Transcript QAV 403

Episode Name: QAV 403 Club

File Length: 01:30:52

Tony Kynas­ton [00:03]: Are you sup­posed to go, “Wel­come back to QAV.”

Cameron Reil­ly [00:04]: Wel­come back to QAV. This is Episode 403. TK, you’re on your way back to Syd­ney. I believe you’re in Wag­ga Wag­ga. Wuk­ka Wuk­ka, like a Fozzy Bear. Named after Fozzy Bear’s famous catch­phrase Wuk­ka Wuk­ka.

Tony Kynas­ton [00:26]: I am. I’m in Wag­ga Wag­ga. And I have to call it Wag­ga Wag­ga. Appar­ent­ly, you can only call it Wag­ga if you’re a local.

Cameron Reil­ly [00:31]: Is that right? That’s the rules.

Tony Kynas­ton [00:35]: That’s the oth­er [inaudi­ble 00:00:34]. Yeah.

Cameron Reil­ly [00:35]: Dub, dub. No one calls it dub dub?

Tony Kynas­ton [00:38]: What’s dub dub?

Cameron Reil­ly [00:39]: WW, dub dub.

Tony Kynas­ton [00:40]: Ah! No, no one calls it that.

Cameron Reil­ly [00:42]: Right. Okay. Just me. I remem­ber get­ting into trou­ble in San Fran­cis­co many years ago, call­ing it San Fran. And the locals, they were like, “No, no one calls it San Fran. It’s either SF or San Fran­cis­co. You don’t call it San Fran, you stu­pid Aus­tralia.” Well sor­ry.

Tony Kynas­ton [01:01]: But they call Mac­cas, Mick­ey D. So I don’t know who’s stu­pid.

Cameron Reil­ly [01:06]: And why? What do you call it?

Tony Kynas­ton [01:09]: Mac­cas.

Cameron Reil­ly [01:09]: Mac­cas. Such a bogan. I was watch­ing an old Burt Reynolds film from 1973 yes­ter­day. White Light­ning, you have ever seen that?

Tony Kynas­ton [01:19]: Oh yeah. No, I can’t remem­ber but I have seen it. Yeah.

Cameron Reil­ly [01:22]: That’s the first of his Gator McCluskey films. Then he did the Secret Gator a few years lat­er.

Tony Kynas­ton [01:28]: Yeah.

Cameron Reil­ly [01:28]: Where he’s a moon­shine run­ner, which is basi­cal­ly every­thing he did in the sev­en­ties.

Tony Kynas­ton [01:35]: [Crosstalk00:01:35] again. Yes

Cameron Reil­ly [01:38]: Yeah.

Tony Kynas­ton [01:37]: Yeah. And they were all writ­ten by [inaudi­ble 00:01:41] man.

Cameron Reil­ly [01:41]: Well, as the Smokey ones were, yeah, that’s right.

Tony Kynas­ton [01:44]: I think so. It was Hoop­er and Gator and [inaudi­ble 00:01:46]. Weren’t they?

Cameron Reil­ly [01:47]: Oh, well maybe. I don’t know.

Tony Kynas­ton [01:50]: Yeah.

Cameron Reil­ly [01:51]: But you know I said to Chris­sy like the Smokey and The Ban­dit films was basi­cal­ly White Light­ning. The guy just took the best bits of White Light­ning and Gator and added com­e­dy. And what’s the face? The…

Tony Kynas­ton [02:08]: Sal­ly Field, The Fly­ing Nun.

Cameron Reil­ly [02:09]: Sal­ly Field. Yes. But any­way, the town where he’s run­ning around is called Bogan Coun­ty. Bogan Coun­ty. I said to Chris­sy. She goes, “Well, bogans, not a thing in Amer­i­ca. We don’t have bogans. We have red­necks. We’re not bogans.” I thought it was fun­ny. I was think­ing about get­ting a sign made up to Bris­bane. For Bris­bane say­ing, you know, “You are now leav­ing Bogan Coun­ty” when you leave the bor­der. But it was direct­ed…

Tony Kynas­ton [02:41]: Hel­lo, Bris­bane, lis­ten­ers too.

