Transcript QAV #356

Episode name: QAV 356

Duration: 01:20:09

Cameron Reilly [00:05]: Okay, welcome to QAV Tony Kynaston episode 356 this day of our Trump Monday, the 23rd of November, 2020. How was your weekend?

Tony Kynaston [00:23]: Good. We haven’t really done 356 episodes. Have we?

Cameron Reilly [00:27]: No, it’s season 3, 56, but we’ve probably done one a week for nearly two years now so.

Tony Kynaston [00:35]: More than one a week.

Cameron Reilly [00:38]: We’ve done probably a hundred and something. Yeah. Well, that’s right. We’ve done interview. Yeah, we’ve probably done 150 to 200, I think hmm, wow holy- crap.

Tony Kynaston [00:47]: Yeah, wow exactly.

Cameron Reilly [00:48]: Think about how many podcasts I’ve done in the last 15 years.

Tony Kynaston [00:52]: Yeah.

Cameron Reilly [00:52]: It’s one of these days I’m going to get good at it, one of these days well.

Tony Kynaston [00:58]: One of these days.

Cameron Reilly [01:00]: Season three, episode 56. I just say 356 because I’m lazy.

Tony Kynaston [01:07]: You are the Tolstoy of podcasting.

Cameron Reilly [01:13]: What a – 200 years say out of date and dead. What do you mean by that?

Tony Kynaston [01:18]: No, no, no you took your podcasts and write them out and be like war and peace with them.

Cameron Reilly [01:23]: [Laughs] Yeah. Well, that’s yeah, yeah. Any-hoo, for the third time how was your weekend?

Tony Kynaston [01:33]: [Laughs] I can hear a cock crowing in the background for the third time. No, it was good, very relaxing. We had a big night, Friday night with Jenny’s old workmates and we sunk a few bottles of red, nice red and sat out in the balcony, which was good. It wasn’t that windy. It was about 1:30 in the morning and yeah, it was good, and then Saturday I spent recovering.

Cameron Reilly [01:59]: It wasn’t windy, but you were pretty windy by the sounds of.

 [02:02]: [Laughs].

Cameron Reilly [02:04]: Long and windy.

Tony Kynaston [02:04]: Wind Baggy.

Cameron Reilly [02:04]: Wind Baggy.

Tony Kynaston [02:06]: Holding forth.

Cameron Reilly [02:07]: Yeah, yeah. Well, were you talking about investing or the merits of horses? What do you talk about when you have a dinner party?

Tony Kynaston [02:18]: Well, I think the common theme was where Jenny used to work. So, we were talking about that a lot.

Cameron Reilly [02:22]: Oh.

Tony Kynaston [02:24]: Yeah, yeah.

Cameron Reilly [02:26]: Is it still a thing? Is it still around?

Tony Kynaston [02:28]: Yeah. It’s still around. It’s still a thing.

Cameron Reilly [02:32]: Yeah.

Tony Kynaston [02:32]: It was good. Good fun.

Cameron Reilly [02:33]: Good.

Tony Kynaston [02:33]: Nice bunch of people.

Cameron Reilly [02:35]: Well, that’s good.

Tony Kynaston [02:37]: How was your weekend?

Cameron Reilly [02:39]: Oh, the usual running around after Fox. Oh, Chrissie had a studio concert which was great on Saturday. I always liked her studio concerts or interview concerts to see where her kids are at. It’s always inspiring to see these kids that she’s been teaching. For those who don’t know, my wife runs a violin studio. She has taught violin for her entire life, and yeah, like a lot of these kids have been with since she first moved here, not long after she moved here, 11 odd years ago. There’s one little kid Noah. I remember him starting with her 10 years ago when he was three years old and he was really shy and it took him a year to be able to even look me in the eye when I’d say hi to him every week. [Laughs] And he stood up.

Tony Kynaston [03:29]: Did you have your shirt on?

 [03:33]: [Laughs].

Cameron Reilly [03:34]: What on the weekend or back then?

Tony Kynaston [03:35]: Back then.

Cameron Reilly [03:35]: Yeah. He stood up on Saturday and played flooded the bumblebee from memory night perfect.

Tony Kynaston [03:41]: Oh wow.

Cameron Reilly [03:42]: So, it’s amazing just to see that happen in these kids.

Tony Kynaston [03:46]: Yeah.

Cameron Reilly [03:46]: Like Chrissie feels like they’re her kids and to an extent, and I do too a little bit, having seen them every week for 10 years. So, you get to know their families and it’s amazing. Anyway, she does good. She does good in the world I think teaching kids the beauty of music and how to play a difficult instrument and its lovely.

Tony Kynaston [04:07]: That’s very rewarding.

Cameron Reilly [04:09]: Whereas I just sit here and take shit from you all week so.

Tony Kynaston [04:16]: [Laughs]. Well, you little bit too don’t you.

Cameron Reilly [04:17]:

Little bit yeah, I try.

 [04:17]: [Laughter]

Cameron Reilly [04:18]: Alright where do you want to start this week? You want to talk about why our portfolio is lagging the old odds?

Tony Kynaston [04:29]: It is for the month. We’ll have a look at its total performance.

Cameron Reilly [04:33]: Yeah, it is for the year, for fiscal year, September, October, November, I’m assuming it’s got something to do with our investment in gold stocks of recent times and the hit that they took and also sort of the all odds. So yeah, after pays in the all odds now, isn’t it so in the beginning.

Tony Kynaston [04:55]: Oh yeah top 20.

Cameron Reilly [04:57]: Yeah.

Tony Kynaston [04:59]: The biggest reason is the bank stocks have gone up.

Cameron Reilly [05:01]: Oh, really?

Tony Kynaston [05:03]: Yeah. Well, since the vaccine news came out everyone’s going okay, maybe it’s not going to be too bad and particularly the bank stocks are up 10% or so.

Cameron Reilly [05:12]: Right.

Tony Kynaston [05:13]: And then there are really good portions of the all odds index. So unfortunately, we don’t have Macquarie bank or Macquarie group in our dummy portfolio, but that would have given us a good solid boost in the last couple of weeks.

Cameron Reilly [05:28]: Right.

Tony Kynaston [05:29]: Yeah, Macquarie group is on our buy list and I own it.

Cameron Reilly [05:34]: Yep.

Tony Kynaston [05:34]: So that’s at least gone as good as the other major banks, but that’s, that’s the main difference is no banks in main portfolio, and as you said, some gold stocks which had gone down.

Cameron Reilly [05:42]: Yeah.

Tony Kynaston [05:42]: What I find intriguing is all these articles I’m reading in the last week or so saying it’s a flight to value. People are out of growth and are going into value, okay but the banks are good value, but it’s not, not really a flight to value. It’s just some people have bought into bank stocks. That’s all it is.

Cameron Reilly [06:06]: They think that’s value.

Tony Kynaston [06:07]: Quantise and Sydney airports and things like transit a little bit.

Cameron Reilly [06:10]: Right.

Tony Kynaston [06:13]: And if you look at the best performing stocks in the last week or so they’d been flight centre and Quantise and, and tourism type stocks that were beaten down very heavily during COVID, and they’re only coming back now that there’s a vaccine and the borders are opening up but the stocks that we were holding went down in March and rebounded quite strongly since then.

Cameron Reilly [06:36]: Right, right, and we sold one of our gold stocks last week, Regis resources, Steve Madden emailed us this afternoon saying he thinks we did it too soon, but it hit our three-point trend line and rules are rules, as you said to me last week, or I said to you last week, something like that

Tony Kynaston [06:57]: Premature ejection he said.

 [07:02]: [Laughter].

Tony Kynaston [07:03]: Well, he wasn’t saying that to be fair to state.

 [07:04]: [Laughter].

Cameron Reilly [07:06]: You’re making him saying it a lot funnier than he is. Come on.

 [07:08]: [Laughter].

Cameron Reilly [07:09]: He’s on the board of the Australian shareholders association. He can’t be that funny.

Tony Kynaston [07:14]: And he’s got RSI as well.

Cameron Reilly [07:15]: Yeah.

Tony Kynaston [07:15]: From premature ejection.

 [07:17]: [Laughter].

Tony Kynaston [07:17]: Ejection.

Cameron Reilly [07:20]: Oh, you’re in a mood. How much have you been drinking today? It’s only four o’clock down there. You start early today under the goonies.

Tony Kynaston [07:28]: No, I haven’t no, to be fair he was using the RSI indicator the relative strength index.

Cameron Reilly [07:36]: Oh.

Tony Kynaston [07:37]: Regis resources wasn’t a sell according to that.

Cameron Reilly [07:41]: Hmm, mm.

Tony Kynaston [07:41]: So, he could be right. We’ll see but it certainly crossed our sell point.

Cameron Reilly [07:44]: Right.

Tony Kynaston [07:44]: Last week. Yeah.

Cameron Reilly [07:47]: Talking about the flight to value, you just mentioned reminds me of a quote I threw into our newsletter today. I was watching a video over the weekend by a guy. It was an interview with a guy called Bruce Greenwald. He’s the Robert Hiboron professor emeritus of asset management and finance at Columbia business school and the author of “Value investing from Graham to buffet and beyond”. And he’s just putting out a new edition of that. And he was being interviewed by 10 Oh Santos, who is the David L and LCM Dodd professor of finance and faculty director of the Heilbronn Centre. I don’t know why I feel compelled to say it like that but I just do, and it was funny. He was saying that the first edition of the book, when it came out, everyone was saying value investing was dead. The second edition has come out. People are again saying value investing is dead.

