Transcript QAV 360

Episode Name: QAV 360

Duration: 01:15:32

Cameron Reilly [00:04]: Thanks for the warning. I ducked just in time. Where are you today TK?

Tony Kynaston [00:11]: Yeah, Darlinghurst.

Cameron Reilly [00:14]: Darlinghurst.

Tony Kynaston [00:16]:  Maybe trying to pack before I go away tomorrow.

Cameron Reilly [00:19]: Oh, right. I thought you were already downplaying golf with Ruddy.

Tony Kynaston [00:24]: Oh, that was up in the Hunter Valley.

Cameron Reilly [00:27]: Right. But you’re back from that.

Tony Kynaston [00:29]:  I am. We got back last night and he left this morning. He stayed overnight at our place. Yeah. We had a tournament on which was great. Good fun.

Cameron Reilly [00:37]: Was it a drinking tournament or a golf tournament you did with Ruddy?

Tony Kynaston [00:40]: It was both. And that probably cost me the golf tournament, actually. I was in contention. I was a contender like [inaudible 00:00:50] on the back nine on the final day.

Cameron Reilly [00:54]: As long as you weren’t incontinent. You didn’t lose because you’re incontinent.

Tony Kynaston [00:58]: No, no.

Cameron Reilly [00:59]: No, no. Get to your age, that becomes a real thing. You know, you have to look into Depends. I think they call it in the US. Don’t know what they call them here.

Tony Kynaston [01:09]: Nappies.

Cameron Reilly [01:13]: Big body nappies. Oh, that’s a shame you didn’t win. My condolences.

Tony Kynaston [01:18]: That’s alright. I had fun. I had a great time.

Cameron Reilly [01:21]: I didn’t win my chest tournament last week either, but I did win three out of the four games that I played. The one that I lost, I lost to a nine-year-old little Indian kid. And I was incontinent after that. I tell you.

Tony Kynaston [01:35]: Inconsolable.

Cameron Reilly [01:36]: I was shitting myself. No.

Tony Kynaston [01:40]: I went into town today for an appointment and had a burger in a cafe overlooking the park and there were these old guys were playing the giant chess pieces.

Cameron Reilly [01:50]: Oh yeah.

Tony Kynaston [01:50]: Standing around and watching, I thought that’s Cam in 20 years.

Cameron Reilly [01:54]: Oh yeah. That’d be me now if I had people to play with. You know, we just watched the Queen’s Gambit, finished it last night. Not a great series in my opinion. Overhyped but nice to see a show that’s built around chess as an idea anyway, although there’s not really a lot of chess in it. But every time she saw a group of guys in a park, I think at the end, like in Russia, there’s a group of guys sitting around playing chess. I’m like, that’s basically, my son, Tyler and I, you know, he came and played in the tournament as well. We were both like, all we need is a good 10 years in prison. Like if we just had 10 years in prison where we had the two of us, we were actually plotting this out. We both need to commit a crime together, get sentenced together to the same jail. And then all we will do is play chess for 10 years and we’ll come out of prison grandmasters. It’ll be great. And then we’d have a great story to tell. That’s kind of our backup plan. If QAV doesn’t work.

Tony Kynaston [03:00]: There is some financial advice wind up in jail for 10 years. Although my chest wouldn’t improve, I’m pretty sure.

Cameron Reilly [03:05]: Right. But all of the guys in prison would come out, they’d be fired up about investing.

Tony Kynaston [03:13]: Exactly.

Cameron Reilly [03:13]: Yeah.

Tony Kynaston [03:14]: In fact, we need a ring. We would like to raise capital. It’s we need like light fingers to get to the safe. We need muscles to knock out the guards.

Cameron Reilly [03:25]: And we need Tonyto figure out what to do with the loop once we’ve stolen it.

Tony Kynaston [03:31]: Exactly. Yeah.

Cameron Reilly [03:32]: Yeah. I mean, it’s funny we’ve never seen that in a heist film. Like they’d like a reservoir [inaudible 00:03:36] scene. They do the heist and then they’re like, “Right, so…”.” And they go, “Well, now we’re going to give it to Tony.” Right. What’s Tonygoing to do? Well you are going to have to wait 20 years? It’s slow but get rich slowly. And they’re like, “Right. Oh, okay.” Yeah. Sort of any climactic, heist film, really. Just the heist is the first five minutes of the film. Then the next hour and a half of the film is just the guy sitting around getting older, twiddling their thumbs, waiting for you to…

Tony Kynaston [04:07]: Yeah. Playing chess.

Cameron Reilly [04:11]: Going back to prison so they can play chess without having to have the pressures of normal day-to-day life. All right.

Tony Kynaston [04:20]: Yeah. But at least they wouldn’t get caught because they splashed it round.

Cameron Reilly [04:24]: No, that’s right. Yeah. Yeah. You’re the cleaner. You’re going to clean the money.

Tony Kynaston [04:30]: Winston Wolf.

Cameron Reilly [04:31]: Yeah.

Tony Kynaston [04:32]: I’ll clean the money. [crosstalk 00:04:34].

Cameron Reilly [04:34]: Maybe you’re both if you clean the money and the blood off the back seat of the car. All right. Let’s…

Tony Kynaston [04:40]: I thought Crown Casino was for that.

Cameron Reilly [04:46]: I think Lawyer Paul’s going to be emailing you going, “You can’t say that sort of thing, Tony.” Normally me saying that kind of stuff.

Tony Kynaston [04:55]: Allegedly.

Cameron Reilly [04:55]: Allegedly. There you go. We’re good now. Let us get into the show. People are starting to wonder what we’re doing here. Wanting to just do a portfolio update. I made a couple of changes to our Google portfolio [inaudible 00:05:12] thing, and I also uploaded our portfolio to the Sharesite finally last week. After our chat with Doug Morris, the CEO of Sharesite, really easy, I guess, to upload it. I just had to export the transaction list out of Google sheets and, you know, move the columns around a little bit et cetera, et cetera. I haven’t shared it with everyone yet, because I’m still trying to find out from Doug how to do that. And also it hasn’t handled the IQG to SSR merger. So I’ve asked them what to do about that in their little support window. But as it stands, it says that our total return for this financial year on the portfolio is 22.68%. And so…

Tony Kynaston [06:01]: Good.

Cameron Reilly [06:02]: Good. Yes. You know, because they are doing it for the financial year. I was still doing it from the beginning of September in our Google sheets. So I changed the Google sheet over to the beginning of the financial year as well. I thought, well, now that we’ve got a financial year starting point, we might as well do it from that. Google sheet says that we’re 21% as of this moment, Wednesday, the 9th of December at 3:07 PM. Google sheet says that we’re up 21% since the beginning of the financial year. The all odds are up 13.48%. But of course, our portfolio’s total returns, the all odds straight up a number there isn’t. Yeah, it’s my month-end, and I can’t get day-to-day total returns on the all odds. But you know at a basic level, we’re up 21%. All odds are up say 13, 14% probably, you know, once you add in the total returns, it’ll be a little bit higher than that. So we’re doing okay for five months into the year. Not twice the ASX at the moment, but the all odds, but 21%, 22% is pretty good for five months.

Tony Kynaston [07:17]: It is. It’s good. Yeah. I think I’ve got those details on how to fix Alkane. So I’ll send them through to you.

Cameron Reilly [07:25]: [inaudible 00:07:26].

Tony Kynaston [07:29]:  Alkane Resources.

Cameron Reilly [07:29]: [inaudible 00:07:29] gold. I think.

Tony Kynaston [07:31]: Sorry it was [inaudible 00:07:32]. Wasn’t it? Yeah.

Cameron Reilly [07:34]: [inaudible 00:07:34] Yeah.

Tony Kynaston [07:35]: Yeah.

Cameron Reilly [07:36]: Okay. So I just wonder if people are looking at the portfolio, wondering why the growth looks so much bigger than it did a week ago. That’s why. It’s going from FY 21 now, the beginning of FY 21.

Tony Kynaston [07:48]: And I think that’s a good change Cam because then we can benchmark ourselves against everyone else in the market as well.

Cameron Reilly [07:54]: Yeah.

Tony Kynaston [07:54]: Yeah. Right.