Cameron Reil­ly [02:44]: Hey, I live here. I’m allowed to say that. It’s direct­ed by Joseph Sergeant who also direct­ed The Tak­ing of Pel­ham One Two Three.

Tony Kynas­ton [03:55]: Wal­ter Matthau.

Cameron Reil­ly [02:55]: Yes. That’s one of my favorite films. A great sound­track on there too. Wal­ter Matthau, Good Mar­tin Bal­sam, Robert Shaw, Hec­tor Eli­zon­do. Music by David Shire who is mar­ried to…

Tony Kynas­ton [03:11]: Mrs. Shire.

Cameron Reil­ly [03:12]: Yes. Also known as…

Tony Kynas­ton [03:15]: David’s wife. I don’t know.

Cameron Reil­ly [03:18]: Well, they were mar­ried and they’re now divorced. Talia Shire AKA Con­nie Cor­leone AKA Fran­cis Ford Cop­po­la’s sis­ter.

Tony Kynas­ton [03:26]: You pro­nounced it “Shear”. That threw me off a lit­tle. I thought it was “Shire”.

Cameron Reil­ly [03:29]: That could be. I don’t know. Any­way.

Tony Kynas­ton [03:31]: Right.

Cameron Reil­ly [03:32]: We are com­plete­ly off track. This is an invest­ing pod­cast in case any­one’s won­der­ing. Aus­tralian shares have fall­en in after­noon trade. Tony, accord­ing to the news, as US mar­kets slipped from their record highs, get this, I like this, on con­cerns it may either be over­val­ued or in bub­ble ter­ri­to­ry. No. What!

Tony Kynas­ton [03:51]: Yeah. That’s right.

Cameron Reil­ly [03:52]: You don’t say. I’m shocked that there’s gam­bling going on in this estab­lish­ment. They just worked that out, Tony. It may be the bub­ble.

Tony Kynas­ton [04:04]: Well that’s actu­al­ly a good out­come if the mar­ket self-cor­rects before the bub­ble burst. I mean, some mar­kets go side­ways for a long time. So that’s not a bad thing. I sus­pect there’s going to be a rise in bond yields and a rise in infla­tion and a rise in inter­est rates, in any one of those will trig­ger a bit of a route, but who knows when who knows by how much.

Cameron Reil­ly [04:28]: Civ­il war. We’ll get to that. Well in Aus­tralia it’s meant that Fortes­cue Met­als is down 6% today.

Tony Kynas­ton [04:36]: Oh real­ly.

Cameron Reil­ly [04:37]: But yeah, so it’s only up 218% now since we bought it. So I’m a lit­tle bit wor­ried about Fortes­cue. I read a great arti­cle about Andrew For­rest this morn­ing in The Fin. Some­thing about he’s decid­ed he’s going to set up the world’s largest sus­tain­able ener­gy com­pa­ny.

Tony Kynas­ton [04:57]: An iron ore com­pa­ny, I think. Sor­ry. Not iron ore, steel­mak­er using hydro­gen.

Cameron Reil­ly [05:04]: Oh, okay. Well, you know, more than I do.

Tony Kynas­ton [05:07]: No, I think we read the same arti­cle.

Cameron Reil­ly [05:07]: That’s what he was running…Well, you paid more atten­tion than I did. Run­ning around the world when he got COVID that’s what he was set­ting up or some­thing.

Tony Kynas­ton [05:14]: Yeah. Yeah. Well, I think there are actu­al­ly two things there. You’re right. He was going around the world look­ing for alter­na­tive ener­gy sources. But he’s also now talk­ing about set­ting up a steel­mak­er. A steel­work that uses hydro­gen rather than what­ev­er, coal pow­er I guess is what’s nor­mal­ly used. Yeah.

Cameron Reil­ly [05:34]: Well for peo­ple lis­ten­ing if you’re won­der­ing why Tony’s voice sounds a lit­tle bit sketchy, it’s because he’s in a Wag­ga Wag­ga and he’s using a dodgy head­set, micro­phone, Apple micro­phone thing. Not his good micro­phone.

Tony Kynas­ton [05:51]: Yeah. Brand new. I had to go to buy one today after golf. That’s why I did­n’t know the mar­ket was down this after­noon. By the way, it’s the 27th of Jan­u­ary today too while we’re record­ing.