Tony Kynaston [08:52]: [Laughs].

Cameron Reilly [08:52]: But I took his quote from the video, he said, “what investing has always been consists of two basic ideas. The first is you look for opportunities where nobody else is looking and you stay away from the crowds that are overpaying for glamorous opportunities. That hasn’t gone away. The second thing a tradition of approaching valuations with a clarity and a precision that normal investors, don’t, it’s more than just slapping a multiple on things and saying, okay, this is a growing business. It’s worth 40 times earnings.” And then he goes on to talk about how value investing has changed, evolved since grahams day and the early buffet days and all that kind of stuff. And I know that the way that you do it, the way you teach it is a little bit different again but those two things remain the same, right? We’re looking for.

Tony Kynaston [09:43]: Yeah.

Cameron Reilly [09:43]: Missed opportunities and we’re paying a lot of attention to valuing them and determining what we think is a good buy.

Tony Kynaston [09:54]: Yeah, no, definitely. I agree with those, those quotes.

Cameron Reilly [09:57]: And we’ve struggled when we get other people on the show quite often to get them to explain the evaluation. It’s been a common theme I’ve noticed over the last couple of years, it doesn’t matter who it is, whenever we asked them well, how do you decide what the intrinsic value of something is, they stumble around.

Tony Kynaston [10:15]: Hmm, mm.

Cameron Reilly [10:15]: It’s a fascinating to me because I’ve only been doing this for a couple of years now but if somebody asked me, “Well, how do you guys determine the value of a stock?” I’d be able to articulate it in a minute or two, I think high level. Not many people we’ve had on the show as guests have been able to do that. Why do you think that is?

Tony Kynaston [10:35]: I think it’s a two-fold problem. I think it actually is very hard to value stocks, but I think it’s the bigger problem is that most people, they use stocks relatively rather than fundamentally. And what I mean by that is they’ll say things like, well, it’s a growing company and they usually they get sold at their 40 times earnings or four times sales or 10 times sales. It’s software as a service business and therefore it should be sold at 10 times sales or 50 time’s sales or whatever. But who says that? Why should you buy it and then pay 50 times sales? It’s because that’s what everyone else does. That’s a relative valuation, and that’s where I think people get a bit lost in terms of valuing things.

Cameron Reilly [11:20]: Hmm, mm.

Tony Kynaston [11:20]: It’s a bit like when you go and buy a house, you could look at it fundamentally and say, well, it’ll cost me this much to build a house if it was to be knocked over, or we could look at it and say, well, if I rented it, I get this much yield, and that places a value on it or you could say that as real estate agents do, the one down the road sold for a million doors, this one’s a bit nicer, it sells for 1.2. That’s a relative valuation. I think that’s where people lose sight of the right metrics to value a company.

Cameron Reilly [11:52]: Right.

Tony Kynaston [11:53]: So, most of the valuations we’ve heard, I think could be relative ones if we’ve ever heard any [Laughs].

Cameron Reilly [11:58]: Yeah.

Tony Kynaston [11:59]: We generally hear things like it’s growing.

Cameron Reilly [12:02]: Yes.

Tony Kynaston [12:03]: We don’t hear things like its fair value or its above its value or its below its value. They just say it’s growing.

Cameron Reilly [12:09]: Yeah, good management, solid good people, good story. They are investing in R and D. Remember that was one of Rudy’s things but yeah.

Tony Kynaston [12:22]: Yeah, and he’s right. Those things do make a good company.

Cameron Reilly [12:26]: Yeah.

Tony Kynaston [12:27]: But that’s different to a good investment.

Cameron Reilly [12:29]: Yeah.

Tony Kynaston [12:30]: And people lose sight of that all the time.

Cameron Reilly [12:32]: Yeah, I mean I’m not taking the piss of anyone obviously, but it’s been genuinely surprising to me how difficult it has been for people to articulate it. Now I mean some of it might just be that they’ve never had to articulate it before but even when you and I started doing this show, I don’t think you were in the habit of having to articulate how you did this, but you can do it.

Tony Kynaston [13:03]: At least it was all written down. It was all written down. We just went through it.

Cameron Reilly [13:06]: Yeah. I mean you could do it. You were a little bit waffle about it at first.

Tony Kynaston [13:09]: [Laughter].

Cameron Reilly [13:10]: No, I mean that in the nicest way, just because you weren’t in the habit but now, you’re smooth as butter right because you’ve done it for two years every week, but most of the.

Tony Kynaston [13:23]: It won’t be long before I’m playing flight of the bumblebee will it.

 [13:26]: [Laughter].

Cameron Reilly [13:33]: But yeah. Anyway, it’s just surprised me how few people are able to articulate why they invest in.

Tony Kynaston [13:42]: Yeah.

Cameron Reilly [13:42]: What they invest in, even the professionals who do it for a living.

Tony Kynaston [13:46]: Hmm, mm. No, definitely.

Cameron Reilly [13:48]: Anyway, enough of that so back to our portfolios. So, we’re trailing the old odds for the last couple of months, but I’m guessing you’re not concerned about that.

Tony Kynaston [13:58]: No, because if you look at the performances, we started the portfolio the old odds is down -5% and our portfolio is up something like 10% so.

Cameron Reilly [14:07]: Yeah.

Tony Kynaston [14:09]: That’s just going to keep widening over time. It might, you know, it might slow down a bit now if the all odds go for a run but that happens from time to time. It happens in the short term. In the long-term, we’ll outperform.

Cameron Reilly [14:20]: Yeah. Cool.

Tony Kynaston [14:22]: Yep.

Cameron Reilly [14:22]: Thought you’d say that. See.

[14:23]: [Laughs].

Cameron Reilly [14:25]: I’ve been listening and you’re very predictable.

 [14:26]: [Laughter].

Cameron Reilly [14:32]: What’s next?

Tony Kynaston [14:32]: I don’t know you tell me.

 [14:35]: [Laughter].

Tony Kynaston [14:37]: What a prediction.

Cameron Reilly [14:38]: Let’s talk about some of our journal entries from last week, shall we? What do you think the highlights were in your journal entries?

Tony Kynaston [14:47]: I can’t even remember what they were. You have them in front of you?

Cameron Reilly [14:50]: I do yeah. Well, I don’t, but I will.

Tony Kynaston [14:53]: Okay, I want to see the pictures.

 [14:57]: [Laughter].

Cameron Reilly [14:57]: We saw edges which we spoke about. Yeah. Now you told me that I should replace it with Grange resources GRR in the QAV portfolio but in your own portfolio, you replaced it with one of my old favourites, unfortunately, which I no longer own. So, I don’t get to take advantage.

Tony Kynaston [15:14]: Oh.

Cameron Reilly [15:14]:

Of the bump the price probably took when he bought it last week, the reject shop.

Tony Kynaston [15:21]: The reject shop. That’s right. Yeah. I bought some reject shop last week. Yeah. Haven’t seen how it’s going. I haven’t looked since last week, but yeah. I sold my Regis resources and bought the reject shop.

Cameron Reilly [15:32]: Hmm, mm.

Tony Kynaston [15:33]: Which was the next one on my buyer list that I hadn’t done and was big enough for me to buy into.

Cameron Reilly [15:38]: Right.

Tony Kynaston [15:40]: Yeah.

Cameron Reilly [15:40]: It’s trading around about $6.84 at the moment down from its highs of it got up as high as $8 at one point. So, it’s back down.

 Tony Kynaston [15:54]:  I think retail has come off along the lines of the gold stocks so the reject shop had a great run after COVID because people were thinking that customers were going to be hit by economics hard times and they go and shop down market and the opinions on that changed a bit after the use of a vaccine on the horizon and borders opening. So, we’ll see what happens from there but it’s still, it’s still a very cheap stock. We’re talking about valuations before. Let me just pull up the buy list here.

Cameron Reilly [16:34]: I’m just looking at its buy line because I know everyone wants us to do a lot more buy line charts.

Tony Kynaston [16:42]: Hmm, mm.

Cameron Reilly [16:42]: When you bring it up, tell me what you’re using. I assume your first point is ran back in sort of March, 2016, your second point, I’m guessing sort of August 2020, maybe.

Tony Kynaston [17:02]: First point on the buy line I’ve got at March 16, as you said. And then if I have a look at, yeah, it almost be, it’s changed over the time as it has gone up really. So, the current buy point is quite high up. It’s really around the current price, but the last time we had to sell this, where would that be? That would have been around, thinking maybe around, I’m doing this quickly, April, 2019 was probably the last time we sold it. So, if I look at the first sort of buy signal after that yeah, I would use the second highest point is July, 2000 at 1251 and draw my buy lines from that.

Cameron Reilly [17:55]: Okay buy lines.

Tony Kynaston [17:57]: It’s basically the highest point with the next highest point to the right is the graph I’m using or the method using.

Cameron Reilly [18:04]: What’s the second point? July, 2016?

Tony Kynaston [18:07]: Yeah, that’s right.

Cameron Reilly [18:09]: Really? So, you’re not using the right most peak, you just taking that one.