Cameron Reilly [07:56]: But when I get the instructions from Doug on how to share it, I will do that. Right now onto what do you want to talk about? Do you want to do a stock of the week before we get onto the journal? Any other news?

Tony Kynaston [08:12]: I think it’s the same thing. In other news, what’s news. I saw an article today in the Finn, today being Wednesday written by Elio D’Amato, just highlighting how the cash flow statement works and how it’s good to use price to operating cash flow as a metric. And he also mentioned the price of free cash flow, but it was really seeing from our hymnbook it was a good article. If people haven’t seen it, they can look it up. But yeah, exactly what we’ve been saying.

Cameron Reilly [08:45]: Elio is a convert.

Tony Kynaston [08:47]: Yeah. The profit and loss, and in particular is, you know accrual accounting, an often subject to the policies that the management wants to apply. But cash is king.

Cameron Reilly [08:59]: Cash is King. Well, before we get under the journal and the stocks et cetera, you were on TV. You had your television debut last week on Aus Biz Koch’s Channel 70 offshoot, whatever it is and online thing. You did a great job. Congratulations. You were very…

Tony Kynaston [09:19]: Thank you.

Cameron Reilly [09:20]: Very smooth. I thought you did a much better job than the hosts did. They didn’t seem really sure what to ask you. They were like, “Oh, ah, hmm, well, Tonyinvesting stocks. hmm. Go.”

Tony Kynaston [09:37]: Yeah. No, they probably didn’t have much preparation time.

Cameron Reilly [09:41]: Well, I think they…

Tony Kynaston [09:42]: It was good though. Like originally I was booked to talk about QAV and checklists. And then the morning of, I got a memo from the producer saying, “Yeah. Yeah. But we’re want to talk about three specific stocks. So send us your three stocks.” And that’s what they finished up interviewing me about.

Cameron Reilly [09:56]: Yeah. You had to do a little bit of fast-forwarding to have some stocks to talk about.

Tony Kynaston [09:59]: Yeah. Which was fun. And I also said it had to be from today’s news. So that was the fast one, he was to see what QAV stocks was in the news that day.

Cameron Reilly [10:10]: Oh my God.

Tony Kynaston [10:11]: Yeah.

Cameron Reilly [10:11]: Well, particularly under those circumstances you did a great job. Well done.

Tony Kynaston [10:16]: No, thank you.

Cameron Reilly [10:17]: I know it was never part of your plan to be on TV.

Tony Kynaston [10:20]: No, it’s not.

Cameron Reilly [10:20]: When we started this.

Tony Kynaston [10:22]: No, or providing any sort of market commentary, really.

Cameron Reilly [10:25]: Yeah. Yeah, I know. But well, I thought you did a great job. Hopefully, they’ll get you back on and you can talk more about QAV next time. The methodology, the thinking, the genius. And we also had an article in the ASA Magazine that came out last week. The Equity Magazine, thanks to Steve Maggs for helping organize that. I think that was well received from what I’ve heard.

Tony Kynaston [10:51]: Oh, good. I haven’t had any feedback, so that’s good to know. And thanks, Steve. That’s great that we got some profile with that institution.

Cameron Reilly [10:58]: Yeah.

Tony Kynaston [11:00]: Good.

Cameron Reilly [11:01]: Yeah. Hopefully…

Tony Kynaston [11:01]: Appreciate it.

Cameron Reilly [11:03]: We’ll be doing some more with the ASA. I think we’re going to try and do a bit of a live webinar for the ASA members early in the new year. So that should be good. And then maybe we’ll get up and do a bit of a dog and pony show at some of their events next year as well, so we spread the word.

Tony Kynaston [11:18]: Yeah.

Cameron Reilly [11:19]: Okay.

Tony Kynaston [11:21]: You can be the dog.

Cameron Reilly [11:22]: I’m always the dog, Tony. Downward facing dog. That’s my game attack in chess.com. Just look for me there. What stock do you want to talk about? Let me run through some of the stocks in the journal that you mentioned the last week. Yancoal, you said it’s gone past the buy line.

Tony Kynaston [11:42]: Yeah, it has. And, interestingly, some of the coal stocks are turning up now because China’s not buying Australian coal. So I’m not sure what’s going on there. There was an article in the Fin Review amongst other places talking about the potential for some mergers and acquisitions in the coal sector. So that might be putting a bit of a fire under some of the share prices, but yeah. Yancoal is one I’ve owned before myself many, many years ago. It is only small loads or was a big company, but the two shareholders owned quite a bit of stock between them. I’ll just call that up. And one of them is Chinese. So maybe that’s why Yancoal is back in favor. But you have a Yanzhou. Hope I pronounced that, right. The Yanzhou Coal Mining Company owns more than half 62.26% of the stock which is, you know quite a lot. And that limits the average daily trade size. Obviously, Yanzhou trading its shares every day. But the rest are smaller holders and they’re probably trading. But yeah, so only a small amount of average daily trade for Yancoal. That’s the first thing to note. The second thing was its graph was a little interesting.

Cameron Reilly [13:10]: Yeah. I’m looking at it now. Let’s talk through it. The high point is obvious sort of February 2017, up around, I don’t know, 12, $11, $10.70 or something. Eyeballing it. Where’s the second point on this?

Tony Kynaston [13:29]: Well, so this is one of those which are at the beginning. So originally the second point would have been the next highest peak to the right, which was July 2017.

Cameron Reilly [13:39]: Yeah.

Tony Kynaston [13:40]: And if you draw that line it crosses, you know, somewhere around about March 2018. And the interesting thing about this graph is that if you look at the two low points on the graph, you’ve got March 2016 at $1.65 and then $1.67 a couple of months later in May. And the share price hasn’t been that low since then. So the buy price is going to be sort of, you know, around $1.70, just tracing a line from those two lows.

Cameron Reilly [14:12]: The sell price.

Tony Kynaston [14:13]: The sell price. I’m sorry. So when I say it crossed back in, would I say, August.

Cameron Reilly [14:20]: I’d say it’s more like May 2018.

Tony Kynaston [14:23]: May 2018. Okay. It’s been a buy since then but it’s never gone back and cross its sell line. It’s been going down and down and down and down. So what I did in this circumstance was just to use the rightmost peak because you can always keep running the ruler from the highest point over all the peaks as they trend out to the right. And the rightmost peak, I think is February 2020, which then gives it you know, across at the buy line. Just to view that somewhere around about June, July.

Cameron Reilly [14:59]: Yeah. June 2020.

Tony Kynaston [15:00]: June, this year.

Cameron Reilly [15:01]: Ran about $2 mark just over.

Tony Kynaston [15:03]: Yeah. And it was still going down from there. But just in the last two months, it’s been turning up again. So that’s why I had a price alert turned up again and it has, so that’s why I’m adding it to the buyer list at the moment. But really it’s been a buy for a number of years going sideways or slightly downwards from there.

Cameron Reilly [15:21]: So it’s currently trading around $2.54.

Tony Kynaston [15:25]: Correct.

Cameron Reilly [15:25]: But it’s a bit of a falling knife for the last…

Tony Kynaston [15:28]: It has.

Cameron Reilly [15:28]: Three years, coming up four years, really. So I don’t know, man. Bit of a bunny boiler.

Tony Kynaston [15:39]: Or possibly. Yeah. I think it’s more along the lines of one of the questions we’re going to talk about today. It’s a buy on the buy list now and it should have been a buy in the buy list all the way along, really, since what did we say, August 2018. But I haven’t put it on there because it’s been trending downwards since then, even though it hasn’t crossed the sell line. So it’s only in the last month or two, you’ve seen an established uptrend a couple of months in the row. So I think that’s getting safe enough to put back on the buy list, even though it’s been a buy along if that makes sense.

Cameron Reilly [16:17]: Yeah. Buy, but not a buy because it’s a falling knife.

Tony Kynaston [16:20]: Yeah. It’s right. It’s been above the buy price and way above the sell price but the trending down still.

Cameron Reilly [16:28]: Yeah. But it looks like it’s picking up for reasons we don’t know because of the whole China situation.

Tony Kynaston [16:36]: Yeah. Quite possibly. I haven’t researched the stock to know why it’s doing that.