Cameron Reil­ly [06:05]: It is the 27th of Jan­u­ary, 2021. Well, let’s say we’ve got a big show today. Lots of ques­tions. Lots of stuff. Let’s get stuck into Howard Marks’ memo. Can we start there, Tony?

Tony Kynas­ton [06:15]: Yeah, sure.

Cameron Reil­ly [06:16]: Well, I was just going to say Stephen Mab brought this to our atten­tion last week, Howard Marks from Oak Tree for new lis­ten­ers. Some­body did point out to me, one of our new sub­scribers sent me an email dur­ing the week say­ing, “I tend to lis­ten when I’m out doing a walk. And I can’t Google things. Can you explain things and not just assume that we know them all the time?” You’re right. We should do that more. I apol­o­gize if we assume an a pri­ori lev­el of knowl­edge too often. So for new sub­scribers, Howard Marks, if you don’t know, an Amer­i­can bil­lion­aire investor runs a com­pa­ny called Oak Tree. One of the guys that we talk about from time to time. He puts out a memo on a fair­ly reg­u­lar basis about what he thinks is going on. And he put out one recent­ly talk­ing about how he sat down with his son, Andrew, who’s also an investor and he’s start­ing to think about mov­ing away from val­ue invest­ing and look­ing at invest­ing in growth stocks. Tony. Some­thing of Val­ue was the name of his memo if peo­ple want to Google it. Howard Marks, Some­thing of Val­ue.

Tony Kynas­ton [07:23]: Yes. They say that you can’t, no one rings a bell when the mar­ket tops, but when a val­ue investor like Ray Dalio starts to talk about inter­net stocks.

Cameron Reil­ly [07:32]: Howard Marks.

Tony Kynas­ton [07:33]: Howard Marks, sor­ry, starts to talk about inter­net stocks, it’s called capit­u­la­tion. And it prob­a­bly is get­ting clos­er to the top of the mar­ket when a dyed-in-the-wool val­ue investor is start­ing to think about buy­ing inter­net stocks because his son has talked him into it. That reminds me of the old Buf­fett quote that Wall Street’s the only place that peo­ple trav­el to work in Rolls Royce’s and take advice from peo­ple who run in the sub­way.

Cameron Reil­ly [08:00]: I’m pret­ty sure Howard Marks’ son does­n’t ride to work in the sub­way though.

Tony Kynas­ton [08:04]: No. I think accord­ing to the arti­cle he’s been seen as a suc­cess­ful investor in growth stocks and tech stocks in par­tic­u­lar.

Cameron Reil­ly [08:11]: Yes.

Tony Kynas­ton [08:12]: But I was dis­ap­point­ed by the arti­cle because the premise was that Howard’s son had taught him the way to invest in these growth stocks. In oth­er words, you know, pick this one, not that one because of these things. But that did­n’t real­ly come out in the arti­cle. It was just basi­cal­ly, you know, buy the one that’s going up and then hold it. So it was a very strange arti­cle, espe­cial­ly from some­one as expe­ri­enced as Howard Marks. And in fact, almost every para­graph in the arti­cle start­ed with, I remem­ber back to this crash or that crash, you know, the 87 crash or 2017 crash or the…

Cameron Reil­ly [08:54]: Or The NIFTY 50.

Tony Kynas­ton [08:55]: The NIFTY 50. That’s right. How I cut my teeth and these things went wrong. You know, peo­ple were buy­ing the NIFTY 50 stocks because they were told to buy them and they were going up and there was fear of miss­ing out and you should buy them. And then they crashed with your old shock in 72. So he’s basi­cal­ly, you want to take out all the bits in the arti­cles that come from his son and just fol­low his advice, which is to watch out for bub­bles.

Cameron Reil­ly [09:19]: I think it’s a good arti­cle. Like there’s a lot of his­to­ry on Buf­fett and Munger and all of this kind of stuff in there. And like you, I mean, this was part of an ongo­ing con­ver­sa­tion we’ve been hav­ing with Steven recent­ly about some­thing that we’ve talked about on the show many times over the last cou­ple of years, you know, we’re not, you’re not, should­n’t say we because I don’t know shit, but you’re not philo­soph­i­cal­ly averse to buy­ing quote-unquote growth stocks, tech stocks. You don’t have any sort of reli­gious objec­tion to them. It’s not like, you know, you’re a Jew and they’re not clean, they’re pork. But you just don’t know how to place a val­ue on them. You haven’t fig­ured out yet a method­ol­o­gy for work­ing out how to put some sci­ence behind invest­ing.