Tony Kynaston [18:13]: Well, like I said, you can use the right most pick in which case the buy line is around the current price.

Cameron Reilly [18:19]: Yeah.

Tony Kynaston [18:20]: But also, if you follow the sequence of the buy line follows a sell line.

Cameron Reilly [18:27]: Yeah.

Tony Kynaston [18:27]: If we look back and see when the last time it was a sell, it’s going to be around about I’m going to say around March, 2019. It’s nowhere near a sell line at the moment, if we take the current low point, which is that one’s 197, that one’s 178 is June, 2019, that would have been a sell before that. So, if we go back a bit and take the second lowest point, that would have been October, 2018. And if you take that lowest point and then the next one to the right of that, it was a sell soon after that. And then it would have been, yeah buy back in probably around December, 2019.

Cameron Reilly [19:14]: Hold on one second, don’t we have to scroll the graph back and if we’re going to do this and take the go back five years from that point in time, like five years from 2018.

Tony Kynaston [19:27]: Yeah. Strictly speaking, we should.

Cameron Reilly [19:29]: So

Tony Kynaston [19:31]: So, you can either use the right most peak, which gives us a buy price around its current price.

Cameron Reilly [19:35]: Yeah.

Tony Kynaston [19:36]: We go back to try and work out when the last sell was.

Cameron Reilly [19:40]: Yeah right.

Tony Kynaston [19:41]: And then the first buy after that was our buy.

Cameron Reilly [19:43]: Okay.

Tony Kynaston [19:43]: Which is a bit of historical reconstruction as you say.

Cameron Reilly [19:48]: Yeah.

Tony Kynaston [19:49]: Because if you think about it’s been on our buyers for a while ever since COVID so.

Cameron Reilly [19:55]: Yeah.

Tony Kynaston [19:55]: The buyer is going to be around that sort of start of the year time.

Cameron Reilly [20:01]: Right. If we take those two points you said before both of them back in 2016.

Tony Kynaston [20:08]: Correct yeah. So, the first one is March, 2016 and the second one is July, 2016.

Cameron Reilly [20:14]: Right. So, it was a by the late 2019 around about $2 50.

Tony Kynaston [20:22]: Yes, that’s right.

Cameron Reilly [20:22]: And it’s been a buy ever since.

Tony Kynaston [20:26]: Yep.

Cameron Reilly [20:26]: I’ll do a screenshot of that. Throw it up for the peeps

Tony Kynaston [20:29]: Okay, good.

 [20:33]: [Laughter].

Tony Kynaston [20:33]: It just look like if you forget about all the stuff around lines, if you just have a look at the graph, it’s kind of bottoms out in that period that goes from, say October 18 through to the COVID cough and it’s been a general upturn since then so even if you just want to sort of eyeball it from a macro point of view, it’s really around after March that it becomes a buy.

Cameron Reilly [20:55]: That’s right.

Tony Kynaston [20:55]: A solid buy.

Cameron Reilly [20:56]: Right.

Tony Kynaston [20:57]: Yeah.

Cameron Reilly [20:58]: And what was its QAV score?

Tony Kynaston [21:05]: I don’t know what it was when we bought it originally, but when I bought it last week, the QAV score was 0.36, which is [Cross-talking 00:21:12]

Tony Kynaston [21:13]: Yeah, it is.

Cameron Reilly [21:13]: Yeah, I’ve seen.

Tony Kynaston [21:14]: That was the point I wanted to make about valuation. I mean, this is a company which is operating quite extensively throughout Australia and we’re paying 1.5 times operating cash flow.

Cameron Reilly [21:27]: Right.

Tony Kynaston [21:28]: So, if you think about it, if you use a coffee shop analogy, this is operating cash flows, especially in the retail situation, the reject shop store is going to be not too dissimilar to the coffee shop store.

Cameron Reilly [21:41]: Hmm, mm.

Tony Kynaston [21:41]: And opera operating cash flow is basically well, its sales coming in list the costs of getting those sales. So, it’s pretty close to gross margin or gross profit in terms of the way to think of it its gross profit so we haven’t taken out all the other things you take out like financing and taxes and depreciation and blah, blah, blah. But we’re paying only 1.5 times the gross profit of this company.

Cameron Reilly [22:08]: Yeah.

Tony Kynaston [22:09]: We get paid back in 18 months. To me, whatever your value without it can’t be worth much less than what it’s trading for now.

Cameron Reilly [22:16]: Yeah. Cool. So, you didn’t buy Grange resources for your own portfolio because it’s too small. Is that right? The average trade?

Tony Kynaston [22:26]: Yeah. That’s right.

Cameron Reilly [22:26]: Right. Okay.

Tony Kynaston [22:29]: Whereas the reject shop is 1.6 million average daily trade and Grange is 250 million.

Cameron Reilly [22:35]: Let’s look at some of the other highlights from last week. You pointed out, we were talking last week about Hawthorne resources, another one of our gold stocks, and I think the only stock in the QAV portfolio that’s underwater currently. You said that.

Tony Kynaston [22:51]: [Laughs].

Cameron Reilly [22:52]: But.

Tony Kynaston [22:53]: Sorry, go ahead.

Cameron Reilly [22:55]: You said that it’s got a dividend that is going to be paid or would have been paid late last week, right 20th of November.

Tony Kynaston [23:04]: Yeah. So, in fact, I’ll just have a look up the announcements, if there’s anything here for it now. Yeah. We should have picked up nearly 4 cents in terms of a special return of capital and a special dividend. They split it up for probably for tax reasons. Going back, let’s see now I’ll get the exact numbers. Okay. So, there’s a 2.469 return of capital and a 0.157 special dividend. So roughly 2.50 cents for return of capital and 1.5, 1.6 for special dividend, but we should add those to our dummy portfolio now. I’ve got 4.10 cents.

Cameron Reilly [23:47]: I just listed as a dividend.

Tony Kynaston [23:50]: Yeah, I think it’s simple enough to list as a dividend under dummy portfolio.

Cameron Reilly [23:54]: So, it’s how much 4.16 cents.

Tony Kynaston [23:58]: The numbers are quite long its return of capital is 0.024690873 cents or dollars.

 [24:08]: [Laughs].

Tony Kynaston [24:08]: And a special dividend this is 1.0157869914 is a special dividend.

Cameron Reilly [24:18]: What was that first one again? 0.246?

Tony Kynaston [24:21]: 0.2469.

Cameron Reilly [24:21]: Yeah.

Tony Kynaston [24:21]: 08737.

 [24:21]: [Laughs].

Cameron Reilly [24:28]: Wow so I can always.

Tony Kynaston [24:31]: That’s the lowest I’ve gotten involved here.

Cameron Reilly [24:31]: Yeah.

 [24:31]: [Laughs].

Cameron Reilly [24:35]: I add those up and I get 0.0404778651.

Tony Kynaston [24:44]: Hmm, mm so that gets added to the portfolio since it was paying out last week. Now people, I don’t know own Hawthorne, but people who do own Hawthorne, I know some of our listeners do, should be receiving their notifications if they haven’t already pretty soon, which will have all the details around that. And they’ll probably also have it spelled out in terms of the return of capital and the dividend. I’m hoping there’ll be some other supporting documentation about what they’ve received as tax advice. Although it’ll obviously be qualified by the fact that they can’t give specific tax advice, but oftentimes in these circumstances, the dividend component, which is a smaller part, is going to be taxable and the return of capital may not be although it may have to be added to your capital gains cost base which will have a tax impact in the future when you sell.

Cameron Reilly [25:35]: Right.

Tony Kynaston [25:36]: Yeah, I mean your accountants can help you with that. And when it comes to tax time and just pass on the documentation and they’ll sort it out for you.

Cameron Reilly [25:44]: Right. Well, that’s a nice little bump for us 0.04.

Tony Kynaston [25:51]: I think last week we talked about Hawthorne and I said, I thought it was the gold price coming down. That was the problem and that might be part of it but I think the fact that people had factored in that once the stock went ex-dividend and capital return that it was worth 4 cents a share less and it dropped from 14 back to 10.

Cameron Reilly [26:11]: Right.

Tony Kynaston [26:13]: As you know, the process is always the shares go ex-dividend for a period until they’ve trade come dividend first, and if you buy it, that means you’re entitled to that dividend and return of capital. And then there’s a gap between when they rule off the books and say, anyone who buys after this date doesn’t get the special dividend.

Cameron Reilly [26:35]: Yeah.

Tony Kynaston [26:35]: That’s called ex-dividend but that could be a period of time then before that dividend is received by the shareholder so that the people who were buying ex-dividend, weren’t going to pay 14 cents when 4 cents was on its way but they weren’t getting so they pay 10.

Cameron Reilly [26:50]: Well, adding that to our portfolio just knocked our growth this year when we started at the beginning of September up to 8.04%. Sorry.

Tony Kynaston [27:04]: Okay.

Cameron Reilly [27:04]: So, we’ve jumped from six up to eight made a big difference.

Tony Kynaston [27:08]: Closing the gap.

Tony Kynaston [27:08]: 300 bucks.

 [27:09]: [Laughter].

Cameron Reilly [27:12]: Yeah, it is.