Cameron Reilly [16:40]: Well, it seems quite obvious to me that ScoMo just going to give Xi Jinping a stern look, waggle his finger and all the import restrictions from China will disappear. They’re terrified. Terrified of Scotty from marketing like stomping his foot and frowning and having a bit of a cry that they’re being mean. I think that’s the plan.

Tony Kynaston [17:05]: Is that like Tony Abbott trying to shoot upfront Putin.

Cameron Reilly [17:09]: Yes. Yes.

Tony Kynaston [17:11]: Similar thing.

Cameron Reilly [17:12]: Yeah it is. Yeah. He’s learned from the best.

Tony Kynaston [17:16]: Yeah. Well, I mean, you know, I don’t think they’ll go down this route and I think they’d be shooting themselves in the foot somewhat. But the only leverage that Australia can apply on China now is to say if you want to buy our iron ore, take all the tariffs off the other exports that we give you and then stop iron ore for a while. But of course, that would shoot themselves in the foot because the Australian budget is being supported at the moment by extra royalties from iron ore. So they’re unlikely to do that, but that’s probably the only leverage that the government has with China at the moment.

Cameron Reilly [17:49]: I don’t think you want to play Russian Roulette with China right now. I think they’ll just…

Tony Kynaston [17:54]: Take by chicken.

Cameron Reilly [17:55]: They’ll take the gun and they’ll spin it, man. Because maybe Russian Roulette it’s not the right analogy, but I don’t think there’s any sort of acting chicken as you say. It’s like Christopher Walken in one of his early movies with Woody Allen.

Snippet [18:18]: Can I confess something? I tell you this because as an artist, I think you’ll understand. Sometimes when I’m driving on the road at night, I see two headlights coming toward me fast. I have this sudden impulse to turn the wheel quickly head-on into the oncoming car. I can anticipate the explosion, the sound of shattering glass, the flames rising out of the flying gasoline. Right. Well, I have to go now Dwayne, because I back on the planet earth. [inaudible 00:18:48].

Tony Kynaston [18:55]: I had forgotten that scene.

Cameron Reilly [18:56]: It’s a year before Deer Hunter came out or two years before Deer Hunter came out and really, the year before they made it. So yeah.

Tony Kynaston [19:06]: Great line. I’ll have to get back to [laughter 00:19:08].

Cameron Reilly [19:13]: Anywho. Yes. Playing chicken with China is the title of my next [inaudible 00:19:18] biography. Let’s go back to your…

Tony Kynaston [19:23]: What you’re writing in jail.

Cameron Reilly [19:25]: Yeah. Let’s go back to some of your other posts this week. 

Tony Kynaston [19:31]: Yes. Sure.

Cameron Reilly [19:31]: You’re buying some Sandfire Resources. Somebody’s got a question about that which we’ll get to.

Tony Kynaston [19:38]: And that was the stock I was going to make the stock of the week.

Cameron Reilly [19:41]: Right.

Tony Kynaston [19:43]: So it’s turned upwards quite dramatically recently because they opened a new mine in Africa, a copper mine over there. And as we know, copper as a commodity has turned upwards and that’s with the far end of the share price and it jumped I think about 20% in two days. And it’s still going up slightly from there. But yeah I think that’s probably going to rewrite the stock going forward. And the big problem with Sandfire that the analysts really are scared of is that it was a one-mine company. The mine was called the DeGrussa over in WA and it has an impending end of life. So I can’t remember how many years they’re out again, maybe two, something like that, two or three. And they’d been doing a lot of drilling around the DeGrussa looking to expand it and maybe finding another ore thing to mine. But now they’ve come out of, I guess, left fields somewhat in terms of the announcement anyway with this mining in Africa, which is going to continue their cash coming in, even if the DeGrussa closes in a couple of years.

Cameron Reilly [20:55]: And they can hear the drums echoing tonight which is the bonus.

Tony Kynaston [20:58]: [inaudible 00:20:59] Africa.

Cameron Reilly [21:04]: Allow my guitar to play a little bit of Toto. Now we’ve talked about SFR a lot recently, and I seem to recall we were answering a question a little while ago about whether or not it was a Schrodinger. So I’m just pulling up the chart.

Tony Kynaston [21:23]: I think from memory in the last couple of months it’s been on and off the buy list because it started to trend up and then trended down again.

Cameron Reilly [21:30]: Yeah. But it’s really shot up in the last couple of months.

Tony Kynaston [21:36]: Yeah. And really just in two days. So most of that increase happened when they announced they got this new find in Africa. Yeah.

Cameron Reilly [21:45]: The 30th of November closed at $4.36. Today, it’s $5.81. Oh my golly gosh. And it’s not in my portfolio or the QAV portfolio.

Tony Kynaston [22:03]: No.

Cameron Reilly [22:05]: What a shocker.

Tony Kynaston [22:06]: It’s kind of in [inaudible 00:22:07].

Cameron Reilly [22:08]: Not like Pokemon.

Tony Kynaston [22:10]: No, but I did buy some in the last couple of days’ post that big increase. So it hasn’t gone up much since then, but yeah, I think it scores really well on the QAV checklist. Now it’s got the mine life issue, put the bids somewhat anyway. It should go on from here.

Cameron Reilly [22:32]: Very good. All right. What else did you have to talk about then? Just looking for the highlights this week.

Tony Kynaston [22:38]: I think API was another one.

Cameron Reilly [22:41]: Australian Pharmaceutical Industries. You said it’s a falling knife maybe.

Tony Kynaston [22:49]: Yeah. So they have an August interview date. So the numbers came through on Stock Doctor in the last week or so. And if you look at the chart it’s been going down for a long time. And if people don’t know API, they probably know the brands that they operate. They operate Priceline, the retail sort of ‘chemisty’ outlets. And I do have some other chemist shops, I think, Amcal, but I wouldn’t be 100% sure I’m going from memory on that. But yeah since they put these results out though, the stock graph has definitely turned up into a buy situation. Possibly because of COVID, you know, a lot of other retailers have done well out of COVID because people are staying home and they’re consuming more products in their home. So they’re buying them themselves rather than necessarily maybe at the office. I’m not sure what that would be. But there’s any total evidence that people are putting on makeup to do their own Zoom calls. I know you probably make up to do your Zoom calls. I know JD does. So that might be behind their increase in sales. But yeah, certainly a good set of results for API in the last month or so.

Cameron Reilly [24:11]: Good. And you’re not worried that they’re falling off. I mean, they seem to have jumped up quite a bit in the last, 30th September, they bottomed out at a $1.40. They’re now $1.29. Still a long way from $2.23 where they were in April 2017. But this does seem like a pretty big jump. But they’ve jumped big before though. Like the middle of 2018, they jumped from $1.35 up to $1.84 and then plummeted again within a couple of months.

Tony Kynaston [24:44]: Yeah, it’s possible. I’m not going to try and predict what will happen. And this might also be a bit like the Shaver Shop. Because if you look at the low points on the graph September 2020 and October 2020 and extend that out, the slope on that line is not going to be too different from the slope that’s going up now. So it won’t take much of a reduction in share price across the sell line on its way up.

Cameron Reilly [25:09]: Yeah.

Tony Kynaston [25:10]: Like a reverse Schrodinger. So we’ll see.

Cameron Reilly [25:13]: Okay. Let’s see, what else have we got from the last week? South32 fell off the buy list due to a share price increase but hooray, you own it.

Tony Kynaston [25:28]: But I owned it for a couple of months too and it hadn’t been doing much. It’d been sort of hovering around the buy price and it’s increased now too. And I think quite possibly again, I’m just going from memory here possibly because of the copper that South32 mine and export online sell.

Cameron Reilly [25:48]: Right. Believe me, copper, I wasn’t even there now. What else have we got? Nothing, that’s it. That’s all the highlights from the journal this week.

Tony Kynaston [25:55]: All right. Yeah.

Cameron Reilly [25:58]: Get in some Q&A.

Tony Kynaston [26:00]: Yeah, sure.