Tony Kynas­ton [10:10]: Cor­rect.

Cameron Reil­ly [10:11]: In these sorts of stocks. So we’ve had a num­ber of guests on over the last cou­ple of years that are investors in these things and you always ask them the same sort of ques­tions. Like how do you decide, how do you val­ue these things? What’s the method­ol­o­gy used to fig­ure out what they’re worth and when to sell? And so far, nobody has been able to give us not even the begin­nings of an answer that I can recall. They’re just like, “Well…”

Tony Kynas­ton [10:38]: Yeah. There have been some begin­nings of the answers when Johannes Ris­seeuw was the Exec­u­tive Chair­man of Damstra. He was say­ing that the bankers that float­ed his com­pa­ny would look for things like, I think from mem­o­ry, you know, sales growth 20% every year for the last three years or what­ev­er the num­ber was. Soft­ware as a ser­vice type busi­ness so you have recur­ring rev­enue. He had two or three things that they were look­ing at. So I kind of get that, but you know, there’s no check­list for qual­i­ty in that kind of thing. If we are doing is buy­ing a stock because the sales are going up 20% year on year, what hap­pens to it when they don’t? And you know, where’s the mea­sure of qual­i­ty? What if you have 10 stocks they’re doing that? Which one do you pick first? So yes, I agree with you, Cam. I’ve strug­gled to have a check­list for the growth stocks, which is some­thing more than just buy the one that’s going up.

Cameron Reil­ly [11:33]: So we’ve been look­ing for some way where you could apply some side of this. I was on the ASA Queens­land Aus­tralian Share­hold­ers Asso­ci­a­tion, Queens­land con­fer­ence call last week with Stephen and he was talk­ing about some­thing that the Mot­ley Fool guys have been talk­ing about recent­ly, which is look­ing at gross rev­enue growth per share, as one met­ric to tell which com­pa­nies in a par­tic­u­lar sec­tor are doing bet­ter than oth­er com­pa­nies. And he said like, we take the maybe the buy now, pay lat­er stocks, look­ing at those sorts of things. But you know, Howard Marks says in his memo that you should­n’t have knee-jerk dis­mis­sive­ness around tech/growth stocks. And he says the same thing that I know you’ve said and I know Buf­fett and Munger have said many times is that there’s no real dif­fer­ence between val­ue invest­ing and growth invest­ing. All invest­ing is val­ue invest­ing.

Tony Kynas­ton [12:40]: Val­ue invest­ing.

Cameron Reil­ly [12:42]: It’s just how you mea­sure val­ue. How do you deter­mine val­ue, right?

Tony Kynas­ton [12:46]: What that’s the oth­er ques­tion is, I mean, like, yeah, you’re right. Munger has said that in the past and Buf­fett said some­thing sim­i­lar. And Buf­fett goes on to say, if I can pay a dol­lar an hour for some­thing which will make me $20 over 10 years, I’m going to buy it. It’s a good deal.

Cameron Reil­ly [12:59]: Yeah.

Tony Kynas­ton [12:59]: And he’s right. But the prob­lem is there are so many things that can go wrong with these growth stocks that pro­ject­ing out even a cou­ple of years is very hard. Let alone 10 years or 20 years and then dis­count­ing back. I mean com­peti­tors can come into the mar­ket. Gov­ern­ments can reg­u­late against them. They can be bro­ken up as they might hap­pen in the States with the big tech com­pa­nies. So there are all sorts. I don’t know how you could build a dis­count­ed cash flow for these kinds of stocks, real­ly. Even if you want one or two.