Tony Kynaston [27:13]: Yeah. So, I’m sorry. I didn’t remember that last week when we talked about it, but I think that’s the reason why Hawthorne’s dropped. And if I look at it now, which I think today’s the first trading day after it paid a dividend; it’s up 5% today.

Cameron Reilly [27:25]: Right.

Tony Kynaston [27:27]: So, I am hoping that it’s a good stock on our buyer list and it will continue to trade upwards from here.

Cameron Reilly [27:35]: Right, all right. Good. Well, I think that’s enough of a journal notes from last week because we need to get into questions. I had no questions at nine o’clock this morning and now I have a ton so thank you to everybody who was paying attention on the Facebook page today and started sending through your questions.

Tony Kynaston [27:53]: You’re a good question wrangler.

Cameron Reilly [27:54]: Yes. That’s my many well few skills.

 [27:59]: [Laughter].

Cameron Reilly [27:59]: Here’s from Tim. Hi Cameron Riley I’m still struggling with the three-point line on the sell side and was hoping that TK and yourself could check our SSG and ADH, please. I saw Mark Mangano post last week with regards to SSG sell at 0.93 cents. My sell was lost so I must be using points on the chart that are incorrect. I thought the dip due to COVID around the end of March wasn’t being used, is this correct? And then he has another one about ADH, but let’s talk about SSG.

Tony Kynaston [28:34]: Yes. Shaver shop groups. I mean the first point to make is sorry that Tim, sorry and Mark sold out maybe a little bit early, but they can always buy back in, but they would’ve made hopefully a good deal of money on the way because the buy on shaver shop group, would be some way maybe just a little bit north of 50 cents, and it’s now trading at a dollar and five, and if they sold out at 93, they still made decent sort of return in a couple of months. So, it’s certainly good. In terms of its sale, no, I think we definitely need to use the COVID cough is the lowest point on the graph, which is March, 2020, obviously and that price is the closing price for that month is 31 cents. But this then becomes another one of those sorts of upward Schrodinger’s or bunny balls as we call them going forward so it’s kind of the second line that we would have used in the past was 43 and a half cents in April, 2020, and if you draw that line, it’s been crossed going up probably about where these guys may have sold outside of September. It was 885. It closed in September this year. And that was a bit of a dip between the end of August and the end of September. So, I could see that that was a reason for selling, but it’s then rocketed up again, up to a dollar five today. So, I guess the interesting thing for me is maybe I need to review my guidelines for these kinds of rocketing up share prices, but I haven’t seen this kind of reversal from a big downturn because of COVID for well over 10 years.

I mean, the last time we saw a stock markets crash and then rebound was GFC. So maybe 2009, and before that 2002, but maybe, I don’t know, maybe we just have to have a bit more tolerance when shares are on their way up like this because they do sort of go up and then cross their line and then go up again. For me, I’m quite happy selling out and then putting the money back into something else which is clearer or buying back in once the lines are established. And I know you have to pay transaction costs and taxes if you do that but if you really liked the stock, then it’s probably worth it because you’ve taken the risk out of having a big downturn. But I’m wondering whether we need some kind of tolerance built in here like maybe there has to be two clear months of downturn or something like that because we had the same problem with GEA the beta shares, the Australian share market funding, and we had a similar upward trajectory that was going up very steeply and just deviated a little bit which was enough for me to sell it but it’s again, of course kept going upwards with the rise in Australian share market with the ASX going up. So yeah, I appreciate the problem and I apologize if Tim and Mark feel a bit negative about the system but that’s how I do it and this is a very unusual circumstance.

Cameron Reilly [31:44]: So, walk me through looking at the SSG charts. Let’s talk about the buy line.

Tony Kynaston [31:51]: Yep.

Cameron Reilly [31:52]: So high point is going back to a sort of late 2016.

Tony Kynaston [32:01]: Yeah. September, 2016 at a 1.19.

Cameron Reilly [32:04]: And what would you use as the second point then sort of just before the COVID cough, February, 2020.

Tony Kynaston [32:10]: It was, yeah, correct.

Cameron Reilly [32:12]: Okay. So, the current buy price would be around 0.55.

Tony Kynaston [32:20]:

 Yeah.

Cameron Reilly [32:23]: You’re taking the bottom at the COVID cough March, 2020 as the first point.

Tony Kynaston [32:28]: Correct.

Cameron Reilly [32:28]: And then going through the next month, April the next lowest point.

Tony Kynaston [32:33]: Yes.

Cameron Reilly [32:33]: So, it’s like almost straight up.

Tony Kynaston [32:35]: Yep.

Cameron Reilly [32:36]: So yeah, then it becomes a Schrodinger.

Tony Kynaston [32:41]: Yep. That’s right. It does. Yep.

Cameron Reilly [32:43]: So, it’s currently both above the buy price and below the sell price.

Tony Kynaston [32:50]: Sorry now or back in April?

Cameron Reilly [32:52]: Well, now it would be. It’s above the buy price but if you draw that line straight up, the sell price is oh, yeah, the sell price is like 1.20 if you draw that line straight up.

Tony Kynaston [33:07]: If you use the April one as the second one, I think what happens or what I would do is over time as it’s going along, there’s another.

Cameron Reilly [33:14]: Another buy sell.

Tony Kynaston [33:15]: Another trust point.

Cameron Reilly [33:16]: Yeah right.

Tony Kynaston [33:16]: Which is in September, 2020 so if you use that as a second point, it’s just touching the sell point again now.

Cameron Reilly [33:24]: Right. So, you’re right. It’s kind of trading in that it’s just touching its sell point, but it’s well above its buy point.

Tony Kynaston [33:30]: Hmm.

Cameron Reilly [33:33]: Okay.

Tony Kynaston [33:34]: Yet again these ones are a bit tricky, I think.

Cameron Reilly [33:36]: Yeah, which is why they’re a bunny boiler.

Tony Kynaston [33:39]: Yeah exactly, very tricky to handle.

 [33:43]: [Laughter].

Cameron Reilly [33:43]: We flirt with them and then we regret it.

 [33:51]: [Laughter].

Tony Kynaston [33:51]: Yeah. And then we have to buy our kids a new rabbit.

 [33:52]: [Laughter].

Cameron Reilly [33:56]: It’s all fun and games until you come home and have to buy the kids a new rabbit.

 [34:02]: [Laughs].

Cameron Reilly [34:02]: Let’s look at Tim’s other one, ADH.

 [34:07]: Both Speakers: ADAS limited.

Tony Kynaston [34:11]: And this is another one of those retail stocks I was talking about that has come off its peaks recently because of the feeling in the market that the times are changing and that stores which have done well during COVID may not do as well going forward or may have a slower level of growth going forward. So, it is a home where stores and the benefit of during COVID because people working from home and spending lots of time there and going, Hmm, I really should change my bedspreads or my throws on my couch or whatever. And they were going off and buying stuff to spruce up their home. It was okay when their wife was there all day but now that they’re at home working, I think we can make the place look presentable.

Cameron Reilly [34:55]: Wow that’s incredibly sexist. Tony can’t believe you just said that wow.

Tony Kynaston [34:59]: [Laughter]. Well, it could be the other way around too. I suppose the wife came home and didn’t like it, but anyway, ADAS has done really well out of people refitting their homes when they’re working from home and then it’s kind of changed, it’s come off a little bit, but yeah, let’s go through it.

Cameron Reilly [35:16]: Well, the chart looks pretty straightforward to me. So, the low point over five years is back in sort of May, 2017, and then the second point being the COVID cough.

Tony Kynaston [35:28]: Yeah.

Cameron Reilly [35:29]: Right. So, then I get a sell price, round about 90 cents. The buy price probably starts late 2018, and the second one being just before COVID February, 2020.

Tony Kynaston [35:47]: Yep.

Cameron Reilly [35:47]: So, it’s well, and truly above that sell, but yeah. So, I’d say that’s a pretty, pretty clean one, Tim. Hmm. Would you disagree with any of that?

Tony Kynaston [35:59]: Nope. No, I think that’s right.

Cameron Reilly [36:01]: Alright. Well, I’ll post these up on the blog post and the Facebook page, et cetera, Tim, have a look at that and let me know if you have any questions, but thanks for the questions. Yeah. Look, these things are tricky as hell and just keep listening, keep practicing and you’ll get the hang of it I think and as Tony said before, like some of them, like the shaver shop are just completely new territory in a bizarre and probably too hard. I mean, if you’ve already bought it, then you still have to figure out when to sell it but I don’t know if you bought shavers.

 [36:49]: [Laughter].

Cameron Reilly [36:49]: If you bought COVID, you’re doing really well because it’s having a booming year.

 [36:56]: [Laughter].

Cameron Reilly [36:56]: What a booming year it’s having, more customers than you can poke a dirty mascot. If you’d bought shaver shop, let’s say after the COVID cough, when it was going up, if you’d bought it back around, say June, what would you do now, you would have to calculate what the sell price is after that and that’s still like kind of roughly where it is right.

Tony Kynaston [37:24]: Yeah, that’s right yeah.

Cameron Reilly [37:26]: So, what would you do?

Tony Kynaston [37:26]: And well, I don’t know that’s what I’m thinking I might have to sort of review what we do for those kinds of situations maybe it means two downward months in a row before we sell.

Cameron Reilly [37:39]: Yeah.

Tony Kynaston [37:39]: It keeps fluctuating around that sell line and it’s buy line because it’s so steep going up.

