has done so by picking good stocks and by managing the capital wealth, and that gives credibility and that helps you determine who’s perhaps worth following and perhaps who’s worth listening to. Yeah, that’s basically the idea.
Cameron (10:06): Right and they came from sorry, Tony.
Tony (10:08): No, go ahead, go after you.
Cameron (10:10): Oh I forgot what I was going to say. No, I guess you spoke about investing $100,000? Are there limits on the amount you can deploy depending on how big the capital is of the company?
Andrew (10:34): Oh Tony yes.
Cameron (10:27): I see on Strawman, a lot of people are investing in small companies. Obviously, they can’t put a hundred thousand dollars into each trade. Is there some kind of sophisticated black box that stops them from doing it or you just say, that’s fine.
Andrew (10:41): No, they’re all trading rules, and this has evolved. So in the early days, we just had unlimited capital and it was more like a newsletter like Motley Food that’d be by recommendations or not and we would just track it all in percentage terms and then we added plenty money and then we had to add rules around that. So there’re a lot of rules. I’m quite proud of the way of IP it’s been built up over our time here to try and make it. There’s a balance between giving people the flexibility to do what they feel is appropriate to them, but also not to gain the system. So, the big one is that we have a 20% rule in terms of waiting. You cannot initiate a position or add to a position such that it pushes you over 20% waiting.
So when you start off with that a hundred K you can only put 20 K into a position and that cash will actually provide you with some cash track there as well so cash earns is 0% rate of return, pretty accurate in this low-interest-rate environment.
Cameron (11:39): Yeah.
Andrew (11:40): So that’s if someone doesn’t put it all their money into a 1 cent stock. We’ve also got volume matching rules around that as well. So on the ASX, if there’s $10,000 traded in a given day, well, that’s all you can buy. And that’s not really something you ever have to worry about when you’re dealing with the big, biggest stocks but at the smaller end, becomes very important. And just this last week, a little bit contentious actually, but just this last week, we actually had to enforce a two central as well. So we’ve actually stopped people from buying shares that are less than 2 cents. The reason around that is that we operate on end of day closing prices only and without getting into the minutia of it, there’re ways to gain the system with people trying to buy stocks at 0.1% and flipping it the next day for 0.2 of a cent. So other than that, it is any stock you can buy up to 20%. You must volume match with what was traded on the ASX that day, and you can only trade at the end of the day. So you can’t intraday trade which is fine. We’re more of an investment platform but that’s it, other than that, you can do whatever you like.
Cameron (12:50): Does the platform take into account taxes and brokerage as well?
Andrew (12:54): Yeah, no we do an account for either a brokerage or tax. We could, the reason we haven’t is because it would be a consistent feature across everyone. So, if we did add brokerage in, I guess one argument would be, it would penalize to some extent those who overtrade. So that is something we have thought about but the tax everyone’s in a different scenario. So as yet, we haven’t, we may in the future, but not at the moment.
Cameron (13:23): Just on that. Without going into personal cases, have you drawn any broad conclusions from your network yet? Does someone who trades frequently get a better result than someone who trades infrequently, for example.
Andrew (13:40): There are always exceptions to the rule. So we’re knocking on the door of about 14,000 users on the platform. So, there’s a bit of an infinite monkey theorem here. So, you know, there’s always going to be someone doing particularly well with a particular strategy, and we have people joining all the time. So there are people who might look brilliant for a few weeks and then fall away and vice versa. But I would say this is some general observations. I strongly believe this as a general rule on markets, but I think those who overtrade tend to underperform, and by the way, that’s without those taxation and brokerage restrictions that we have but definitely, I’ve noticed that. Another thing that is a very obvious feature to me at least is that you can trade your virtual portfolio on Strawman without saying anything.
You don’t have to put any notes up there. You don’t have to put a valuation, but those that use the platform a bit like an investment diary so they’re not just buying X, Y, and Z because share price is moving up, they’re buying it because they’ve looked at the business, they understand the different dynamics that are at play. You can tell when you see some of these guys that have been on there for a while. They put a lot of research into this. They’ve clearly done their homework and lo and behold, they’re the ones that tend to outperform longer term
Tony (15:01): Question for you about the platform and what you’re doing. It seems quite a wide-ranging platform as you say with 14,000 users. How are you funding it? I cannot see any sort of obvious advertising or linkages that are to brokers or something. How’s it being funded?
Andrew (15:15): Tony, it’s 2020. Revenue is so last millennium.
Tony (15:21): You put it on after pay have you?
Andrew (15:25): Yeah, so we make well-paying outs really. We do a few sponsored posts occasionally, we have some affiliate programs if lack of share so Australian shareholders association, these kinds of things but, but we haven’t really turned the revenue taps on yet. Frankly, we could, in fact, we’ve had a lot of offers but it tends to be from investor relation firms and it tends to be investor relation firms that are being paid by if I can be blunt, really crappy mining stocks that want to pump their prices, and these guys pay a lot of money to promote their stock. So it’s been very hard to say no to that money, but we feel as though the moment we do that, we devalue the whole experience.
Tony (16:17): Right.
Andrew (16:18): And frankly, it’s that Charlie Munger idea of he whose bread I eat is so amazing and as soon as we do that, our allegiance will be with the investor relations company, won’t be with the investors. We want to look after the investors. And the only reason we haven’t was a couple of reasons. We do have a revenue model. I’m happy to tell you about it, although it’s very tentative and subject to change but why we haven’t wanted to initiate that yet until we’ve got this positive flywheel happening, the challenge with social networks, in Google Plus, found this out the hard way. It doesn’t matter how good the technology is, if there’s no one on your platform, it’s worthless, and this is Google tried to beat Facebook with Google plus. It was a disaster. So, we don’t want let anything get in the way, and two, we’ve got a self-sustaining community there.