Cameron Reil­ly [13:30] And get­ting back to the very basics as we talked about in our very first episodes. And when we did the reboot for 301, the cof­fee shop anal­o­gy, we’re try­ing to val­ue a cof­fee shop. You fig­ure out, okay, I think a share based on its turnover, its track record, its prof­itabil­i­ty, all these sorts of things that we look at. Here’s what I think a share of it is prob­a­bly worth. And if I can buy a share in the busi­ness for less than that, then I’ve got a safe­ty buffer, a mar­gin of safe­ty in the sort of clas­sic val­ue invest­ing terms. But how you fig­ure out what a val­ue in the buy now pay lat­er cof­fee shop looks like, is the ques­tion here? How do we do it? How do we work that out? Any­way, so just enough on the Howard Marks thing you say…

Tony Kynas­ton [14:24]:  Can I just say, I just have one more thing. I would think the only legit­i­mate strat­e­gy for buy­ing tech stocks or growth stocks comes from Peter Lynch’s went up on Wall Street, where he talks about, if you find a new prod­uct or ser­vice that you or your friends or your fam­i­ly mem­bers are using, then that might be a good invest­ment. So if you were some­one who’s maybe, your­self start­ed using After­pay or your kids did and thought, okay, this is inter­est­ing. This is new. This is gain­ing trac­tion and you bought some shares in it. I total­ly get that and respect that. But that’s dif­fer­ent from look­ing at the NASDAQ and can try to pick the next Ama­zon and mak­ing bets such as spec­u­la­tion.

Cameron Reil­ly [15:05]: Well, so it was buy­ing a share just because you’re using and you think it’s okay.

Tony Kynas­ton [15:09]: [inaudi­ble 00:15:09] It’s absolute­ly spec­u­la­tion. But there is some sci­ence behind that. I mean, Peter Lynch did point out that it was an ear­ly indi­ca­tor of suc­cess­ful com­pa­nies that they can break into your cir­cle of use. And if they’re doing that, they’re doing some­thing right, and there­fore they’re worth invest­ing in. So I do have some sym­pa­thy for that argu­ment. And if you think about it, you know, if I applied that log­ic to myself, I’ve nev­er used After­pay. No one I know uses After­pay. So I can’t apply it to After­pay. But you know, when I first bought an Apple iPod, I think their shares were 200 bucks or some­thing. So that would have been a good time to buy them, even though I, you know, I could­n’t val­ue them. I had no idea how they’re going to grow. When I first used Ama­zon you know, it would have been a good time to buy this stock. So I think there is some method­ol­o­gy in that at least. And if you’re dis­ci­plined to know you do it for those things, which are new to you, then I think that fol­lows Peter Lynch’s dic­tum. But you’re only talk­ing, I mean, how many times does it hap­pen to, you’re only talk­ing about a hand­ful of stocks prob­a­bly in your life­time if that hap­pens to you.

Cameron Reil­ly [16:23]: When did you buy an Apple iPod? Like last year?

Tony Kynas­ton [16:27]: No, I bought an Apple iPod back in like 15 years ago, prob­a­bly.

Cameron Reil­ly [16:33]: The share price was 200 bucks?

Tony Kynas­ton [16:35]: I think so. Yeah. What’s it now?

Cameron Reil­ly [16:37]: One hun­dred and forty-three.

Tony Kynas­ton [16:38]: Oh, it must have a split. It was kind of bucked up to. But went up to, I think, $1,200 or some­thing. 

Cameron Reil­ly [16:44]: What!

Tony Kynas­ton [16:45]: Yeah. It must have gone through some splits.

Cameron Reil­ly [16:47]: Accord­ing to the share chart, I’m look­ing at, back in like 2001, the share price was 35 cents. 

Tony Kynas­ton [16:54]: Yeah. Has Apple ever been 35 cents? I think it’s been through a few splits, Cam.

Cameron Reil­ly [16:57]: Prob­a­bly. Yeah. 

Tony Kynas­ton [16:59]: Yeah. 

Cameron Reil­ly [17:01]: Yeah. Well, explain capit­u­la­tion for new lis­ten­ers. What is the con­cept of capit­u­la­tion? 