Cameron Reilly [37:44]: Yeah.

Tony Kynaston [37:46]: That’s probably what we should do is just eyeball it, still going up.

Cameron Reilly [37:52]: Yeah.

Tony Kynaston [37:52]: Why don’t we just hold it yeah.

Cameron Reilly [37:55]: But then what happens to rules as rules?

Tony Kynaston [37:59]: Rules is rules, and as I said before, if it was me, if I own shave a shop, I would have sold out at 93 cents or whatever the number was back in September.

Cameron Reilly [38:09]: Yep.

Tony Kynaston [38:09]: And then if I hadn’t bought something else, I would have bought back in.

Cameron Reilly [38:13]: Right.

Tony Kynaston [38:14]: In the following monthly yeah.

Cameron Reilly [38:15]: Okay. Cool. Let’s move on to Gary. Hi Cam, how are you? I’m good. Thank you, Gary. I’m hot.

 [38:26]: [Laughter].

Cameron Reilly [38:26]: It’s 31.1 degrees in my little studio here right now and running at 47% humidity so it’s not a pretty sight.

Tony Kynaston [38:36]: I feel in luck.

Cameron Reilly [38:38]: Really?

Tony Kynaston [38:39]: Yeah. We’ve been over 60% today.

Cameron Reilly [38:41]: Right, jeez.

Tony Kynaston [38:43]: 29 degrees so it’s hot.

Cameron Reilly [38:46]: Good for keeping cigars. That’s about perfect for cigars 60%.

 [38:49]: [Laughter] Okay.

Cameron Reilly [38:50]: Yeah. I am wondering if you guys are able to point me in the right direction to look into creating an SMSF with my and my wife’s combined super. I’ve heard Tony talk about his SMSF before I realize he no longer contributes to it. And although I am nowhere near ready to look after this myself, it seems like a sensible idea to combine the two to grow quicker, especially when one isn’t being added too much at all. Any guidance, not advice would be much appreciated. Thanks for the show by the way, it is very addictive. Oh, that’s good to know, Gary.

Tony Kynaston [39:26]: Thanks for the feedback, Gary.

Cameron Reilly [39:27]: Thanks for the compliment. What would you say about SMSF creation apart from go talk to an accountant?

Tony Kynaston [39:37]: It’s true. I’d talk to an accountant, definitely but okay. There’s a couple of, I won’t call them scams, but there’re a couple of things that people should be aware of with super funds and the industry. I’ll say it nicely and say it doesn’t go out of its way to promote this but people who have a career that moves around and most of us do or did as I did, you’ll have different super funds with different employers, and if you don’t watch out that, that can lead to you paying lots of costs and more importantly, missing out on lots of growth. And just to give you to give you some numbers around that. So, Gary and his wife maybe they’ve had two jobs each and so between them, they’ve got four super funds with other past employers, maybe their current employer and their past employer, and let’s say they have, I won’t even know how much they have in those funds, but generally if you’re running a self-managed super fund, it’s going to cost you sort of around about $4,000 a year to run the fund. And that’s in terms of the regulatory costs of getting tax returns done, and a Superfund also has to be audited where they check for compliance with rules and trust the obligations and things like that. So, it’s a little bit more expensive than getting your own tax return done by an accountant but s not overly expensive. Okay. So, it costs four grand per fund to do that. If you have four funds, it could potentially be costing you 16 grand whereas if you had the one SMSF that combined all those four funds, or even if you just roll everyone’s super fund up into one managed by one of the employers, you’re saving money.

Some people have super funds which have less than 4,000 in them, and oftentimes when they get that low, they get charged a percentage like 1% or whatever, but you’re still paying a large amount of your money that’s lying there in the administration costs. And another point to that is if your super fund is something like say $50,000 and that’s with an ex-employer, and you’ve got 50,000 in a couple of other ones, the $4,000 that they might be taking out in fees, and I’m not saying they do because they do it cheaper probably than more than I can do it but they’re taking out a couple of grand that may be halving your growth in the folder or even worse than that. So, you they’ve put your money into say an index fund and getting 10%, which is actually quite rare for a Superfund to do, they usually spread it across all sorts of different assets, and you’re lucky to get 7 or 8%. And then they’re spending three or four grand of that 50 grand a year on the cost of running the fund and you’re making that kind of money from just investing it with their balanced fund, you’re actually standing still, and your growth in those small funds you might have with other people is being eaten up in fees. And the other thing to watch out for is if you have insurance in the fund now, super funds, often would give you a good deal on insurance in terms of its cheaper policy than you can pay outside of the fund if you went off and did it yourself with an insurance company as almost like a marketing tool. But again, your policy costs on a small fund could still be running into the thousands and eating up the growth in the fund.

And sometimes that can mean the fund goes negative. If it’s a small amount you’ve got invested in that. So, the first thing I’d be asking Gary to there was a play out some old superannuation statements and check that that’s not happening, and if it is to very quickly either consolidate all his funds in the one fund, either with an employer or as he’s suggesting in an SMSF. So that’s just a sort of a nutshell of some of the traps that people can fall into a superfund. And it happened with my wife, Jenny. She worked with a previous employer for about 18 months before she left and we pulled out the super just recently to roll over into our SMSF and she actually went backwards because the insurance she had through that fund was greater than the amount they funded it that year.

Cameron Reilly [44:05]: [Laughs] Hold on.

Tony Kynaston [44:06]: That’s someone who’s worked in the financial industry all their life.

Cameron Reilly [44:08]: And worked for a superannuation company at the time.

Tony Kynaston [44:13]: Correct.

 [44:13]: [Laughter].

Tony Kynaston [44:13]: Yeah.

 [44:16]: [Laughter].

Tony Kynaston [44:16]: So that’s the first thing, and then on the subject of insurance, which is often sold by super funds as a reason to have one particular funder or another. I don’t know Gary’s age or his situation, the way I approached insurance was to look at what I needed the money for, not just to have an amount of money that my wife and family got if I died, but what we decided to do was I insured my wife and she ensured me for an amount that would allow us to put the money into a relatively passive investment like an ETF, and then use the dividends to pay for whatever extra help we needed to bring up our daughter. And it’s only been in the last sort of 12 months or so that that she’s now at university that we haven’t needed that kind of money that we’ve been exiting our insurance policies. So, there’s no real reason for us to have an insurance policy.

So that would be another thing I’d ask Gary to have a look at not so much whether he needs insurance, but we’ll have a look at a situation to decide if he needs insurance and what the objective of that insurance is. It might be that the objective is that to get a lump sum to pay down the mortgage for the other spouse or it might be that it becomes a passive income for the other spouse if you’re not working. But it sounds like they’re both working. So, depending on what they need the money for that determines how much insurance you need. And then don’t get necessarily sucked into keeping your money in one particular superfund or another because they tell you you’re paying less than premiums, and if you went out and got your own insurance policy because you might be giving up a lot more in terms of the administration costs on those funds than you could do by doing it yourself.

And thirdly, insurance, at least partly is tax deductible inside super two, but the superannuation tax rates are much lower than the top marginal rate so you’re getting less benefit from having one component of life insurance and your superannuation fund. And that’s the incapacity insurance. So, it’s the insurance they pay out if for some reason you can’t work for a long period of time, like you’ve been disabled, or you’ve got cancer or something like that. They will give you a certain percentage of your regular salary. That sometimes is called workers continuity insurance or disablement insurance. That’s actually tax deductible, yeah and it’s often part of a life insurance policy. So sometimes, again, if you take into account the after-tax costs of insurance, and life insurance and disability insurances, it’s actually cheaper to have it out of the fund rather than inside the superfund, and so you’re negating the benefits of having all those super funds with insurance running.

So, the other things I’d look at in terms of setting up your own fund, an accountant will give you a big folder, which has all you need to know to set up the fund, and generally, that’s a trust deed which will be just legal boilerplate, and the same trustee is virtually in effect for all SMSF. And I’ll give you the information you’ll need to open a bank account because your SMSF will be a separate bank account and then sometimes they also give you the information to take to your stockbroker because we’re investing in the stock market. You’ll need to go to the stock broker and ask for a separate account to be set up for the SMSF.

And then lastly, and this is a question for your accountant, they may also suggest you have what’s called a corporate trustee. So, in the past, I’ve had both you can act as a trustee yourself, and I now have a corporate trustee. And the corporate trustee has become a thing in the last sort of five to 10 years as just another added layer of protection of your assets. So, particularly if you’re being sued or if there’s a bit of divorce or something like that the assets are contained within a corporate trustee environment rather than being you as the trustee which has slightly different legal ramifications but that might also be something you want to look at, and if you don’t have a spare company lying around, which most people don’t, there’ll be a small cost at setting up a corporate trustee company like a shelf company and then you have to do an ICQ return for that every year which costs about $475, something like that, each year to do that. So, your running costs are going to be between four and $5,000 a year. So, I wouldn’t open up an SMSF if I only had sort of 30 or $40,000 but if you’ve got hundreds of 1000s of dollars, and it’s certainly worthwhile I think you’ll save money on perhaps where you are at the moment.

Cameron Reilly [49:06]: Oh, nice long answer. I have my air conditioner running in the background.

[49:10]: [Laughs].

Cameron Reilly [49:12]: 10 minutes. That’s great.