So anything that was going to impede that we weren’t interested in. So we’ve just been funding it out of our own pockets through until now. And the other thing was trying to come up with a model that would enable people to participate to varying degrees. We want it to be free always but we want to have a higher premium level of membership that gives you extra benefits and extra bells and whistles.
Tony (17:43): Right.
Andrew (17:43): So it’s been a challenge in sort of designing that and building that. I’m really excited to say that I think we’ve got something that’s really cool. I want to keep my cards a bit close to my chest. If you asked me at the start of the year, I would’ve said it was going to be out by July but that’s how things have gone but we’ve got something that I think will be great. It will be free if you want it to be free, but if you want to have a higher level or a better experience, there’s something there as well and one that will actually recognize and reward financially those that are the better contributors.
Tony (18:25): Right. That’ll be the Electric Strawman.
Andrew (18:28): Yes [laughs].
Tony (18:30): Sign up forms.
Andrew (18:31): Absolutely. That’s exactly right.
Tony (18:34): So, I guess my line of questioning goes to this next question, if you’re not making money out of advertising or subscribers or some other way like that, are you making money by setting up your own investment fund that uses some of the better returners to guide what you invest in?
Andrew (18:53): I wish we had. So we’ve got this thing called the Strawman Index and what that does is, it’s hard to explain verbally, but in broad terms, what we do is we take the more popular stocks from across the community and we build a sample portfolio based on that and that thing, if you just go to Strawman, and then hit the companies tab, you’ll see how insanely good that thing has been. If I open it up now, in fact, we had a very early alpha release in late 2017, and then the public version was released in 2018. Since then it’s been 41% per annum versus 6% for the market. Even over the last 12 months, it’s been about a 22% return versus a -2.6% return for the market. So, I wish we had done that because we would have made incredible returns but I’ve been fortunate that all of my personal wealth is in the share market and has been over 10 years and that’s permissioned me to fund Strawman and to avoid having to go cap in hand to any investor relations firm.
Tony (19:58): I’m just scrolling down that list and it’s great returns, a lot of tech stocks on there and buying up, pay later type stocks. I mean, congratulations, it’s a great return. I think what would stop me from investing in that index is the worry that next month it’ll go South, just like it did in 2000 so.
Andrew (20:15): Yeah.
Tony (20:19): I mean they’re fantastic returns from these users and they’re all based on those kinds of companies and that seems to be the way that Strawman goes. Is there any sort of, I guess, divergence in the Strawman population that has a more traditional type investment thing, or is it overwhelmingly of one type of profile that tends to go after the buy now pay later or tech stocks in their portfolios?
Andrew (20:47): Yeah, Tony, it’s kind of evolves. So we sort of started off with a few hundred and as it’s grown, it has more, so it’s hard to sort of pin it down to any one particular style. I would say if there was any particular bias, it was certainly towards smaller cap stocks but that being said, I mean some of the really big winners that we’ve had are certainly small-cap stock, but there are real businesses there, the businesses with sales, not necessarily profits in all cases but real businesses executing to their strategy very, very well. But I guess the other thing I would say is this index was really we put this in place at inception before we knew how it was going to be one because we felt it sort of lends to the viability of the quality of the community. But I don’t think anyone would sort of say you should follow that to the letter. It’s more of something just sort of keeps us honest. Within that group, you’ve got people who would invest only in income stock. Some people who only invest in property trusts, others that, go for the buy now pay later as the pot stocks and lithium stocks and all the basics so everything in between.
So the other thing that I would encourage you to do is go to that member’s tab there, you can look at the various leader boards that we have and start scrolling through some of those top performers. The one month, three months data boards are a little bit of noise. There’s a fair bit of luck involved in those kinds of timeframes, but those people have been on the platform for over a year or so. You’ll see some really great contributors and are a divergence in terms of approach.
This is the idea as well I’ve got very strong views as anyone who’s heard me speak before on how I think you should approach the market and there are certain approaches that I’m very anti but at the same time, we didn’t want to be too ideological. We really wanted to sort of let results speak for themselves, just sort of say we’re agnostic. You want to be a chartist. You want to be a momentum trader. You do you, and you do whatever you want and if you’ll know what you’re doing, it will come out in the results. It’ll come out in the wash, so to speak. So we’re, we’re totally agnostic and I would say anyone who’s considering jumping on, they don’t feel as though you have to conform to any one particular approach. You do what is appropriate to you and before you follow anyone, certainly before you, you think about following any of their ideas in the real world, get to get to know them. As I said, there’s so much transparency here. You can click on a user profile. My profile is I should’ve come up with a better name. My profile is Strawman as well, and you’ll see the stocks I’m holding and you’ll see how often I trade and you only have to flick around there for a few minutes. You’ll get a very good sense of the kind of investor I am or in terms of the approach I take, the preference that I have while the returns are what get the headlines, it’s diving deeper into the actual activity of a user that will be very, very valuable for you in working out who is this person out there in cyberspace doing these trades?
Tony (24:02): Yeah. So, I’m just looking at your portfolio now. Isn’t this how you invest yourself outside of the platform with real money on the ASX?