Tony Kynas­ton [17:07]: Yeah. So as we know, the stock mar­ket is bizarre, but the trad­ing bizarre that involves hag­gling and peo­ple try­ing to sell you things and you try­ing to find the best bar­gain. So it’s a Petri dish or you know, a lab­o­ra­to­ry of human psy­chol­o­gy. And one of the things that are often a har­bin­ger of a change in sen­ti­ment is when some­body who has been on their soap­box bang­ing on about one type of invest­ment or one type of invest­ing style or about the stock mar­ket in gen­er­al, sud­den­ly changes tune. So obvi­ous­ly how it Marks being a val­ue investor for the last 50 years prob­a­bly, is now start­ing to open up to growth invest­ing. And so he’s capit­u­lat­ed. He’s changed his style of thought. He’s basi­cal­ly say­ing, “Okay, I’ve held my val­ue invest­ing the­o­ry as being sacred for the last 50 years, but I’m now start­ing to ques­tion that.” Which is prob­a­bly the worst time to ques­tion it. And it often indi­cates there’s a change in the mar­ket com­ing because as more and more peo­ple change their mind and pil­ing into growth stocks, they get into a big­ger and big­ger bub­ble, and of course, one day it crash­es. 

Cameron Reil­ly [18:25] Any­way, mov­ing on speak­ing of oth­er val­ue investors putting out mem­os. So tweets, in this case, Ray Dalio did a tweet, six tweets actu­al­ly the oth­er day. Ray Dalio, anoth­er Amer­i­can bil­lion­aire val­ue investor runs an orga­ni­za­tion and invest­ment com­pa­ny called Bridge­wa­ter Asso­ciates, been around for for­ev­er and a day, very, very suc­cess­ful. Found­ed the firm in 1975. Cur­rent only got 138 bil­lion US under man­age­ment. He did a series of tweets say­ing he thinks the US is head­ing for a civ­il war unless it can solve its polit­i­cal-eco­nom­ic and social divi­sions pret­ty quick­ly. Well that does the [crosstalk 00:19:19]. 

Tony Kynas­ton [19:20]: Which it can’t.  

Cameron Reil­ly [19:22]: No. Not a chance in hell.

Tony Kynas­ton [19:24]: Hope­ful­ly he is wrong, but yeah. What will it do for the mar­ket, the tweets, by the way, I think there’s been enough com­men­tary in the US to stay open.

Cameron Reil­ly [19:31]: No, not the tweets. The civ­il war. What a civ­il war do to the mar­kets?

Tony Kynas­ton [19:36]: Oh, it depends. I mean a good ques­tion. I have to go back and have a look at the civ­il war in Amer­i­ca, and if there was a stock mar­ket back then. But often­times in wartime, the share mar­ket can go up because the gov­ern­men­t’s pump­ing heaps of mon­ey into the econ­o­my, par­tic­u­lar­ly to man­u­fac­ture things, whether it’s arma­ments or whether it’s man­u­fac­tur­ing things to feed peo­ple at home when there’s a dis­rup­tion in the econ­o­my. It’s a bit like the COVID cough. But you know, there’s obvi­ous­ly fear out there as well. So I’d have to go back and have a look at what the wartime mar­ket looks like. But I sus­pect that’s prob­a­bly up some­times and down oth­ers, but I’d have to go and have a look.

Cameron Reil­ly [20:19] He says, I believe we were on the brink of a ter­ri­ble civ­il war where we are at an inflec­tion point between enter­ing a type of hell of fight­ing or pulling back to work togeth­er for peace and pros­per­i­ty that address­es the big wealth val­ues and oppor­tu­ni­ty gaps we’re now see­ing. Yeah. It’s been inter­est­ing recent­ly, you know, I’ve been talk­ing about a com­ing US civ­il war on some of my polit­i­cal shows for years, and I just seemed like it was just me and I don’t know, think extreme right, like Bre­it­bart for all these years. And now to see guys who are bil­lion­aire investors like Ray Dalio talk­ing about it as kind of a lit­tle bit freaky. 

Tony Kynas­ton [21:02] Do you real­ly think there’ll be a civ­il war on the States?

Cameron Reil­ly [21:06] Yeah. I don’t see any way out of it. I don’t know how bad it will be, and I don’t know when it will hap­pen, but the ten­sions are so high that some­thing needs to give. And I just don’t know. I just can’t see any way out of it. Just yeah. Unless some polit­i­cal leader comes along that can unite the coun­try again and address the divi­sions and all of the prob­lems that they’ve got. I don’t think Biden’s that per­son. I don’t know who that per­son is. Yeah. I just see they’re tear­ing them­selves apart over there. The hatred between the left and the right is so deep and endem­ic.