Tony Kynaston [49:13]:  Yeah good. Thank you.

Cameron Reilly [49:14]:   Thank you Gary.

Tony Kynaston [49:17]:  One of my agents ask me one of my pets peeves the way people.

Cameron Reilly [49:20]:   Yeah.

Tony Kynaston [49:21]:  They can be they can be taken advantage of by the funds management industry when the industry supposed to be working in their favour.

Cameron Reilly [49:27]:   Cowboys and sharks’ man, cowboys in sharks. Thank you, Gary. By the way, as you already know, not advice. Please don’t take anything Tony told you as financial advice, but stuff to think about that you might want to talk to your financial advisor or your accountant about. Here’s one for Gary, again, the same Gary I think I’m wondering if you use the DRP on the shares you buy or divs used for other things like day to day living, other investment, paying back leverage etc. Does using the DRP on an investment make a difference if you have a small amount invested into a larger amount i.e., 10,000, 100,000 or a million. Thanks, Gary, I don’t know what the Democratic Republic of Pakistan has to do with your investing Gary. I’m not sure that would be either sovereign risk. I think there Tony.

Tony Kynaston [50:20]:  The DRPK. Yeah, no. DRP stands for dividend reinvestment plan.

Cameron Reilly [50:25]:   Oh, I see.

Tony Kynaston [50:27]:  We’ve spoken about this in the past. So, if you get a dividend from a company and the company runs a plan, you can elect to have that reinvested back into the company rather than paid out to you as cash. And the things to look out for first of all, is how much the discount that’s on offer for you to do that and a lot of companies will do it at a discount, usually it’s only sort of two to 3%, but it still adds up. And even if you don’t get a discount, it’s still worth considering because you’re saving on brokerage if you were to put that money to use buying something else. So, there is a kind of slight benefit in that but yeah, as I said before on the podcast series, I don’t generally take up the DRP because I do use the money to pay down leverage as Gary suggested. So, we have a mortgage and the dividends go to pay down that mortgage but above and beyond that, you need to take into account your tax position. So, any dividend that’s paid, whether it’s taken as cash or reinvested, is also taxed and so if you get say, $100 as a dividend and you reinvest $100 back into the company maybe they offer a discount, so maybe getting $102 worth of stock for that $100 invested. You’ll still get hit by the taxman at the end for $47.50 if you’re on the top marginal rate for that dividend, so it depends whether it is SMS cheaper but if it’s in your own name, and you’re on a top marginal rate, you’re paying tax. If you don’t have the cash because you’ve reinvested the dividend back into stock, you still have to find it from somewhere else to pay the tax. So, think about that but also some companies will allow you to do a partial reinvestment and some people will reinvest or save the tax and take it as cash and then reinvest the rest back into the company. So, they are things to look out for, but generally I don’t do it because I need the cash to pay off our mortgage interest.

Cameron Reilly [52:30]: And then nothing to do with Pakistan is that what you’re telling me.

Tony Kynaston [52:34]:   Correct, yeah.

Cameron Reilly [52:34]:   Right, okay. Thank you, Tony. Thank you, Gary tk. This one’s from Trent. If TK was investing in three QAV stocks today, what would he be going for if he didn’t have to worry about large trading volumes? I understand these are not recommendations and we’ll do my own research. Cheers, Trent. Just be the top three on the buy list wouldn’t its Tony.

Tony Kynaston [52:58]:    It would exactly, yep.

Cameron Reilly [53:00]:  Which are as of the last sheet, you sent me Hawthorne resources, Grange resources and Eclipse group.

Tony Kynaston [53:10]:  Correct, and just for full disclosure, I own shares in Eclipse group, which has done well for me, it’s gone from about $1.22 to 1.80 this year. So that’s pretty good. And again, those top stocks on the buyer list by now are also trading at one and a half times operating cash flow. So that’s such a cheap way of buying cash for a business which is making money. It’s been around for a long time. It’s going through a bit of a turnaround at the moment because they had branched out into other businesses looking for growth and then they’ve sort of stumbled at having too much complexity and then the new CEO came in and started to sell off those companies, which is one of the reasons why it’s going up. But, also, I’ve forgotten the chaps name, and I apologize but we had one of the fund managers on a couple of weeks ago who talked about these kinds of leasing companies and finance companies. And he said, quite rightly, that during COVID, nobody was turning over their leases so companies like Eclipse provide financing for vehicle leases, among other things and those leases were being extended rather than new cars being bought and it had slowed down the whole industry during COVID. But we would expect that to change going forward as the economy opens up, and I think Eclipse has got plenty of upside in it.

Cameron Reilly [54:45]:  Well, we have all three of those stocks in the QAV portfolio. I just want to point out already, and Grange resources is also 1.58 price to operating cash flow so round about the same so two of them trading one and a half times, hmm.

Tony Kynaston [55:03]:  Hmm, it’s very cheap, isn’t it?

Cameron Reilly [55:04]: It is cheap.

Tony Kynaston [55:06]: Yeah. I mean these also have good quality scores as well so they’re good companies but would there be any business, you could walk down the street and turn down that was offered to you at 1.5 times operating cash flow?

Cameron Reilly [55:20]:   Yeah, I mean outside of outside of some secrets that they might be holding on to that would be a really easy buy right.

Tony Kynaston [55:33]:  Yeah, and we can see from the share market that this positive sentiment so being bought by other people as well so we can take some kind of comfort that other people can see that it’s a sensible buy but yeah, I’m bowled over that these companies are so cheap.

Cameron Reilly [55:49]:  Hmm, why do you think that is? Let’s gets back to that quote from Greenwald that I read out earlier on right. People’s attention is going to more glamorous things.

Tony Kynaston [56:03]:  Yeah.

Cameron Reilly [56:04]:   In the banks. As you said, some of these businesses are a little bit boring. By the way. I’ve been meaning to tell you this. We were doing an interview last week, I think it might have been Andrew Page at Straw Man, and he and I were on the call and he came in a couple of minutes later, while I was in the process of saying that your approach to investing is very boring, in that we look at boring companies, and you just came in at the last bit where I said, yeah, Tony’s very boring and then I went oh, hi, Tony. I forgot to mention to you, that’s what it was, that I wasn’t talking about you and your personality.

Tony Kynaston [56:45]:  Oh okay.

Cameron Reilly [56:45]:   Your approach to investing, you’re very conservative and we look at boring companies, right, that just generate a lot of cash and we can get them at a good price.

Tony Kynaston [56:55]:  Thank you for that but I haven’t thought about it.

56:58 [Laughter].

Cameron Reilly [56:58]:  It’s been bugging me. I’ve been meaning to point that out to you.

Tony Kynaston [57:04]:  Okay.

Cameron Reilly [57:05]: Thank you Trent for your questions. Shawn, “What’s your general opinion of AGM voting rights? I’ve ignored the proxy options given to me so far, but wondering how you guys approach your voting option? And you’ve talked about this recently.

Tony Kynaston [57:17]:  Hmm, yeah, I rarely vote and if I don’t like the company, I sell the shares, which I’ve really done as well, quite frankly so yeah.

Cameron Reilly [57:25]:   You’re like the typical American, you really vote unless you absolutely have to.

Tony Kynaston [57:33]:  Yeah, and if I don’t like it, I move.

Cameron Reilly [57:36]:   Well, no, don’t do that.

Tony Kynaston [57:38]:   No, I think Stephen Mane raises good points about this and maybe some people do deserve and a bit of a slap on the knuckles for all the capital ratings they’ve done which dilute retail shareholders and we’re going through one of those, I think it was AMI Resources, which we spoke about last week sorry Aurelia Metals and that’s a valid point. And there are some people out there who think that companies aren’t doing enough on their ESG and so that’s a valid point. And there are people out there who think that CEOs get paid too much, and they can have a chance to vote and express their opinion on that but all those things rarely interest me. I’m there to make money, and if I can’t make money, I’ll sell the stock and go somewhere else and that’s a sweeping generalization and I know that the ASA does a lot of good work in terms of making recommendations on where to vote.

So, if Shawn wants to look at how to vote and takes an interest, that’s fine and the ASA is a good place to start because they have good recommendations on how they propose voting, and they do lots of research on that and I think it’s a great part of corporate democracy if you like that we get to vote at AGM’s on all these things, but I think the large number of them are the same things, re-elect some directors, approve the pay for the CEO. Occasionally, something big comes along like approve a takeover or something similar or approve a large capital investment, for example, a refinancing deal and yeah, I may vote in those situations, but I can’t recall the last time I did.

Cameron Reilly [59:35]:  Then you have the news Corp AGM which I believe went for 20 minutes last week.

[59:39] [Laughs].

Cameron Reilly [59:39]:  And it was just consisted of Rupert talking about how seriously they take climate change.

[59:46]: [Laughs].

Cameron Reilly [59:49]: 

Well, I hope his editors are listening around the world because I don’t take it very seriously.

Tony Kynaston [59:52]:  They take it very seriously but even the other way.

Cameron Reilly [59:56]: Oh, I’m sure they understand the Rupert nod and wink.

Tony Kynaston [59:59]: Yeah exactly.

Cameron Reilly [59:59]: They wouldn’t have the job if they didn’t understand that sure we take it seriously next.

Tony Kynaston [1:00:05]:  Yeah.