Andrew (24:12): It’s not a perfect match because of tax considerations and the rest of it but it’s pretty close. Yeah and so if there’s a stock on my Strawman portfolio, I think without exception, I hold it in real life, maybe the weightings a little bit different, and maybe the timing’s a little bit different, but it’s a pretty close analog.
Tony (24:34): A couple of things. Have you always invested that way? You said before you’d been doing it for 10 years. So has being on Strawman changed you at all?
Andrew (24:41): So I’ve been investing for about 20 years or so it’s only that I would argue I’ve only been doing it seriously for about 10 years in the sense that like literally selling my house and putting every last cent I own into the market. I’ve been doing that for about 10 years but yeah, when I started off, I was buying stuff because the share price was going up and it sounded cool.
Tony (25:09): Why did you sell your house and invest it in the market?
Andrew (25:11): I felt as though I could get a better return.
Tony (25:13): So you didn’t think of mortgaging the house and putting that in the market?
Andrew (25:19): So no, I didn’t and that is a whole other story. We actually found ourselves on 730 report earlier this year, because what’s the short version? So obviously, when you do that you need to rent, and I thought on paper, renting made a great deal of sense and it was all about how much you could make your capital work for you, and financially it’s worked brilliantly. There are no regrets but what we didn’t factor in was that, when you rent you have no security and there are lifestyle factors that came into play that don’t get reflected on a spreadsheet. So Tony, if I had a time machine, I should have done that. But I didn’t do that.
Tony (26:03): Or you go out and buy a house and then sell your shares to buy the house and then mortgage the house and buy the shares back.
Andrew (26:09): Definitely that is an option too and a lot of this money also has been since tied up in Strawman which is at a certain stage as well so it’s.
Tony (26:18): Yeah that’s not financial advice by the way. That’s general advice.
Andrew (26:21): Yeah, yeah, yeah, no, I would never advocate for anyone to do that. You got to do what’s right for you but that’s what, that’s what we did.
Tony (26:29): Looking at your portfolio in Strawman, you’re holding a lot of cash. Is there a reason for that?
Andrew (26:34): Yeah, I wish I hadn’t. It’s been a huge drag. So I think of all the companies that I really like, I don’t necessarily like the valuations that are out there and there’s only so much cash I’ve got, as in the real world on Strawman, there’s only so much cash I’ve got to invest. So I’ve actually had a higher than in hindsight, necessary waiting in cash because I felt as though I would like some dry powder should some attractive opportunities come along, and I definitely took advantage of that in some way back in March but not nearly as hard as I should have.
Tony (27:11): That’s an interesting point, Cameron and I look at setting up a QAV portfolio on Strawman when we were starting out and the first question I asked was what’s the IV you place on this stock? And we both we tried, we both say, well, basically our portfolios above the IV that we would calculate for the stocks which but it doesn’t worry us. So why is there an emphasis on having an IV calculation for stock?
Andrew (27:43): The very early version of Strawman, we forced you to have an IV. If you weren’t prepared to say what you thought the share was worth even broadly, we wouldn’t let you place the trade.
Tony (27:51): It must have been when we were trying to start the portfolio.
Andrew (27:54): Yeah. So that was as I said, I did sort of start off more ideologically driven than I’ve since become, so you don’t have to do that anymore. You don’t have a valuation there. Personally, as an investor, I think firstly any intrinsic value calculation is wrong.
Tony (28:13): Yeah, I think so too.
Andrew (28:15): It has to be wrong like I cannot predict the future and even if we could perfectly predict the future, you might have a different desired rate of return and therefore use a different discount rate. So there’re problems with all of with that and I acknowledge that but I do think at the same time, that you should have a general sense as to what is, broadly speaking, what is cheap, what is expensive?
Tony (28:35): Yeah.
Andrew (28:36): You have to right?
Tony (28:37): Yeah.
Andrew (28:38): By definition, if you’re buying something, I would like to think it’s because you think it’s good value.
Tony (28:42): Correct.
Andrew (28:43): Now, how you estimate value, you may have come at it a different way to me, but if we were at a pub, and you’re trying to pitch me a stock and you could give me a great rundown of the business that that would be wonderful but my next question would be is “Tony, why do you think this is good value?” Now, I don’t expect you to give me an answer to five decimal places. And I always laugh when you see the brokers say we value XYZ, and they give you this hyper-precise answer. It’s nonsense. Whenever I do a valuation, I probably have a dozen different valuations but I go for that generally right as opposed to specifically wrong, I think you have to have a notion of value. Otherwise, what else frames your buy sell decisions?
Tony (29:29): Yeah, correct. Now, I agree. If I was forced to use an IV and auto value or to convince you as to why a stock was value, I would use price to operating cash flow and in our investing world, we look at stocks which have a price to cash flow of less than five and I expect that to go up in the future because it’s something with a price to cash flow of less than five is pretty cheap. But whether it goes to 10 or whether it goes to 15 or whether it goes to seven I’ve got no idea really.
Andrew (30:00): Yeah.
Andrew (30:02): But just you saying that already gives me a huge insight into you as an investor and when you say you like the stock; I can frame that opinion around a particular philosophy or outlook. I find it’s super valuable. And, again, we could debate whether that’s the best way but the fact that you have a way.
Tony (30:20): Yeah.
Andrew (30:22): Says it speaks volumes to me.
Tony (30:24): Yeah, right. So let me go back to the index and the Strawman profiles on the leader board. If I wanted to use Strawman to construct a portfolio, how should I do that? If I went out and bought what was on the index now, they may have already had the around, do I wait until there’s a trade on the index and something new comes in before I buy it? What would you recommend?