I just like a his­to­ri­an, ama­teur his­to­ri­an, but, you know, some­body makes his liv­ing out of talk­ing about his­to­ry and doing deep dives on, you know, what’s hap­pened in his­to­ry and from 2000 years ago through to the Cold War and the Renais­sance and all that kind of stuff, look­ing at how soci­eties build them­selves up and how they tear them­selves apart. I just see it all play­ing out in the US again. I’ve seen this. Yeah. I keep say­ing this to Ray on my his­to­ry shows and Chris­sy, I’ve read this book before, many, many times, right. These things nev­er end well. When coun­tries get like this, they need either a glob­al war as Ger­many did in the 30s and 40s to tear them apart so they could be rebuilt or it’s a civ­il war that tears them apart and rebuilds them. I can’t think of many or any exam­ples in his­to­ry where a coun­try has been at this lev­el of divi­sive­ness and has fig­ured out how to put itself back togeth­er again. So I hope it does­n’t hap­pen.

Tony Kynas­ton [22:55] I have a slight­ly dif­fer­ent view. I would­n’t say I’m wor­ried. I think there’s a high chance that there’ll be some kind of con­flict with Chi­na, whether it’s you know, a cold war type con­flict or an eco­nom­ic type war that Trump tried to start or whether it’s a fall­out old-style type war. So I think that’s more like­ly than a civ­il war in the US. The US at the moment reminds me of the US when I was grow­ing up as a kid when there was this Black Lives Mat­ter protest. Now, there were lots of civ­il rights protests back then. There were lots of peo­ple dri­ving around in cars with Con­fed­er­ate flags, wav­ing from them. The South Will Rise Again was a chant and the KU Klux Klan was recruit­ing and all that kind of stuff again. But it all came to noth­ing.

And I sus­pect it prob­a­bly will this time too, because I don’t think that the Trump base can ever mil­i­tar­i­ly get enough sup­port to launch any sort of effec­tive clash or assault or take over. I mean the Capi­tol Hill assault was a rebel, basi­cal­ly. It was nev­er going to actu­al­ly over­throw any sort of gov­ern­ment. I don’t know what the gen­er­als are like in the Pen­ta­gon, but I’d sus­pect that you know, you’d have to win over a lot of those before you could launch any sort of worth­while assault on the gov­ern­ment in Amer­i­ca. I don’t see that hap­pen­ing. I see it more like­ly to be your oth­er hypoth­e­sis, which is an exter­nal some kind of skir­mish with Chi­na.

Cameron Reil­ly [24:32]: Well, we’ll see. Any­way, that’s Ray Dalio that’s gross rev­enue growth per share. Let’s move on to…

Tony Kynas­ton [24:41]: Just, I should answer some more about growth rev­enue, growth per share that was to give peo­ple some more back­ground on that. So Steve Mab had sent that through because he had, I think, read about it, Mot­ley Fool, and how they were using it as a key met­ric to base their invest­ment deci­sions on and I haven’t inves­ti­gat­ed in any sort of detail. And I sus­pect that it prob­a­bly is a good met­ric to embrace basi­cal­ly the invest­ment deci­sion on, because if a com­pa­ny’s gross prof­it is ris­ing year on year, then it’s doing some­thing right. Either the mar­ket’s favor­ing it or the mar­ket oper­ates in is favor­ing it eco­nom­i­cal­ly, or it’s cut­ting costs or it’s grow­ing in size either by sales or by expand­ing over­seas or what­ev­er. So I don’t dis­miss that as a good met­ric. It’s not read­i­ly avail­able on Stock Doc­tor or any oth­er place I’ve seen.