 Cameron Reilly [1:00:05]: Thank you, Shawn. Jamie, hi Cam, this one might not be in entirely in Tony’s circle of competence but I’d like to understand the blanket sell guidance for qualified audit reports. Not all qualifications are created equally, there are adverse opinions, the worst limitations on scope can be for very good reasons, emphasis of matter, essentially highlighting already disclosed matters but it takes a trained eye to know what’s what maybe that’s why it’s easier to just sell.

Tony Kynaston [1:00:39]: True but the qualified audit the one that I mean when I say qualified audit is usually wording to the effect that the auditors, they usually say something like, there’s a material concern that the business may not be ongoing or words to that effect, which is the most serious one. So, they’re the ones I’m looking for when I say qualified audit but the fact that the auditors have raised the fact that the business may not be a going concern before they conduct an audit. And again, management will often dispute that. Sometimes they put out press releases at the same time saying here’s why we think they’re wrong. At the AGM, they’ll often come out and say we’ve addressed the concerns and it’s all fixed but on the balance of probabilities, the companies that have a qualified audit of that kind of material and going concern nature either don’t make it or the share price suffers detrimentally.

Cameron Reilly [1:01:41]: And so there might be qualified audits that relatively benign and you wouldn’t sell.

Tony Kynaston [1:00:05]: No, I take the point that Jamie’s made. It can be splitting hairs and so I wouldn’t take the risk if it’s qualified, it’s qualified then I would sell. And I guess, to that point you just made, I’m thinking of Z-implats, which there was all that matters raised about the carrying values of assets on the books and they didn’t use the form of words that would therefore impede the going concern nature of the company but we did see the share price come off because of that sort of cloud over the company so it was a good enough reason to sell, I think. So, Jamie’s right. Things have to be really bad if an auditor for a company raises an issue like that because turn the situation around, you’re in the business of doing audits, and you want to keep doing audits and one of your customers, you may have done audits for the last five to 10 years, suddenly you just can’t stand it anymore.

1:02:50 [Laughter].

Tony Kynaston [1:02:32]: Skated close to the wind, you’ve taken the money every year, you’ve been convinced by them that it shouldn’t be qualified audit and you’re just gone no, I have to qualify this. You won’t be able to go forward so it’s pretty bad.

1:03:04 [Laughter].

 Cameron Reilly [1:03:08]: So basically, saying that makes him a bit of a bunny boiler. It’s just too hard. You don’t want to.

Tony Kynaston [1:03:15]: Yeah.

Cameron 1:03:16]: You don’t want to get in. By the way, we sold Zim in late May at $9 65.

Tony Kynaston [1:03:26]: Hmm, mm.

Cameron Reilly [1:03:05]:  We’re currently $11.36 so.

Tony Kynaston [1:03:29]:   Quite an extension.

1:03:30 [Laughter].

Cameron Reilly [1:03:33]:  Audit Smawdit, there you get it.

Tony Kynaston [1:03:35]: Okay. Yeah, like I said, it’s a balance of probabilities that happen and another one I’m thinking of is what’s it called now the credit company. I’ve forgotten prime, I think it’s called prime, let me have a look quickly if I can find it. Prime Financial Group [PFG] again, they didn’t have an audit saying that they may have problems as a going concern. They have one again, about the carrying values that they held their debt ledges on their books for, and the reverse has happened with them. They’ve dropped from September 17 at a high of 21 cents down to nine and a half cents today. So, it’s a balance of probabilities thing if Zimplats has come good, I’ll go back and have a look at their audit. I think for me, the last time I had looked at Zimplats, there was still some mention of the carrying value issue and the currency issue that went with that on their audit statement but perhaps people have taken the view that’s not material but anyway, I’ll wait for it to be cleared up. I mean if it continues to be on the audit books or any audit report, I’d still feel uncomfortable owning it.

 Cameron Reilly [1:04:57]: Yeah, I mean like people invest in things that we’re uncomfortable in investing in all the time, right so part of your sort of process is to minimize the risk and by what look like pretty safe bets. You’re going to get some wrong to along the way but basically, it’s buying safe bets, undervalued companies that seem to be performing well and getting rid of any along the way that seem to hit snags.

Tony Kynaston [1:05:29]:  Correct, yea heat chopping water.

Cameron Reilly [1:05:32]: Yeah, bunny boilers.

Tony Kynaston [1:05:33]: Hmm, mm [Inaudible 1:03:33].

Cameron Reilly [1:05:34]: They may look exciting but you come home one day, and you find that she’s let herself into your apartment and sliced up all of your bed linen and your suits with the carving knife while you’re out because she found another girl’s earring on the floor in the bed.

1:05:55 [Laughter].

Cameron Reilly [1:05:56]: It doesn’t matter that she left you.

Tony Kynaston [1:05:57]: Hypothetically.

Cameron Reilly [1:05:58]:  A week earlier ran off with another guy that she met it in AA meeting. You went out and jump straight back on the horse. You’re like were like the fact she went out the same night to the local bar, picked up a nurse took him back home. That’s beside the point. She still feels slighted. I don’t know this story. I’m just making this story up. It’s not I don’t know where I’m getting it from. [Laughs].

Tony Kynaston [1:06:23]:  You dropped out there for a minute. It sounds like you went to a bar and picked up a whore. Is it a horse or a whore, get back on the horse?

1:06:31 [Laughter].

Cameron Reilly [1:06:33]:  Back on the nurse.

Tony Kynaston [1:06:34]: Back on the nurse okay.

Cameron Reilly [1:06:35]: Yeah.

Tony Kynaston [1:06:36]: Something says you do.

Cameron Reilly [1:06:38]: What makes you think it was me? Hypothetically, a friend of mine that may have happened to.

Tony Kynaston [1:06:44]: Yeah.

Cameron Reilly [1:06:45]: 20 years ago.

Tony Kynaston [1:06:48]:  Getting back the shares. I’m just looking at Zimplants, when did we sell it?

 Cameron Reilly [1:06:51]: 25th of May.

Tony Kynaston [1:06:54]: Right. Yeah, it went down from there didn’t and it went right down to 8.99.

 Cameron Reilly [1:07:01]: Yeah. [Cross-talking 1:07:02].

Tony Kynaston [1:07:02]:  I’m going to go back and have a look at its annual report and just have a look yep.

Cameron Reilly [1:07:08]: Last question, this is from Elma over in WA, not huge importance, but I’d like to understand regression testing how it’s done? What do you need and just where would you find any kissing data?

Tony Kynaston [1:07:20]:  Is that missing data?

Cameron Reilly [1:07:21]:  No, I think kissing data is what he meant. He wants data on kissing.

Tony Kynaston [1:07:25]:  Let’s start with you.

1:07:27 [Laughter].

Tony Kynaston [1:07:28]:  Tell us about 20 years ago.

 Cameron Reilly [1:07:30]: He’s having a slow patch over in WA Elma. Listen kiss him data.

Tony Kynaston [1:07:34]: [Laughter] oh dear. Yeah, so I mean the first point that I’d like to make is that I use the term regression testing, but it’s not in any way sort of formally, statistical analysis, I don’t use SAS or any other tools to look at coefficients and ask what it means and all that kind of stuff so a statistician listening to what I’m going to say would scoff and say that’s not regression testing, and they right, it’s not regression testing. What I’m doing is testing hypothesis. And so typically what I do is if I have a thought that maybe I should be changing something in the checklist, I’ll go back and have a look at as many years’ worth of data as I have in my old spreadsheets and I’ll see if I can use that data to alter something. And the example that springs to mind was  whether 20 stocks was too many to hold, and whether I should be holding two or three because after I did some K analysis, it came out at two stocks, I think from memory selling  back and I still had all the QAV scores from the last five years, which I think I posted on at some stage in the Facebook group or maybe you send it out, but anyway and instead of buying the portfolio I had, I bought a portfolio of a couple of stocks and just saw how that would have gone now. 

That gave me a similar result. So, it didn’t sort of strike my fancy as being something worth going further into the investigation but that’s what I mean by testing. The statistician will look at that and say well it’s only one example over one time period and you could have a different result if you use different data in different time periods, and they’re absolutely right, but it’s enough. For me, I’m looking for the smell test. It’s enough for me to say that in that particular case, the last five years; there wasn’t much difference in doing it one way or the other so I’m not going to make a change. That’s how I generally approach it. I have written off the stock doctor, haven’t had the reply yet to see if we can somehow get access to the past data in detail because even though you can see things like past PE ratios, past operating cash flow numbers, we can’t query on that so I’m hoping that with a bit of negotiating with stock doctor, we can get access to that data, which would be a great data set to use to do this kind of testing on. Then the last thing that I do is, and I can use stock doctor for this is if I don’t have access to enough prior data and I want to test something, I’ll run a filter in stock doctor and drop it into their portfolio product or the portfolio. What’s it called the feature they have which we actually create different portfolios and then I’ll just come back and look at it after six months or 12 months and see if it has had a better run than what I’ve been doing with my normal investments.