Andrew (30:50): I walk you back a bit, and we’re always very careful with this partly for licensing reasons but also just for ethical reasons, I would never advocate to anyone just buy and sell whatever comes in or out of the index. It’s wonderful track record but for a long term investor like me, even the three years that it’s been around for is an incredibly brief amount of time and it’s been achieved in a very bullish market overall, with a particular bent towards technology and growth stocks which has for whatever reason been favoured. So I would not encourage you to do that. What I would encourage you to do would be to take that 100 grand and invest it as you Tony would invest it today in real life. If I gave you $100,000 in cash and you went out into the ASX. What stocks are you going to buy and why? Roughly what do you think they’re worth? Forget the index. The index is just going to aggregate you and Cameron and me and a million other people out there and it gives you some perspective but I wouldn’t say just buy the index. In fact, if you bought the index and everyone bought the index, it would just feed on itself and it probably wouldn’t work.
Tony (31:59): Correct. Yeah. That’s interesting, though. So how do I approach? How do I make money from Strawman as a new user to the network? Do I just follow someone who I like who mirrors my investing style? And I’m talking about a user who comes in who doesn’t have the time because they’re a doctor, dentist, lawyer, or whatever, to do their own research?
Andrew (32:22): Yeah.
Tony (32:22): But they have the cash to invest? What should I do?
Andrew (32:24): I think there’re two ways to approach it and they’re not mutually exclusive. I think the first one is just a wonderful training ground. I mean, it’s plain money so you can’t lose anything here. But you can still invest in real stocks, real stock prices with virtual cash and so it’s going to just give you wonderful real-world battle experience on the ground but risk-free. So I think for anyone who’s particularly new to the market, I think get in there, get amongst it, buy some stocks, and you’ll just gain experience without risking your real hard-earned cash.
The second way I would do it is actually spend a bit of time investigating the people who are more active; when I say active, not necessarily in trades but active on the platform and adding insight and research and stuff. You’ll see these people; they’re very prominent in the newsfeed. Our activity filters will show you sort of who’s putting a lot of work in. The leader boards will show you the people who have delivered very attractive returns over a long term. Have a look at the people that resonate with you, what are the kind of stocks they are buying is that align with your temperament and tastes, and then use it as an idea. But the thing is, I’m really fond of saying this. I say it all the time but you can borrow an idea but you can’t borrow someone’s conviction. So we can all have a chat, and I can give you a pitch, and maybe I’m convincing in that pitch, and you run out and buy it but the second that thing drops 20% for whatever reason, you don’t know anything about it other than Andrew likes it. You’re not going to be able to hold through those tough times, you’re certainly not likely to buy more, and maybe you shouldn’t be and so really this is an idea generator, I would argue, but it’s on you what you do with it. And it actually frustrates me quite a lot. If someone not just asked if it happened when I was at the full or anywhere else is that someone would get a tip from somewhere, the internet and then if it would go well it was their own genius, and if it went bad, it was everyone’s fault, but their own. And that sounds really harsh but I say that in all seriousness, this is this is your money and no one cares more about your money than you. No one is responsible for that money other than you. So don’t jump on the Strawman and just buy something because someone who happens to be ranking well at the moment likes it. I mean that is a really dumb thing to do but pay attention to what they’re doing, dig a little bit deeper, use it as a starting point for your own research, build up your own investment thesis, own the idea, and build conviction because if you don’t do that, you know the best ideas in the world they’re not going to help you.
Tony (35:06): Yeah, I mean, speaking from my personal point of view that’s one of the reasons why I haven’t been actively involved in Strawman because I find it difficult to find people that reflect my sort of investment methodology and I couldn’t have the conviction to invest in some of the high growth, high priced stocks or pushing people to the top of the leader boards there so yeah.
Andrew (35:30): I’m so glad to hear that and you shouldn’t and I would never encourage you to, but you should be your true self. As I said, if you look at the short term leader boards, that thing rotates all the time, today’s hero will be yesterday’s hero in a month time. I don’t mean to be mean or rude to the people who are ranking well, at present on those leader boards, I wish them every long-term success but again, you’ll see over time, those that stick around, and those that roll with the punches and those that adapt. There’s no algorithm unfortunately that we can generate that’s going to sort of emerge this for you. I mean, this is why back testing doesn’t work, right? We live in a very chaotic, hard to predict universe impossible to predict universe, and yesterday, tomorrow is not going to be like yesterday, even if it’s very similar. I just really want to make the point clearly here that this is not any kind of black box that you should just follow and buy. This is for you to practice on. This is for you to join a peer group who have people who are selflessly sharing their ideas and putting themselves out there for all to see with a track
record to get rid of the noise so you can have a sensible adult conversation with other serious investors. I mean, that’s why on Strawman, if you look at Strawman, here’s something that no one believes, but it’s true. In the whole time that we’ve run this, I’ve probably moderated five posts and never had a very rarely ever had to delete anything because people would get on there and try to hide things. I mean, they just get voted down on by the other use in the community and all their shenanigans result in very poor portfolio returns for them anyway so no one follows. It’s hard to pump and dump when there’s a spotlight shining on you and this community endorsement community ranking on there, which is I think that the best part about all of this kind of stuff.