Cameron Reilly [26:01]: Q&A from Carl, “Hi Tony and Cam, last week there’d been some discussion about the sell point for Shaver Shop SSG. I thought I’d share my approach to the three-point trend line sell and how that has been applied to SSG. I’ve taken the view where it suits me, I confess, that the three PTL is a more accurate indication of a trend by ignoring the COVID cough. Crazy, right. In the case of SSG, this results in a three PTL sell line with the current sell price of approximately 77 cents. Given I bought SSG at the start of April when it had a price to cash ratio of 1.93 and a QAV score of 0.55, I think this provides a realistic and appropriate balance of risk when considering when to sell. What are your thoughts on this approach? Note, my decision to buy in April for 40 cents was based on a quick bounce from the March low point of my expectation of increased sales as a result of the COVID lockdown. There are more bids in the streets now than they were at Max Yasgur’s farm during Woodstock.” Oh, I love a good more than a joke. That’s a good one. I’ll have to steal that one, Carl. Nice one. Bit nerdy, but I like it. We’ve talked about…

Tony Kynaston [27:20]: Well done, Carl if you bought Shaver Shop at 40 cents. Congratulations. Hooray!

Cameron Reilly [27:25]: Yeah. Now we’ve talked about whether or not we should ignore the COVID cough a bit in the last few weeks, I think.

Tony Kynaston [27:33]: Yeah. I don’t favor that. Look, I mean, in this case, what Carl is suggesting, and it’s pretty hard to talk about it without seeing it. If people want to look at the Shaver Shop graph, they can and they’ll see that prior to COVID in March this year, there was a low point going back about 12 months before that. And Carl is suggesting that he used that as his low point to grow the trend. So that low point was in January 2019, so a bit over a year. To use that as the low point and then the next lowest point to the right of that, which probably would have been about June 19, and to use that as his sell line. And look, I have some sympathy to that because that line is more closely approximating the upward trend of Shaver Shop since that point. But I think I’d be pretty careful about making a general rule from one example. And if you go and look at some other stocks that have the COVID cough that the trend line might not fit as neatly, if you ignore the COVID cough. So I’m going to stick with the COVID cough, even though I fully acknowledge that Shaver Shop has this kind of a funny up and buy and sell upward graph. If we apply our normal three-point trend line draws towards it.

Cameron Reilly [29:03]: Yeah. It’s a bit of a Halloween pumpkin.

Tony Kynaston [29:07]: Yeah.

Cameron Reilly [29:08]: I mean, I kind of, I’m sympathetic to Carl’s view too. Like the COVID cough was an extraordinary event that affected pretty much the entire market equally. And I kind of wonder if we should just amnesia it. Forget it ever happened. If somebody asked me to justify why we don’t, I think I’d be hard put to justify it. Well, no, I’d just say Tony says shut up. That’s [inaudible 00:29:36] you know. But apart from that, how dare you to challenge my guru. No, but why can’t we just ignore it? It’s an extraordinary event. Why can’t we just ignore it?

Tony Kynaston [29:51]: Well, because it’s not extraordinary. I mean the markets do this at least every 10 years and sometimes even more than that. So…

Cameron Reilly [29:58]: Doesn’t matter what the cause is, it’s a market collapse. Is that what you’re saying?

Tony Kynaston [30:02]: Correct.

Cameron Reilly [30:03]: Right.

Tony Kynaston [30:03]: Yeah. And like, you know, next year it could be the dot-com of 2021 that causes the market to collapse and it comes off again. But look, like I said, don’t just use one example to make a golden rule and make a general rule. Go back and look at some of those we have just spoken about. API, there’s no COVID cough on the API graph.

Cameron Reilly [30:23]: Yeah. I noticed that it barely dips. It dipped a little but nothing unusual.

Tony Kynaston [30:30]: Yeah. So look at South32, let’s pull that one up. The COVID cough there, it was a bit of a COVID cough. But funnily enough, if you ignore the COVID cough, you still drawing the same line as if you use the COVID cough. So my general rule is to do it this way, and it’s certainly worked through other downturns and hiccups in the market and upsides in the market as well when things take off. So I’m going to leave it in.

Cameron Reilly [31:10]: So what you’re saying is…

Tony Kynaston [31:13]: Well, what I think is I think the Shaver Shop example is a fudge. It’s a fudge that works and I’m quite comfortable accepting that is a fudge that works. And that’s fine because it is using a trend line to put our stock loss and I’ve got no problems with it being different from how I do it. But I think the general rule is that the COVID cough stays in.

Snippet [31:34]: That’s how dad did it. That’s how America does it. And it’s worked out pretty well so far. 

Cameron Reilly [31:39]: There’s your quote. That’s how Tony does it.

Tony Kynaston [31:43]: What was it in relation to?

Cameron Reilly [31:44]: That’s how I do it and it’s worked out pretty well so far.

Tony Kynaston [31:49]: Yeah. That’s true. But yeah, I think the quote is, “Don’t use one data set to make a general rule.”

Cameron Reilly [31:56]: No, that’s boring. I don’t like that quote. So let’s…

Tony Kynaston [32:00]: I’ll say it in Christopher Walken.

Cameron Reilly [32:03]: Yeah, do that.

Tony Kynaston [32:04]: Don’t use one data set to make a general rule.

Cameron Reilly [32:11]: That’s terrible. Don’t do that. Let’s talk about South32 for a second. I have the chart in front of me. Now, I’m going to argue that the buy line for South32 starts back in sort of July, August 2018 and then runs through February 2019 and is a straight line at $3, nearly $4.

Tony Kynaston [32:42]: Yeah. You’re right. It’s a fudge.

Cameron Reilly [32:44]: It’s a fudge. So you’re starting with the second-high point.

Tony Kynaston [32:48]: Yeah. [crosstalk 00:02:49].

Cameron Reilly [32:49]: Well done. Carl can’t fudge the COVID cough, but you…

Tony Kynaston [32:53]: I didn’t say he couldn’t…

Cameron Reilly [32:53]: You can fudge the bloody that. What!

Tony Kynaston [32:59]:  I didn’t say Carl can’t fudge the COVID cough.

Cameron Reilly [33:03]: Well, you’re saying…

Tony Kynaston [33:04]: Mind your way. Pack more fudge. It’s fine.

Cameron Reilly [33:12]: Keep it clean, Tony. Stephen Maggs told us, keep it clean.

Tony Kynaston [33:15]: That’s right.

Cameron Reilly [33:15]: No fudge jokes.

Tony Kynaston [33:16]: So, you’re right. This one and I think the other one was Eclipse, had a similar sort of graph where it had a couple of peaks that were flat. And I decided to ignore them because it’s trending up towards that number anyway. And I kind of think why wait for it to get up there. So I fudged it.

Cameron Reilly [33:34]: So with South32, what are you using as the second point then. You’re using February 2020 or something later?

Tony Kynaston [33:42]:  It was January 2020.

Cameron Reilly [33:44]: Oh, okay. No. Okay. Yeah. Right. I see.

Tony Kynaston [33:50]: So, if you draw it through February 2020, January sticks outside. That’s where I drew it.

Cameron Reilly [33:55]: Okay. I’m saving that one for the archives. Getting back to Shaver Shop’s chart. I want to just get a nice example of this. So we’re starting with the high point back in 2016 and we’re drawing it through July 2020.

Tony Kynaston [34:21]: Sorry. I’m just calling it up. Hang on. Yeah. So what did you say? Sort of September 16?

Cameron Reilly [34:29]: Yeah. And then the second one seems to be like July, August 2020.

Tony Kynaston [34:34]: Yeah, that’s right. That’s what I would think. And again, it’s one of these falling knives, so I would keep almost rotating it because you can go back and get a sell line. So if you used August, for example, then you are crossing August 17, you are crossing as a buy in January 18 and then you’ve got a couple of low points to the left of that, which means you’re selling out then again on April 18. So then you have to get the peak to the right of that point. So it’s almost like you hold the ruler on the high point and you keep kind of radiating or arching around the compass points until you get to a stage where the peak is just before the lowest point. So the peak looks like it would be December 2018, and even then you keep going. So it’s like there’s another sell line there because January 2019 is a low point and the second low point would be June 2019 after that. So then we’re out during the COVID cough. So then you’re starting with the high point, oh shoot. The high point hasn’t changed, but the next high point, the next peak is just before the COVID cough. And so it becomes a buyer again around June 2020 at 70 cents.

Cameron Reilly [36:14]: But if you’re doing the sell line, starting at the bottom of the COVID cough and then drawing it up to the right.

Tony Kynaston [36:21]: It’s crossed the sell line as well.