So it’s really a scientific method, I guess it’s like, I’ve got a thought, it’s a hypothesis and I’ll set up a trial to test that hypothesis and I’ll use the old odds and I’ll use my own portfolio as the counter points to those as the control groups, and I’ll see whether I did better or worse, and if I did better, I’ll think about what that means and I will start to think about, did I do better in that case just because the market was better for those particular stocks at that time, like maybe they were resource stocks or maybe they were growth stocks. And I’ll think of further about other tests I might be able to run but oftentimes that I just run into dead ends and don’t change the checklist. And an example of that was last year, we talked about using operating cash flows to price ratios of over 100 to see whether that was a good valuation metric for growth stocks. And I just ran a simple filter at that product about the middle of last year after those numbers were out, and dropped it into a stock doctor portfolio, and then looked at it for the next six and 12 months, and it wasn’t outperforming what I was doing with QAV, so I didn’t go any further with it. So that’s a couple of ways of doing it. There are some tools out there which are aren’t bad to look at, I know Yahoo Finance, for example, you can go and download historical price data for a large number of years which I’ve used in the past. But you can’t get access to much more than that but it is still helpful if you wanted to go back and check what holding a portfolio of one particular type of stock or another would look like the price data is available.

Yeah, so that’s pretty much how I do it.  I use the term regression testing.  It’s more of a sort of a scientific or quasi scientific approach to it, of setting up hypotheses and trying to test them.

Cameron Reilly [1:12:20]: Hmm, just asks your intern Elma is my answer to do it for you. That’s all you need to do. Get an intern.

1:12:25 [Laughter].

Tony Kynaston [1:12:27]: Yeah.

Cameron Reilly [1:12:28]: By the way, if you want to see those spreadsheets, Tony mentioned with his historical data, just go to the Bible, TPM Bible, look up historical data. It’s right down the bottom of the Bible page. No page numbers on it, but right down the bottom, like third or fourth last page, and you’ll be able to see the link to that. Thank you, Elma, and if you still need kissing data, get back to me. I’ve got some sites where I can send you.

Tony Kynaston [1:12:56]: [Laughter].

Cameron Reilly [1:12:59]: Here’s a little bit of kissing.

1:13:01: [Laughter].

 Cameron Reilly [1:13:05]:  Finally, Ozbiz, you’re going on Ozbiz Tony. They finally have realized that you’re the man, and they’ve invited you to come on.

Tony Kynaston [1:13:17]: They have yes, yeah.

 Cameron Reilly [1:13:19]: So that’s exciting. So that was nice of Andrew page from Straw Man after we interviewed him last week. He said, hey, would Tony like to go on Ozbiz? That’s for those of you who don’t know, I think its Koshy’s business and a finance, TV/ web show. I think it’s on Channel 7, as well as he does it online. So, Andrew broke it in introduction. And they said, “Yeah, we’d love to have Tony on, set it up.” And then of course, we were introduced to Andrew by Phil Muscatelo. So, I want to thank both Andrew and Phil Muscatelo, who’s been very generous in sending great guests our way. So, I know he’s a listener. Thank you, Phil, I appreciate all of your generosity in having Tony on your shows and sending good guests our way, good introductions. It’s been very, very nice of you.

Tony Kyanston [1:14:14]: Yeah, thanks Phil and thank you Andrew yeah, and just trying to work out when I can go on and they want me to talk about checklists and nominated stocks so I’ll do that.

 Cameron Reilly [1:14:24]:   Oh- oh, awesome.

Tony Kynaston [1:14:26]: Yeah.

Cameron Reilly [1:14:26]:  That’s exciting. I told Tyler that you were doing and he’s very impressed that you’re going to be on TV, not as impressed as he would be if you had a million followers on Instagram.

1:14:44 [Laughter].

 Cameron Reilly [1:14:44]:  But.

1:14:45 [Laughter].

Cameron Reilly [1:14:46]: He said.

Tony Kynaston [1:14:47]: Well.

Cameron Reilly [1:14:47]: He’s just said make sure you coach Tony really well on what to do when he goes on like you got to coach him when he goes on. I said man, what do you think I’ve been doing for the last two years- it’s getting him ready for this moment.

Tony Kynaston [1:14:58]: [Laughter]. You’re like Burgess Meredith.

Cameron Reilly [1:15:03]:  Yeah, get out there, Rock.

[1:15:05]: [Laughter].

 Cameron Reilly [1:15:06]: Get out there Tony. You can do it. Yeah, that’s great. No, I’m sure you do a great job. That’s very exciting.

Tony Kynaston [1:15:15]:  Yeah. Thank you.

 Cameron1:15:17   Alright. Well, I think that’s it for this week. Well, congratulations. I believe Alex finished graduated University last week.

Tony Kynaston [1:15:29]: Yeah.

Cameron Reilly [1:15:30]: That’s exciting.

Tony Kynaston [1:15:30]:  Yeah.

 Cameron Reilly [1:15:31]: The borders are open up so you’re going down to Cape shank for a month. That’s exciting.

Tony Kynaston [1:15:35]: Yep.

Cameron Reilly [1:15:37]:  Got any horses running that we should know about?

Tony Kynaston [1:15:40]:  No nothing at the moment. It’s spring carnivals coming to a close and other than being turned out. There might be something in a couple of weeks, but we’ll see.

Cameron Reilly [1:15:48]: So that’s it. No more horse racing. There are no more opportunities for me to lose any more money to share.

Tony Kynaston [1:15:53]: [Laughter]. There will be at some stage but not in the immediate future.

 Cameron Reilly [1:15:58]: Wow okay.

Tony Kynaston [1:16:00]: Yeah.

Cameron Reilly [1:16:00]:  Well, there you go.

Tony Kynaston [1:16:02]: How’s your portfolio going by the way?

Cameron Reilly [1:16:02]: My share portfolio?

Tony Kynaston [1:16:07]: Yeah.

Cameron Reilly [1:16:08]:  Terrible [Laughter].

Tony Kynaston [1:16:09]:  Really.

Cameron Reilly [1:16:10]:  Yeah, yeah.

Tony Kynaston [1:16:11]:  Seriously.

Cameron Reilly [1:16:11]: No, well, I had to sell some stuff because I needed some cash actually.

Tony Kynaston [1:16:14]:  Oh okay.

Cameron Reilly [1:16:16]:   Actually, it’s not so bad. I got to say it’s looking a lot better than it did the last time I checked, things are up. Grant resources I’ve held since September, it’s still down 7%.

Tony Kynaston [1:16:28]: Hmm, mm.

Cameron Reilly [1:16:28]: Image resources I’ve also held since early September, it’s down nine and a half percent. But Eclipse I’ve held since late August. It’s up 26%. Credit Corp I’ve held since September. It’s up 30%, and CWA I have only held since late October. It’s up 3% but yeah, I had to sell the other things that I held because I needed the cash Tony.

Tony Kynaston [1:16:51]:  It happens yeah.

Cameron Reilly [1:16:51]:  I needed cash.

Tony Kynaston [1:16:54]: Yeah.

Cameron Reilly [1:16:54]:  And I think I need the rest of the cash that’s in that portfolio too.

1:16:57 [Laughter].

Cameron Reilly [1:17:01]:  To pay some extremely large bills that I didn’t have the cash to pay.

Tony Kynaston [1:17:04]: Yeah, yeah.

Cameron Reilly [1:17:05]: So, I might be dumping all of those, at least the ones that are in the green in order to pay off some bills. I look forward to the day when I can leave my shares in there long term and not get faced with life threatening bills.

Tony Kynaston [1:17:25]: [Laughter]. Okay. Oh dear. It worked for you kind of helping to clear all those bills for you.

 Cameron Reilly [1:17:31]: Yeah, maybe but look at the real. I mean, the reason I’ve been investing over the last couple of years since we’ve been doing this is really to put my money where my mouth is.

Tony Kynaston [1:17:42]:  Right.

Cameron Reilly [1:17:42]: It’s the psychological and emotional exercise. I mean, I always kind of knew I was going to have to pull the money back out that I didn’t have that amount of spare cash but the psychological exercise of following the rules for myself, throwing stuff in, selling when I have to sell, parting with the money, having faith in the system, and all of that kind of stuff and yeah look it’s up. So, I can’t complain. It’s doing okay.

Tony Kynaston [1:18:06]:  Yeah good, okay, good.

Cameron Reilly [1:18:09]:  Good. All right, take care, well, have a lovely week. Oh, for those we haven’t mentioned. So, we did a couple of great interviews also last week, which haven’t come out yet. Damian Parker, we did an interview with that’ll come out talking about his story, which was great. We had the CEO of Share site on as well. That was a great interview. And we’ve got a couple of other good interviews coming up, including Cameron Williams Channel Nine-star sports reporter coming on. She’s always a hoot to chat with. So that should be fun. We’re going to talk to Cameron in a couple of weeks.

Tony Kynaston [1:18:49]: Yep.

Cameron Reilly [1:18:49]: And Steven Bruce from Perennial. We’re just trying to work out a date with him so lots of good interviews coming up over the next couple of weeks as well; looking forward to those.

Tony Kynaston [1:19:01]:  Yeah, I agree with you. The last ones have been particularly good.

 Cameron Reilly [1:19:04]: Yeah, a lot of fun.

Tony Kynaston [1:19:05]: Yeah.

Cameron Reilly [1:19:06]: Okay. Have a good one.

Tony Kynaston [1:19:08]:  Violins booting up behind me I should go.

 Cameron Reilly [1:19:10]:  Okay take care. Thanks. Bye.

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