Tony (37:37): Yeah, that was my next question. You’ve outlined a really good thesis for the positive side of Strawman but there must be a negative side as well, and from personal experience with other forums and other companies that do these yeah pump and dumps people buying a stock and then touting it as the next great next best thing is. I mean there’s a dark side to these kinds of platforms. Often I’m not saying there is with Strawman but how do you I guess, apart from what you just said about the rankings, how do you try and prevent tatters and negative comments and even shouters from unleashing mayhem on a platform like Strawman?
Andrew (38:24): Yeah, so I’ll go back he step so when we got VC funding last year and we speak to a few which is really nice, they ring us up and they want to know more about the business, and one of the things that you always get asked by these investors is, what is the problem that you’re trying to solve here? Forums exist so what’s new about this? And I guess the problem that we’re trying to solve is that exact problem of actors that have ulterior motives which anyone who’s been to said forum that’s out there knows that is a huge problem. That’s the problem that we’re trying to solve. And we do it by 1.) Making people accountable and people aren’t dumb. We’ve got a really strong community. So if I get on there, I’m saying by this by this and I joined up, you can see when they joined up, they joined up a week ago, they’ve relentlessly pumped this thing they put a high price, they’ve got no track record there whatsoever.
Everyone who’s looked at their posts has voted it down by the established members of the community. They get no love, they get no traction, and they take their toys and they go home very, very quickly. So even on our company page, every company rather than having 50,000 threads for every company, we have a company page and if you go click on any company on Strawman, you’ll be taken there, we give you the consensus forecasts from the community and then we’ve got what we call straws, which are kind of like tweets. It’s a concise viewpoint or perspective on a company. It’s not a conversational thing like a forum. It’s actually meant to be a specific insight or perspective on a business. There’re algorithms there that date them and rank them according to how new they are, how many people like them, and I’m really excited about this. We haven’t released it yet but we’re getting much more sophisticated on that. So when someone who’s been on a platform for a year was a really good performance, and lots of followers votes, that will have much more say, than the bloke who joins up yesterday, it has no performance. So we’re trying to sort of algorithmically account for that much like if there was a whole bunch of us around a kitchen table as an investment club and we’ve been doing this for 10 years, we all know each other very well. We know what Cameron’s like, I know what Tony’s like, I know your style, I know your track record and then we invite someone new into the club, and they sit down at the table and start mouthing off about the latest and greatest thing. Now, our opinion is going to count for a lot more and it should because we’re known quantity even if we don’t have in every case, the best performance.
And so we’re trying to sort of bring that common sense approach to evaluating perspectives to the platform and you can do it in very clever mathematical ways and it started out very basically, it’s still got a long way to run this, just as Twitter and Reddit and these things are always adapting their algorithms, we are too. But we’re trying to do it in that way so there is a peer review that is in place, there is community endorsement on content so we can’t stop and we don’t want to stop anyone from getting on there and saying whatever it is they think even if what they think is rubbish, and they’re not acting in this in the spirit in the way that we would like them to but members can sniff this a mile away, they will act appropriately and that content will be weighted appropriately.
Tony (41:56): Has anyone on your site ever recommended Apollo tourism and leisure Andrew, it’s something we need to know.
Andrew (42:04): What’s the IXX code?
Tony (42:07): It was an IPT after pay. I always get it confused with after pay. [Laughter]
Something like that. Don’t worry about it. You know what it’s an in-joke.
Andrew (42:07): I see why. I can say.
Andrew (42:20): Well see, this is the thing. I can look it up; I can tell you that eight people have it in their portfolio. 19 people are following it. It is exactly on the consensus valuation at this stage, but no one has added any straws so it doesn’t look like it has much love on the platform at this stage.
Tony (42:38): Yeah, I wonder why [Laughter].
Andrew (42:42): It’s a long story sorry, Tony. I don’t mean to interrupt you.
Tony (42:45): No, that’s all right. I guess getting back to your answer, Andrew about the way you’re going to rank people who come onto the platform and try and pump and dump, for example, is the risk there that you could create some kind of group thing where the people who had been the longest or loudest or have a particular style of investing dominate the conversation?
Andrew (43:07): Yeah, definitely and that is where the refinement comes into it. So we try things occasionally and we realize that that that is one of the problems so it’s all part of the refinement. One thing that comes into it is your performance and the longevity so you might be diametrically opposed to everyone but if you’ve been doing your own thing on Strawman for a few months, and you’ve built up a good track record there, that will give you some weight to what you say. The thing is I come back to the very initial premise it’s called Strawman. I mean, we want ideas to be challenged. The best way to improve an investment idea is to challenge an investment idea and so it happens all the time and stuff I put out there, I’ll hashtag bull case and I’ll write out why I like a company and someone will write a bear case and it’s the best thing in the world. And we don’t want to discourage that in any way, shape, or form. In fact, I vote up on a lot of straws that come through the platform that I totally disagree with but I really value the content and I’m pretty sure most of the established players do that as well because it’s not sort of saying I think you’re right, I think you’re wrong. It’s about saying I think this is a valid opinion and I think it adds to the tenure of the conversation and to the value of the debate.
Andrew (44:29): Very good. I’m out of questions. Cameron, do you have anything to add?
Cameron (44:34): Yeah, I do but before I get into it, Andrew, when you get a little bit excited, your microphone.
Andrew (44:40): Oh.
Cameron (44:40): Is whacking your collar there.
Andrew (44:42): Sorry.
Cameron (44:42): So if you can just stand up to bob your head around [Laughter].
Andrew (44:46): Sorry.
Tony (44:47): Pretty much. We really should get a proper mic. It’s ridiculous.