Cameron Reilly [36:23]: Yeah. It’s a Schrodinger, like we said, last time we did this.

Tony Kynaston [36:26]: An upward Schrodinger. A bunny boiler and upward Schrodinger.

Cameron Reilly [36:28]: Yeah.

Tony Kynaston [36:31]: So, look there’s…

Cameron Reilly [36:32]: In fact, I think this is the stuff where we invented bunny boiler. I think it was this one.

Tony Kynaston [36:36]: Yes, I think it was. Yeah. So Carl was right. And Carl’s right to try and find a way to, you know, get some comfort that he’s got a stop loss in place even though the share price is going up. So I’ve got no problems with what Carl’s doing. I’m just not prepared to take out the COVID cough from the last share price graphs.

Cameron Reilly [36:57]: Right. Thank you, Carl. Ash.

Tony Kynaston [37:00]: Interesting discussion, Carl. Well done.

Cameron Reilly [37:01]: Yeah. Good one here, Carl. And of course, I think Eddie jumped in and supported Carl because Eddie loves a good fudge, three PTL fudge.

Tony Kynaston [37:11]: The hug line, the Eddie hug line. This is the Eddie hug line, we’ve spoken about this before too. Haven’t we?

Cameron Reilly [37:15]: We have. Yeah.

Tony Kynaston [37:16]: Yeah.

Cameron Reilly [37:17]: Ash, “Hi Cameron, Tony mentioned in the recent podcast to take the loss of the delisted company by selling it. Could you please explain how to sell it if it is delisted and where can we sell it?” Thank you, Ash.

Tony Kynaston [37:33]: Okay. Well, if I did say that, I’m sorry, I misled you Ash because you can’t do that or at least easily. There is time to time people who will go around and try and buy your shares in delisted the companies, very, very cheaply in the hope that they can revive a company or wait it out until it’s relisted again. But that’s pretty rare. So no, you’ve got to sell it before it delists.

Cameron Reilly [37:55]: Yeah.

Tony Kynaston [37:56]: So, yeah. And that’s not oftentimes easy to do. I mean, I’ve been caught out at least once where I’ve owned shares in the company that just, you know, wake up one day and it was delisted. So you don’t often get much warning for it. Yeah. So you can only sell it after it’s delisted, if someone comes along and offers to buy your shares, that’s generally for pennies in the dollar. They’re taking a gamble if they can do something with the shell or with the company through administration or whatever. Yeah. So you know, it doesn’t happen very often, but it does happen and it’s better to get out beforehand if you can.

Cameron Reilly [38:36]: So like for example, the one that you woke up one morning and it was delisted, I’m assuming that you just take that as a loss.

Tony Kynaston [38:44]: Well, that’s the horrible, the other flip side to this whole problem is that the tax office won’t let you take it as a loss until it gets to the final end of all the administration or receivership that’s going on with the company, which could take years, you know. Some companies can take 10 years to go through receivership. So you’ve got to wait 10 years before you can claim a deduction for the loss.

Cameron Reilly [39:07]: Oh my God, that’s horrible.

Tony Kynaston [39:09]: Yeah. And so the receivers will actually issue to the tax officer, a piece of paper saying that they certify the company is now no longer operational and people can write it off as a tax loss, but it can take years.

Cameron Reilly [39:21]: It’s a dead parrot.

Tony Kynaston [39:22]: It’s a dead parrot. That’s right. Everyone knows it’s a dead parrot planning for the fields, but the tax office won’t admit it because there’s still a chance that someone could come along and bring some life into it or try and sell it.

Cameron Reilly [39:37]: The tax office is telling you it’s just resting.

Tony Kynaston [39:39]: Yeah.

Cameron Reilly [39:41]: No, it’s just resting. Look beautiful plumage. Resting? It’s dead. It is deceased. It is no more.

Tony Kynaston [39:55]: It ceases to be.

Cameron Reilly [40:00]: Thank you, Ash. Here’s one from Lewis. “Hi Cam, first up, I just want to say, I love the show. Been listening for about six months now, working my way through the episodes. I’m 31 and new to investing. So I’m still grappling with the rabbit Warren of investing and all the different value techniques, but I’m finding your show very helpful. I currently hold an index fund, but I think I have the time and the competitive nature, Ben Graham and Tony talk about to give beating the market a shot.” Oh, God. You know, if it wasn’t for Steven Maggs about throwing a good beat in the market joke there, but I won’t. “However, no one that I know invest. So I have no one experienced to bounce ideas off or guide me. Your show has been great for this. And I really appreciate all the effort you and Tony go to.” Disclaimer, I’m not currently a club member, so I completely…” Well, that’s it. Sorry, Lewis.

Tony Kynaston [40:50]: That’s it.

Cameron Reilly [40:51]: Next. Justin. I said to Lewis, well, we’ll answer your question, but it’ll probably come in the second half of the show and you might be able to hear it. So and it has. We’re 44 minutes in, so sorry, Lewis. Well, we answered your question Lewis, but you won’t get to hear it.

Tony Kynaston [41:12]: It’s quite a long question. So let me paraphrase it if you don’t mind.

Cameron Reilly [41:16]: No. He’s not even a club member, so you can paraphrase all you like.

Tony Kynaston [41:20]: Yeah, it goes on for a whole page. Lewis is talking about Credit Corp and he’s asking why Stock Doctor is different from Credit Corp numbers that appear in other places like I think he’s quoting Yahoo finance. We’ve talked about this before. I don’t have a detailed answer for some of the differences. But Stock Doctor does make adjustments to the data as it comes in, in particular for a company like Credit Corp. And specifically, this was asked I think once before, maybe by a peer here, but certainly a different listener, as to why they were different between Stock Doctor and other sources. And I went to Stock Doctor and they said, yes. 

The Credit Corp is an interesting business in that it borrows money goes off and buys the distressed debt list from a bank and then spends years collecting the debt and bringing that cash in. So Stock Doctor feels that the accounting standards don’t quite reflect the way that cash moves through the company. So they move things from the, I think it’s the investing cash flow lines into the operating cash flow line. I don’t know for sure, but I’m guessing they also do it with some of the other things as well that are in there. There are quite arcane standards. Credit Corp, and companies like it are a bit of an outlier. The standards that are written are there for, you know, the jet was a bit like the three-point trendlines. It’s the general case and there will always be exceptions. And so a Stock Doctor thinks that their numbers better reflect how Credit Corp is compared to the way the standards make Credit Corp report. And you know, I’ve been along to a Credit Corp presentation many years ago where they do take pains to say that they report according to the standards, but they do not necessarily agree with the way that those figures are laid out because of that.

Cameron Reilly [43:17]: Right.

Tony Kynaston [43:18]: So, yeah. So even though if you look at the Yahoo Finance figures, you wouldn’t think that Credit Corp was a value stock. If you do look at the Stock Doctor figures, it does come up as a value stock on our QAV scoring system.

Cameron Reilly [43:31]: Right. Okay.

Tony Kynaston [43:35]: Good picker. Good question, Lewis.

Cameron Reilly [43:36]: Well, Lewis can’t hear you. So, you know, maybe one day he’ll become a club member and he’ll be able to hear it. He does go on…

Tony Kynaston [43:44]: If he does hear this, then the Stock Doctor is pretty receptive to questions like this. So if you want to email them for a more detailed answer about, you know, why there are differences in the PE ratio, et cetera, then I’m sure they’ll answer them for you.

Cameron Reilly [43:59]: If he does hear this in the future, just email us and tell us what happened. Like did Trump leave the White House? Did the vaccine work out for COVID? What happened to the economy? Just give us, you know, a bit of feedback from the future.

Tony Kynaston [44:16]: Was the next four years really boring under Joe Biden? Did he make a difference?

Cameron Reilly [44:20]: Yeah. Did he invite Iran? Now he talks about some of the, he gets into the nitty-gritty of CCP. Depreciation is at least fivefold on any other of the last 10 years making the cash from operations inconsistent. Is this a big red flag? I’m guessing you don’t even get down into that level of nitty-gritty right?