Cameron (44:48): So I wanted to ask you about your investment philosophy. Looking at your page here, you’ve had really good performance on your Strawman portfolio, looking at a lot of the stocks that you hold, there stocks that probably wouldn’t pass buster for us. I’m interested in what’s your process for determining what you’re going to buy?
Andrew (45:15): Well, as I said, it’s moved over the years, but I would say in recent years I’ve been very much a growth-focused investor growth at a reasonable price. I think gold, sensible investing is value investing, but I like companies that have got a wind at their back and that are growing their earnings. I’m not too big into picking up pennies in front of [inaudible 45:37] these days. Although I used to do that a lot but it’s really basic. Do I understand the business? If I can have a half-intelligent conversation with the CEO, I shouldn’t be buying that stock no matter how attractive it looks on various metrics and the rest of it. How do they make money? Are they making money? How do they plan to make money? What’s their available market? What are the competitors like? Forget the share market. I don’t care what the prices are doing. I don’t care about anything else. To come back to the café analogy, I understand what a café is. I understand how it makes money. I understand what is important, and I need to be able to understand that for a business. So there’s a lot of really cool businesses that have actually done incredibly well but I’m not going anywhere near because I don’t feel as though I’ve got a good handle on the industry dynamics and the business model after pace in that category for me, frankly. I mean I get it. I know what they do, and I could explain to you what they do but that is a very fast-moving space where there are all kinds of structural changes within that industry that I just don’t have a confident view on.
And I think the bulls and bears minds may make a good argument. So I’m very happy to put things in the too hard basket. If I don’t feel as though I’ve got a high conviction on what the likely future is for that business just broadly speaking. So I think that’s the first hurdle. Once I feel as though I understand the business pretty well I then have to quantify that earnings growth or that free cash flow growth or that sales growth. It has to come back to the financials at some point so I need to try and be able to, as I said, very vaguely, generally, right, as opposed to specifically wrong, but I need to be able to sort of look into a crystal ball and say that I think integrated research is the kind of business that can grow its earnings at a high single-digit rate over the next five to 10 years.
Or I think this business is likely going to plateau or is going to match inflation but I need to have a view on that. I’m very big at looking at what can go wrong. So what are the things that I need to look out for? What’s the balance sheet like? Is it in good shape? I can’t predict macro factors and I have no time to even try and predict it. That’s not to say that you shouldn’t, but that’s just a limitation of mine. I got no idea what those things are going to do so I don’t try and do it, but I’d like to think that if we do have a bad recession or interest rates go up or FX rates change, the companies that I hold, although may be impacted by those, aren’t going to be completely derailed by those kinds of things.
Do I trust management? Do management have skin in the game and is it trading at a sensible price? And I think if I get all of those things right I’ll make an investment, and I try and at a portfolio level wait according to a combination of conviction, quality and value. So the higher the conviction, the higher, the quality and the better, the value, the more I will put into a stock and I have no problem holding 15 to 20% of my stock, my portfolio on a single stock, if all of those things line up correct and then frankly, from there, I feel as though I should be extremely fussy. There’re thousands of stocks out there. I think that really when you get to 15 or 20, you’ve got all the benefits you’re going to get from diversification.
So I treat my portfolio like a sport team. There’re a lot of great companies that I don’t hold, not because they’re awful, but because I just don’t think they’re as good as what I’ve got and so I try to keep it pretty tight. And then other than that, the last thing is I look to hold for is I’m like Warren buffet. I never want to sell. Why would I end a beautiful relationship that is continuing to flourish? The only time I will sell is if the thesis is broken or the valuation just no longer makes sense, other than that, I’m going to hold on.
Cameron (49:49): Quick question, Andrew, on valuation. We’ve had this discussion with other people we’ve interviewed, especially growth investors. How do you go about valuing a stock that may not even be profitable at the moment?
Andrew (50:00): Yeah, it’s hard. Well, it depends if it’s a pretty profit kind of company, I think you can get a lot of insight by just starting with top-line growth and again, generally, right as opposed to specifically wrong nor is it going to grow at 17.3% per growth for four years, but you know what kind of general rate of growth that we’re looking at? What are the typical net margins or operating margins for a business in that sector? I mean am I relying on this thing throwing out a 20% net margin in 10 years or is it more likely to be a 5% net margin? I need to have a handle on that and I need to be able to argue what’s reasonable. And then I need to figure out what’s a reasonable multiple for that company, whether I’m doing a price to sales, price to cash flow, price to earnings. What is reasonable based on the historical experience based on what views we’re are doing and all the rest of it.
And you follow all that together you can get a target price that might be about five years out and then I just discount that back by my desired rate of return and the higher the risks involved with the more I will discount that back. And then I will stress that using a variety of assumptions and try and figure out a price that sort of what’s an average price based on that agglomeration of different views. It’s that Ben Graham margin of safety philosophy which I’m just huge on. All of these are guesses. People in our industry like to call them forecasts which sounds really sophisticated but they’re all total guesses. But I like to be very conservative in my guesses and then I like to add a really big fat margin of safety on that so even if I’m wrong and I’m probably going to be wrong, that I’ve got far more upside than downside. I’m looking for asymmetry here where if things go right, there’s a lot of upside, but if they don’t go my way, then the downside is limited. And frankly, I expect that it’s the whole Peter Lynch, if you’re right, six times out of 10, you’re good in this game. I expect to be wrong a lot of the time but hopefully, if I’m doing it right and so far so good, when you get it right, the gains more than make up for the loses. You cut the ones that aren’t working well, and you continue to invest in the ones that are doing well. I’m a big fan of averaging up by the way too. If a company continues to execute really well and my conviction continues to go up, I’m more than happy to add to that at a much higher price than what I initially bought in.
Cameron (52:28): I saw a video that I think was the RASK conference from last year and you opened up by talking about ETFs and how you recommend ETFs to friends and family, particularly if they’re not willing or ready to be a serious investor and invest a lot of time and effort it, which is something common with what Tony has said on the show over the last couple of years, he believes that ETFs are a great place. He talks about the investing ladder and ETF is sort of one of the bottom ones on the ladder as you’re working way up but you mentioned the rate of return that you’re looking for when you’re doing your DCF and I was wondering what you think is a good rate of return to get? Because one of the things I’ve learned from Tony over the last couple of years is that as an investor, well, certainly with Tony’s model, we’re just chasing that 15 to 20% compound growth on average every year, not trying to get a 100% where you’re 15 to 20% with relatively low risk, relatively low effort. I don’t have to spend 12 hours a day reading annual reports like Warren Buffet does. What are you trying to achieve with your portfolio, your real money, not your Strawman fake money, your real money. What do you think is realistic based on your 20 years of investing?
Andrew (54:03): I think 10% is realistic, frankly. I feel as though it’s a pride before fall moment. I’m really mindful of hubris but it’s actually been much, much higher than that. Let’s go back a hundred years with the U.S or any of the major western industrialized economies. That’s about what markets do with capital gains and income and given that I can get about that, we could debate endlessly what the next five to 10 years is going to bring probably going to be less than that, but who knows, but long-term, if I can get anywhere near that, the power of compounding is so phenomenal that I’m going to do really well over time. And if I can get that by doing no thinking whatsoever, just by buying an ETF, well, if I’m going to put all this effort into it either I just have to love it for the sake of it, and fortunately I do but also I need to compensate for my time and effort and anxiety and all of that kind of stuff. So, I would say if you’re putting in a lot of effort and you’re not getting more than 3, 4, 5% above your benchmark, then there’s probably better things you can do with your time. By the way, it doesn’t sound like it. If you can target 10% and you can get 12% per annum over the next 20 years, that’s such a phenomenal difference on the return so it’s very material but you need to be getting some out-performance to justify what it is that you’re doing. And I think what people misunderstand about that is they think that if I can target 10% a year, that’ll be great and right.
But that means I get 10% each and every year. No one gets that. Buffet doesn’t get that. No one gets that. What will happen is that one year you’ll get 60%, and then the next year you’ll get -20%, and then you’ll get 3%, and then you’ll get 8%, and then you’ll get -40%. There’re a lot of noise that is hidden in that average. The worst thing I think that can happen to you as an investor is that the first few years you just absolutely knock it out of the park because it sets ridiculous expectations, and conversely, you can do very, very sensible things and get a very ordinary or even a very disappointing return over the first few years and it just dissuades people from doing it, but it’s about process. It’s about consistency and if you do that, and you can generate that as an average, not getting 10% every year, but averaging that 10% every year, I think you should be pretty happy and if you can get 15 to 20% by all means.
Cameron (56:55): Just to wrap up, what’s the number one thing you’ve learned out of the Strawman experiment so far?
Andrew (57:04): As an investor or as an entrepreneur?
Cameron (57:08): Well, both if you want yeah.
Andrew (57:11): So as building a business, I completely misunderstood the complexity and difficulty and the technical challenge. I kind of thought how hard can it be? We’ll get some people in, they’ll build it, we’ll go on and then we’ll run the business whereas reality, the technical development never stops. The reality is that someone who might be a $400 an hour developer is much, much cheaper than someone in the Philippine who’s charging you $10 an hour because although on an hourly rate it’s much cheaper, they’ll probably make a big mess of things and you’re going to have to fix it up and they’ll take 10 times as long. There were a lot of blogs and podcasts that talk about start-ups and also make sure you get good people. I nodded and everyone nods, make sure you get good people because they are everything, and we’ve had some horror stories of some of the people that we’ve had because I was a “tight ass” and I based my judgment on an ignorance of what was important. And by looking at things on an hourly rate basis which was a mistake, which we finally addressed by the way, got some really great developers now, but that set us back years and literally cost me tens of thousands of dollars, if not more. So there’re big lessons in all of that.
Cameron (58:25): Same with marketing consultants like Electric Bean versus Strawman, You want to.
Cameron (58:31): You want to party for the good brand consultants.
Andrew (58:36): Straight after this, I’m taking this down from my LinkedIn.
Cameron (58:40): Do that.
Tony (58:42): It’s good. Where it came from? It’s a good story.
Andrew (58:45): Yeah, I mean it is so true in so many different aspects, whether it is marketing, it’s the joke in marketing, right? I mean every marketer knows that half their budget is wasted. They just don’t know which are right? And I think there’re a lot of parallels with that so a lot of lessons learnt there. If I was to start again with this thing, I reckon we could get to where we are now in about six months and we’d have technically from an infrastructure and architecture perspective, we’d have something that was a million times better. So you live and you learn. From an investment perspective, I guess it’s not so much a learning but a reinforcement which is really pay attention to those that disagree with you. I mean, seek out contradictory opinion and take it seriously. I think that for every one of the stocks that I hold, I’ll give you the bull case and I’ll explain to you why I’m holding it but if I can’t articulate the bad case better than the most bearish person out there, then I shouldn’t be holding that stock. It doesn’t mean that obviously, I need to agree with it but I really pay attention to those that posts differing views to me on Strawman and I think that’s a lesson that’s been really reiterated and reinforced, and it’s a very hard thing to do emotionally and psychologically because as I said we want that confirmation bias and you just look at Twitter, right? Like we all surround ourselves in this bubble, of all the people that we agree with because it’s more comfortable. But I really try and follow people on a lot of social platforms that I fundamentally disagree with them in a lot of areas just to try and avoid that and I think that is something that as investors, we should all try and do a bit more of.