Tony Kynaston [44:42]: I don’t. Yeah. We don’t normally look at depreciation and it can’t, well, we’re doing directly because it down to equity increasing over five years. If your depreciation charges are high, chances are you’re eating into equity. Certainly, if it’s high in any one particular year, it will bust the trend of it increasing. So yeah, I don’t look at that specifically. One of the reasons is that things like, even though the depreciation is important, I’m not saying it’s not important, and I’m not saying that it should be eliminated from analysis for a company, but the depreciation is a good example of one of those accounting standards that are open to interpretation by a company when they’re reporting. And you know, on the downside, sometimes a company will quickly depreciate assets and that’s probably a good thing. Sometimes they take a long time to depreciate assets and that’s a bad thing if they have to replace the asset in a shorter amount of time. 

So there are all sorts of pitfalls when you come to look at depreciation and how it’s reported and whether it’s a true reflection of the time and the cost to replace the asset that’s being depreciated. And of course, sometimes assets are depreciated and they’re not going to be replaced. So you know, applying the accounting standards to the letter of the law can be torturous at times and misleading at times, even though, you know, it’s good to have standards and they apply generally well across all sets of accounts. You know, if you bought a printing press. You’re Rupert Murdoch, and you’ve just bought a huge printing press to print the paper and say, you’re depreciating it over the next 30 years. Maybe in 10 years’ time, you don’t have printing presses anymore because you’re online. So, you know, what do you do with the depreciation charge there? Do you write it all off in one year? Do you continue to depreciate an asset, which is never going to be replaced?

So there are all sorts of, you know, interesting examples. It’s interesting to read about this kind of quirk in company statements because this is how Buffett made a lot of money. He would often focus on depreciation charges and say, you know, the company looks like they might get into trouble, and if you use time because they haven’t depreciated enough, or they’ve been very conservative and that we think that they’ll be worth more in the future because they’d been, you know, kind of anchoring their profits now. But when that depreciation charge finishes they’ll shoot up. So he was pretty good at working out what the true capital requirements were for the business going forward, and then matching it back to the depreciation and seeing if there was an edge in there some way.

Cameron Reilly [47:34]: So I think in my email reply to Lewis, I said, “Well, I don’t think Tony looks at things like depreciation, but we do look at the Financial Health Writing and Stock Doctor and things like that.” So it kind of gets bundled up into some of these other matrices that we do pay attention to, right?

Tony Kynaston [47:53]: Yeah, it does. As I said, I think depreciation would probably have the most to bear in terms of the equity, the net equity increasing over time.

Cameron Reilly [48:01]: Right.

Tony Kynaston [48:01]: Because it’s one of the costs, I guess, on the balance sheet that depresses equity. It goes into the liabilities part of the balance sheet. But just thinking about this, I mean, Credit Corp assets are those debt lists. So I’m guessing the depreciation has to be applied to their original capital purchase. So they go by the credit card defaulters list from a bank and maybe they pay 20 million bucks for that list. I guess they have to depreciate it down. And I guess they would have a good understanding of their average life cycle for a dead list. So, you know, perhaps depreciation charges are driven by that and if they buy lots of debt lists in one year the depreciation charge goes up. So does their revenue because they’re collecting the money from those lists. So I think depreciation might be a little bit different for a company like this, rather than, you know, like a newspaper where it goes and buys lots of printing presses, and then doesn’t change them for 20 years.

Cameron Reilly [49:07]: I did buy CCP back in September. I just want to point out for transparency.

Tony Kynaston [49:13]: In case people think we’re pumping it.

Cameron Reilly [49:15]: Oh, we both did. It’s done well.

Tony Kynaston [49:19]: Yeah. I’m not trying to pump it, but it is a good company I’ve owned before as well.

Cameron Reilly [49:22]: Well, it’s up 25% since I bought it. I’m happy with it. Yeah.

Tony Kynaston [49:27]: Yeah. Me too. Yeah.

Cameron Reilly [49:29]: Okay. Moving right along to somebody who is a club member. Justin, “Hi All, I’ve been looking at MRM, a good QAV score, but fails on sentiment. I noticed they’ve recently completed a capital raise at 3 cents per share. The new shares will start trading on the stock exchange next week. On the day the new shares start trading, does this normally affect the share price, or would the price generally remain stable because anyone currently buying would generally have this already priced in?” Thanks, Justin.

Tony Kynaston [50:00]: Yeah. Good question, Justin. And a tricky one too. So generally that the market works out quickly what’s going to happen with the price as soon as the details of the capital raising are known. So like for example, AMI had a capital raise, we spoke about a couple of weeks ago and the price settled back at what the capital raising amount was. So there is a kind of like a leveling. It’s a bit like water flowing down a mountain, it’s going to keep going until it finds the right level of the share price that takes into account the fact that there are more shares on issue and the people are buying at a price in the market, which is different from the currently traded price. And that can be up or down sometimes. 

There are other things that play there too, of course. If people think that the capital raising is for good use, like, I don’t know, Mermaid Marine, as you said that it has been going down for a long time. But you know, if they’re going to raise money because they’re about to acquire a company and the market thinks that’s a good thing to do because the new company might be, you know, life-saving for MRM that could be huge upside potential for them. Then chances are the market will put the share price higher than the right price. But sometimes I don’t know the details of the MRM raising. If they’re raising capital may be to pay down debt, it’s kind of a zero sum game and the share price will settle around what the raising price is. So, yes, I think the market is always factoring in the new shares on issue and the raising price and sitting on a price since then, but also incorporating in what the new capital will do for the company as well that’s being raised.

Cameron Reilly [51:41]: All right. So how does all of this affect us? By the way, MRM is now officially known as MMA Off Shore, they’ve changed their name in case anyone’s confused about your mermaid reference.

Tony Kynaston [51:51]: I’m sorry. It used to be called Mermaid Marine, I think.

Cameron Reilly [51:54]: Yes, it was.

Tony Kynaston [51:55]: Last I had a look at it. Yeah.

Cameron Reilly [51:56]: Yeah. So how does this affect us? So if we own a stock that completes a capital raising we wouldn’t normally expect to see it spike when the new shares start trading.

Tony Kynaston [52:11]: Unless as I said, the capital is for really good use.

Cameron Reilly [52:14]: Yes.

Tony Kynaston [52:15]: Yeah. And people are excited about the prospects of the company so they continue to buy the shares usually. But once the deal is being announced, so oftentimes what would happen in that situation is the company would come out and say, “We’ve just signed a deal with the XYZ company. It’s going to be a game-changer for us. We see lots of upside in it, but to get that deal the way we have to raise more capital when we’re doing it at 3 cents a share and we’re issuing 10% more shares.” So then people would work out, okay, that means it’s a 10% discount to the current price, blah, blah, blah. However, they’ll start to also work out, well, we think earnings per share will increase for this company going forward. So we’re going to give it a new valuation. So there’s a couple of things at play there.

I guess there are two dimensions to the question. One is if Justin is already a holder of MRM, should he take up the rights? And again, that depends on whether he thinks it’s a cheap price to pay for MRM shares versus what he can buy them for in the market or buy them for when they start trading again. It looks like MRM settled back down towards the new price. But I think they’ve gone up a little bit since then. So maybe it was a good deal taking up the rates. Typically, you know, unless I thought the money was going to be used to radically improve the company, I’ll just be looking to see if I could buy it, make I guess a bit of arbitrage on the rates raising. So for example, if the share price was three and a half cents for MMA and the rates issue was at 3 cents, then yeah, you might want to buy some just to make that half a cent across the board.

Cameron Reilly [54:01]: But if we look as Justin said, I’m just looking at the chart, doing my three PTL on it. Looks to me like it’s well below the buy price.

Tony Kynaston [54:23]: I’m just calling it up now. Yeah, no, it’s certainly well below the buy price.

Cameron Reilly [54:29]: So even if you could get shares at 3 cents as part of the capital raising, would you, when it’s this far below the buy price?

Tony Kynaston [54:38]: No. No, I wouldn’t be looking at MMA Off Shore anyway.

Cameron Reilly [54:41]: Right.

Tony Kynaston [54:42]: Yeah. I guess I’m trying to just tease out the issues in general.

Cameron Reilly [54:47]: Yeah.

Tony Kynaston [54:48]: Because I mean, it happens from time to time. It happened with AMI, which is on the buy list or it was. Yeah. They issued shares at, I think, 43 cents and the share price is currently 42. So there was no point taking up those shares. Yeah. And look to do the job, if you want to be really complete about doing the job, if it’s a retail offer anyway, they have to put out a lot of information about what the accounts would look like after the acquisition or whatever they’re going to do, looks like. They’re called pro forma accounts and you can plug those numbers into a checklist if you like to see if that changes the QAV score for the merged company or the growing company or whatever they’re doing with that raising.

Cameron Reilly [55:37]: Right.

Tony Kynaston [55:38]: And take into account the fact there are more shares on offer.

Cameron Reilly [55:41]: Yeah. Thank you, Justin. Andre, our friend in Canada, “Hi Cam and Tony, I was reading Ray Dalio’s book, Principles and came across his thoughts on diversification, which you used by Bridgewater and seem pretty intuitive to me. I know Tonyhas touched on diversification before, but I’d be interested in hearing his thoughts in response to Dalio’s reasoning attached.” So he gave us a little screen grab here. “I also recognize Dalio deals with a wide range of asset classes so there’s more room to diversify and find uncorrelated investment instruments. But I wonder if Tonyhas considered additional asset classes in his portfolio other than real estate, of course, or whether he thinks it would be worthwhile to invest in as uncorrelated stocks as possible within a stock portfolio.”

Tony Kynaston [56:32]: Okay. So yeah. So the answer is I don’t believe in diversification. I’ve been down the rabbit hole on this whole branch of account or branch of finance about uncorrelated assets and correlated assets. And let me tell you, when something like the GFC or COVID comes along, all of the asset prices go down. They go down in unison. So diversification, I think probably works to a limited extent when times are good. But the old theory that if you hold enough different asset classes when bad times hit, they only hit some of those asset classes may occur sometimes. But when the world goes to shit, the world goes to shit, doesn’t matter what you’re holding. 

So I prefer to use the reverse of diversification, which is concentration and focus on the thing that makes the most money, which across every asset class, over a long period of time is shares. So that’s where I put most of my money. Real estate runs a close second or residential real estate runs a close second to that. They’re both around 9, 10, 11%. That’s rule one of investing, is put your money where the best return is. Now that means you take a long-term horizon because shares will be volatile. They will have COVID costs and drop by 30%, and then they’ll recover and in the last couple of months, they’re back up 20%. So they will be volatile, but over the long term history has shown us that the share market is the best place to park our capital. That’s point number one.

Point number two is a lot of the radar, you know, assets that he talks about aren’t always available easily for us as retail investors to partake in. So, you’re not going to be able to go out and buy barrels of oil, lumps of gold, commercial real estate, caravan parks, hedge funds in New York, all those kinds of things traditionally have only been available to someone like Ray Dalio with billions of dollars where everyone’s knocking on his door saying, would you like to invest with me? That’s changed a little bit in the last 10 years in particular because there are ETFs now available for different types of commodities and asset classes and even hedge funds can be listed on the stock exchange. 

So you can actually build your own diversified portfolio using the kinds of asset classes that Ray Dalio speaks of while not leaving the Australian share market that’s possible now. However, I still don’t think that’s the best way to invest. I think the best way to invest is to say, I’m going to have a system that has proven over a long time and invest according to that. And if that happens to hold a company that invests in commercial property or a company that’s a hedge fund, like an ETF hedge fund, like we’ve gotten some of our buy list items then you get that kind of diversification for free. But that’s not the major driver of why we buy these things. We buy them because they have an element of quality and they appear cheap at the moment.

Cameron Reilly [59:55]: Did you read the book page that he sent us?

Tony Kynaston [59:59]: I did. Yeah. There were three pages, I think actually, yeah. No, definitely. And I’ve read other books about this and you know, there are people who’ve got Nobel prizes for talking about the correlation of assets and how as Ray Dalio says if you can find a portfolio that contains uncorrelated assets you can get a really good return. And you can but you kind of also getting an average return because you’re getting the average of all those different asset classes. And if there’s one that always wins except in periods of volatility, then why wouldn’t you put your money with the one that gives the biggest return and just accept the lumps of volatility.

Cameron Reilly [01:00:49]: I’ve only got one page of it here in front of me. But he says, this is Dalio, ”From my earlier failures, I knew that no matter how confident I was in making anyone bet I could still be wrong. And that proper diversification was the key to reducing risks without reducing returns. If I could build a portfolio filled with high-quality return streams that were properly diversified, they zigged and zagged in ways that balanced each other out, I could offer clients an overall portfolio returns much more consistent and reliable than what they could get elsewhere.” Now, when I read that, I thought, well, we have 15 to 20 investments in our portfolio in 15 to 20 stocks. And yes, it’s all in stocks. But some are iron ore miners. Some are coal miners. We’ve got Bell Financial. We’ve got CCP in our personal portfolios. So I think we have got 20 uncorrelated businesses that we’ve invested in that we believe all offer the opportunity for a high-quality return stream. So I kind of think that we’re doing what he says.

Tony Kynaston [01:02:03]: Well, I think I agree with you. We are but we’re not setting out to do what he says. That’s the difference. First of all, yes, we hold 15 to 20 stocks because he’s right. We can make a mistake with a couple of those and still not suffer financial loss that knocks us out of the game. So that’s why we don’t just hold one stock or two stocks. We hold 15 to 20. So I agree with that point wholeheartedly. But he’s approaching it from another perspective, which he says of those 15 stocks, I want to hold, for example, an oil company and I also want to hold an airline because I know that when the price of oil goes up, that impacts the profitability of the airline and they are uncorrelated assets. So the first point to make of that is to say that therefore you’re probably going to get quite a low return because you know, the left side wins one year and the right side wins next year, but overall they’re balancing each other out. That’s the first point.

The second point is they don’t always even though they might be uncorrelated, they don’t always move in different directions. Ever since COVID, Santos, the oil company we own has gone up and Quantas an airline has gone up. So sometimes they go in the same direction. So, you know, there are other things at play besides just the correlation or un-correlation of these assets. So I hope I’m making it clear. So what Ray is saying is that if he thought there were five really good oil companies to buy, he might only buy one and then look for something that would be completely uncorrelated to the price of oil and buy that and put it in his portfolio.

Cameron Reilly [01:03:49]: He’s strategically un-correlating his current investments whereas we’re letting the process tell us what to invest in. Some of them are going to be correlated. Some of them are going to be not.

Tony Kynaston [01:04:03]: Correct. Yeah. And I have found over the years that there is an element of swings and roundabouts in the portfolio because we tend to be attracted to cycles that turn. So if I just think about the resource industry, like four or five years ago, I was buying lots of gold miners. They’re sort of coming off the ball of it now, but now iron ore is going up. So, you know, they’re uncorrelated or maybe they are correlated because iron ore is going up. People are coming out of COVID and gold is going down because the vaccines have been found, which might return things back to normal. But I didn’t buy those things because they were uncorrelated. I bought them because they’re at the bottom of their cycles and starting to turn up.

Cameron Reilly [01:04:47]: Okay. Thank you, Tony. Thank you, Andre. Hope you’re doing well in Canada.

Tony Kynaston [01:04:52]: Thanks, Andre. One more point to it as well is that it’s very hard as a retail investor to work out the levels of correlation between these different asset classes. And of course, what happens then is people will come along and say, I can do it for you for a fee. So you get the whole superannuation industry pops up and charges people money just to have a balanced portfolio or a balanced growth portfolio, or, you know, balanced this or that portfolio. And of course, it doesn’t perform any better than going and buying an index fund. And you’re paying more in fees just to have this person tell you that oil is not correlated to airline stocks, and they can put a portfolio together of uncorrelated assets. It has led to a whole layer of a professional class out there who charge fees to do that. And it doesn’t really produce a better return.

As you say like, think about the Australian stock market, think about buying an index fund. What you’re buying in that fund? You are buying, you know, your [inaudible01:05:58] that are in shopping centers. You’re buying the [inaudible01:06:03] the Australian retail trust, which I have a commercial property in them. You’re buying mining companies. You’re buying banks. You’re buying IT companies. There’s a large amount of ‘uncorrelatedness’, if that’s a word, between those companies anyway.

Cameron Reilly [01:06:21]: Yeah. APT, I mean, Afterpay all those sorts of things. Yeah.

Tony Kynaston [01:06:25]: Yeah.