Cameron (1:00:33): Yeah, no, I agree. I think as humans we should do that, it’s credibly important to have our ideas challenged and put ourselves in situations where they will be challenged by smart and articulate people.
Tony (1:00:45): Yeah.
Cameron 1:00:45: Good stuff. Well last question, we always ask our guests to give us a book recommendation either from an investing perspective or not. What are you reading? What can you recommend as a good read?
Andrew (1:01:00): I just finished just this morning. I finished reading a book called ‘Homo Deus’ by Yuval Noah Harari. He’s more famous for Sapiens and Sapiens is an incredible book and I’ve just purchased ‘Lessons for the 21st Century’ which is the other books. It’s a brief history of the future. It’s pretty bleak and it’s a very mind-blowing kind of book, and I think what it highlighted to me is that we are living in such a unique point in history and the future is going to be either unbelievably brilliant or unbelievably terrible. It’s probably my take away from it is we’re going to bifurcate.
Cameron (1:01:46): What else is new?
Andrew (1:01:47): Yeah, it was different. I mean, if you meet in the middle ages, your great, great-grandchildren probably had the same lifestyle and same world as you do but even I was born in 1975 and my kids, my lifestyle as a kid is very different to what my kids and I dare say my grandkids will be. If they’re not all chipped up with neuro link brain devices or something at that point. It’s just a fascinating point, and I think it’s interesting as a human but I think there’re lot of lessons for investors as well.
Cameron (1:02:23): I was having a conversation with one of my 20-year-old on the weekend. He came over and he was depressed, he’s sad and he’s frustrated and he’s angry and I said, “what’s going on?”. He goes, “You know, my Tik Tok numbers just have stagnated for the last couple of months. It’s not growing”. I said, “Wow. Yeah, that’s a really tough problem.” I said, “Let me, let me show you something.” I grabbed a photo off my hard drive of my mother when she was, I think about two in Bundaberg like this little wooden shack, they lived in a truck that they were driving around in which was no more than an engine with a steering wheel jammed into the top of it and like a plank of wood on the back and she told me she didn’t have electricity until she was four in the house. And I’m like, your biggest problem is that your funny videos that you’re making aren’t growing. You’ve only got hundreds of thousands of people and.
Cameron (1:03:22): Not the millions you thought you’d have by now watching your videos really that’s.
Andrew (1:03:26): Small problem.
Cameron (1:03:27): Yes.
Tony (1:03:28): Did he took the photo on posted on Tik Tok?
Cameron (1:03:36): No, he didn’t, but he did make me do a Tik Tok with him where I took my shirt off.
Tony (1:03:36): So that can’t be seen.
Cameron (1:03:38): Yeah, yeah.
Tony (1:03:39): I feel.
Cameron (1:03:39): You’re welcome.
Tony (1:03:40): People on Facebook who have to look at the headings and [Cross-talking 19:21].
Cameron (1:03:45): You’re lucky I didn’t charge you to see the glory of my dad though Tony. Well, Andrew, thanks very much. Really appreciate you coming on and having a chat. That was fascinating and I’ll jump back into Strawman and spend a bit more time in there and have an understanding a little bit more about it. Thanks, man.
Andrew (1:04:02): I really enjoyed it guys really.
Tony (1:04:04): Me too.
Andrew (1:04:04): My pleasure.
Cameron (1:04:05): Good luck for the future too. It’s such an exciting future I think you have.
Andrew (1:04:08): Thank you very much. Thank you.
Tony (1:04:11: Yeah. Thanks for spending some time with us. That was great.
Andrew 1:04:14): Oh, absolutely. My pleasure. My pleasure. I think we sing from the same hymn sheet in a lot of ways.
Tony (1:04:20): Yeah I think so too.
Cameron (1:04:21): Well, that’s the end of the free episode for this week. For the brand new folks, I want you to know that each week we have a free episode and a premium episode. If you want to check out the premium episodes, you can go up to our website, qavpodcast.com.au, and sign up for the two-week free trial. You get to have a look at the premium episodes. You get to have a look at the checklist, the getting started guide, all of the video content that we have. You get invited to our VIP dinners and our VIP zoom calls for club members. You get to ask Tony questions that we can answer. You get to get invited to our Facebook group, our private Facebook group, et cetera, et cetera, and also we get a private club member newsletter each week we send out as well with some stuff in it so check that out qavpodcast.com.au.
But as I said, if you’re brand new and you’re trying to figure out what’s going on, go back and listen to season three, episodes one, three, and five, 301, 303, and 305 and then you might also want to go back and listen to season one as well. All of the free episodes in season one, where we go into a lot of detail about Tony’s system and methodology and figure out if this is right for you. If it’s something that you want to go further with, if you want to learn how to invest like Tony does, then you can check out the QAV club. The other thing I always have to say is we’re not financial advisors, so don’t take anything you hear on this as financial advice. This is just here to teach how one guy invests and thinks about investing. If you need financial advice or tax advice, please go see a financial advisor or a tax advisor.
With that stay safe, good luck with your investing, and we’ll be back next week.