Cameron Reilly [01:06:27]: All right. Chris wants to know why you bought SFR and not any of the stocks on the buyer list with a much higher QAV score.

Tony Kynaston [01:06:36]: Yeah. I think you answered that one well. It’s got to do with the average daily trade size. So SFR was my highest stock on the buyer list that I: (a) hadn’t already bought a position in and (b) had an average daily trade large enough for me to buy.

Cameron Reilly [01:06:57]: Which is like a billion dollars, right. Has to be greater than a billion dollars.

Tony Kynaston [01:07:02]: I’m just setting up the buy list now. [inaudible 01:07:00] rates reasonably high. It’s top, maybe 25 with the QAV score of 0.24 but it’s got a large average daily trade amount. I mean, it’s at $4 billion of trade every day. And I do put this buy list together for everyone to use. So I don’t feel thrilled on average daily trade. So there are lots of companies on this buy list that I just wouldn’t buy because I couldn’t get a big enough stake in them without taking on lots of risk of being caught on wanting to get out.

Cameron Reilly [01:07:41]: Yeah. All right. Just to finish up and I apologize to Mark for this. Mark asked this question a couple of weeks ago and it got lost in my emails. “HiCam, a few weeks ago, Tony said, he’d wait to see a one-month upturn in Hawthorne’s share price before buying, noting that it is top of the buy list, but the share price has recently declined, that will be it for all the right reasons. Having returned about a third of its value to shareholders in dividends and capital payments, other stocks in the buy list, AGD and MML are also in recent decline. Presumably Tony would wait to see a one-month upturn in the share price before buying. Is this a new rule for the checklist?” Thanks, Mark.

Tony Kynaston [01:08:25]: Yeah, I don’t think it’s just hard and fast as a new rule because for example you know, Hawthorne is a bit of a special case. Its share price has dropped. Thedrop is equated to how much they returned in capital and dividends to their investors. So it’s kind of like a good thing if you can take that holistic point of view. I’m not necessarily going to wait until a month if any shares or if the trend is going up again in the coming months. For example, if I saw Hawthorne starting to gain, 5%, 4, or 5% for a couple of days in a row, I’d probably buy some. Bearing in mind that as we just alluded to, I’m investing a reasonable amount of money and I wouldn’t buy it all in one day. So I’d start to buy it after a couple of days of increasing share price movement. You know, I might stop if it turned down again for a while and then start up again if it turned up again. Certainly, the conservative way to do it is to wait for that monthly graph to tick up again, I appreciate that.

First of all, I can’t buy Hawthorne resources. It doesn’t suit my position’s weightings. It’s only $18,000 traded on average per day. So too small for me. But if someone was out there with a small amount of money to invest, you know, 5,000, 10,000, 1000, they’d have to consider their own situation in terms of balancing dollar-cost averaging into the position and what the brokerage was to do that versus picking your day to buy into if they wanted to do it all at once. So if they felt that they had a thousand dollars to invest and the best way to do that, to reduce brokerage was to do it on one day. Then yeah, I’d probably wait until we had a solid upturn those appeared and you might miss the first 10, even 20% of share price gain. But you’ve got I guess the insurance so it’s not going to keep going down after you’ve bought it. 

And of course, it could, I’m not saying it won’t, but generally, if the trends were reestablished that it goes up. So yeah. But then you have a large amount to invest maybe $50,000, then you can look at say a couple of days in a row or maybe a week in a row of gains and maybe buy $10,000 worth. Then wait for another few days and buy some more until you’ve got your position worked out.

Cameron Reilly [01:11:01]: We bought it for the QAV portfolio back in April at 13 1/2 cents. And then it went up to 15 1/2 cents, and now it’s down at 9 1/2 cents. It’s the only thing dragging our portfolio. Everything else is very healthy. It’s the one bad egg that we’ve got at the moment.

Tony Kynaston [01:11:19]: What do we pay for it again, sorry?

Cameron Reilly [01:11:20]: Thirteen and a half.

Tony Kynaston [01:11:22]: Okay. But they return 4 cents. So it’s still at 13 1/2 cents really.

Cameron Reilly [01:11:27]: Oh yeah.

Tony Kynaston [01:11:28]: If you write that back. Yeah.

Cameron Reilly [01:11:30]: Yeah. Right. Good thinking 99. Not sure I’ve got that in our spreadsheet. Do I? Yeah, I do.

Tony Kynaston [01:11:37]: Yeah. I gave you some details to add.

Cameron Reilly [01:11:39]: Yeah. Four cents.

Tony Kynaston [01:11:41]: Yeah.

Cameron Reilly [01:11:42]: Yeah. Okay. So it’s net, net or good.

Tony Kynaston [01:11:46]: But yeah, look, it’s a good suggestion. Again, I don’t know if I’d make a general rule about waiting for the month-end all the time. But I’m certainly waiting for some evidence of a turnaround over at least, you know, maybe half a week or a week before I start buying. And then I wouldn’t buy it all on one day. Dollar cost averaging.

Cameron Reilly [01:12:04]:  All right. Well, that’s a full lid for this week, TK. You’re heading down to COVID Central formally known as state formerly known as COVID Central, Victoria.

Tony Kynaston [01:12:18]: I had to pack some masks. They are my suitcase and I haven’t worn a mask for a long time.

Cameron Reilly [01:12:22]: Yeah. It’s still mandatory that you have one on your person I think, down there, right.

Tony Kynaston [01:12:27]: Right. Yeah.

Cameron Reilly [01:12:29]: Well, that’s exciting. So are going to keep doing shows when you’re down at Cape Schanck.

Tony Kynaston [01:12:34]: I wouldn’t mind a break at some stage, but yeah, we can. So like maybe have a break between Christmas and New Year or something.

Cameron Reilly [01:12:40]: Right.

Tony Kynaston [01:12:41]: But yeah. Happy to do them from Cape Schanck.

Cameron Reilly [01:12:43]: Good. Well, we’ll probably save up maybe the interview that we did with Damian and put that out or something when we take a break.

Tony Kynaston [01:12:52]: Yeah. Okay. A Christmas special. We should have saved up all the other ones we did put them out over Christmas as Christmas specials.

Cameron Reilly [01:12:57]: Oh, the Christmas special, I’ll do without you, it’ll just be me and my guitar. I’ll just play some songs and jam a little bit. People will love that, I’m sure.

Tony Kynaston [01:13:08]: We need some jingles. We need like before we say what’s the stock of the week. It’s like [singing 01:13:14]

Cameron Reilly [01:13:15]: I’ll get it done. We need a jingle for a Schrodinger. We need a jingle for a Groundhog.

Tony Kynaston [01:13:24]: I’ll get another week.

Cameron Reilly [01:13:25]: Yeah. I’ll get Jeffrey, who did the music for our film, working on it. I’m not sure if I’ve mentioned it, but the film is now up on Amazon Prime. If anyone hasn’t seen our film, Marketing the Messiah, check it out on Amazon Prime. If you’ve got that. It’s good. It’s getting a lot of attention.

Tony Kynaston [01:13:43]: Yeah. Well done.

Cameron Reilly [01:13:46]: Well, that’s it. That’s it for this week.

Tony Kynaston [01:13:48]: Lots of reviews from angry Christians, as I recall.

Cameron Reilly [01:13:51]: Yeah. They’re flooding IMDb with the angry reviews, which is a lot of fun. A lot of fun for me to read those.

Tony Kynaston [01:14:04]: Maybe you can send some of those across to the Australian Skeptics Association or something like that and get some profile for the…

Cameron Reilly [01:14:10]: Oh That’s a good idea.

Tony Kynaston [01:14:11]: Okay.

Cameron Reilly [01:14:12]: Yeah, I’ll do that. All right, mate. Well, thank you. Have a great trip down. Are you driving down?

Tony Kynaston [01:14:19]: I am. Yeah. [inaudible 01:14:18] tomorrow. Melbourne after that. Melbourne for the weekend and then off to Cape Schanck next week.

Cameron Reilly [01:14:25]: Lovely. Well, safe travels. And we’ll work out when we’re going to do another show next week, sometime.

Tony Kynaston [01:14:31]: Yeah. Sure.

Cameron Reilly [01:14:33]: Take care everyone.

Tony Kynaston [01:14:34]: Thanks. Okay. Bye

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