So it will be hard to use that as a check­list either because even if you have entered it man­u­al­ly, you still have to cal­cu­late it. You’re prob­a­bly man­u­al­ly as well, year on year. So if any­one knows of a source of that, we could have a look at it. I’m not averse to putting it into the check­list, but I’d need to do a whole heap of test­ing, or Steve or some­one like that can do some test­ing for us to see if it’s worth­while. But that’s exact­ly how the check­list was formed. I read some­thing some­where that they had a good idea using one met­ric and I inves­ti­gat­ed it and it seemed worth­while. So it gets out of…

Cameron Reil­ly [26:06]: [crosstalk 00:26:06]

Tony Kynas­ton [26:08]: I’m not dis­miss­ing gross rev­enue growth per share it out of hand. I’m just say­ing it’s dif­fi­cult to do the analy­sis, to work out which stock is grow­ing their gross prof­it year on year. And we’d rather then, try and do some kind of test­ing on it.

Cameron Reil­ly [26:23]: But my guess is it would take a lot to shift you from what you’ve been doing suc­cess­ful­ly for 25 years into invest­ing in these com­pa­nies to move much of your port­fo­lio into the sorts of com­pa­nies.

Tony Kynas­ton [26:39]: Well, from what I saw, from what Steve shared with us, there were some, I’ll call them QAV Stocks on the list of com­pa­nies with that met­ric grow­ing growth, rev­enue growth, per share grow­ing. The one that comes to mind is Vocus Com­mu­ni­ca­tions, which I think, well, cer­tain­ly was on the buy­er list last year or the year before. And I think we may have had it in a dum­my port­fo­lio for a while. So my point being is that I’m not going to make a one-dimen­sion­al check­list just using that met­ric. And so if we add it to our cur­rent check­list, we’re prob­a­bly not going to pick up the growth end of that uni­verse. We’re prob­a­bly going to pick up the val­ue in like, shares like Vocus.

Cameron Reil­ly [27:19]: Right. 

Tony Kynas­ton [27:19]: Yeah.

 Cameron Reil­ly [27:22]: Okay. Mov­ing on…

Tony Kynas­ton [27:23]: I guess anoth­er impor­tant point; the check­list is a blend. You can cer­tain­ly have chal­lenged your port­fo­lios where you just use one met­ric to see if that’s out­stand­ing. But I think that in the end, the bet­ter thing is to add that met­ric to the check­list and give it a weight­ing if you need to. But you don’t want to dis­miss all of the oth­er good things in our uni­verse and focus on one thing. You want to blend in the new thing into the check­list.

Cameron Reil­ly [27:51]: Mov­ing on. John Matrons sent us an arti­cle the oth­er day from the Finan­cial Review, min­ers sell else­where as Chi­na shuts the door on Aussie cop­per. That’s no good, par­tic­u­lar­ly since we’ve got at least one cop­per stock in our port­fo­lio, C6C.

Tony Kynas­ton [28:11]: Well, it’s Aus­tralian list­ed but it’s actu­al­ly a Cana­di­an cop­per min­er. So it won’t be affect­ed by Chi­nese bands on Aus­tralian imports. 

Cameron Reil­ly [28:18]: Woo-Woo! 

Tony Kynas­ton [28:19]: In fact, I may even ben­e­fit. 

Cameron Reil­ly [28:24]: It’s down today with the mar­ket. But any­way, it was doing well before that.

Tony Kynas­ton [28:30]: Yeah. I recall read­ing the arti­cle and not being too con­cerned. But most of the cop­per exporters were say­ing, “Look, we’re busy find­ing oth­er mar­kets besides Chi­na, and we think we’ll be okay.”

Cameron Reil­ly [28:41]: Right. 

Tony Kynas­ton [28:42]: And you won­der whether Chi­na’s sort of pick­ing and choos­ing who it picks on, whether it real­ly wants to dam­age Aus­tralia or whether it’s just fir­ing shot across the bow to make polit­i­cal points. 

Cameron Reil­ly [28:54]: Yes. 

 Tony Kynas­ton [28:55]: Yeah.

 Cameron Reil­ly [28:55]: I would sus­pect the lat­ter. Just try­ing to turn up the heat and Sco­Mo’s feet. 

 Tony Kynas­ton [29:02]: Exact­ly. Yeah. 

Cameron Reil­ly [29:03]: Par­tic­u­lar­ly now that Trump’s out of office, but I don’t see any signs that Joe Biden’s going to par­tic­u­lar­ly change the anti-Chi­na rhetoric that was com­ing out of the Trump admin­is­tra­tion, at least so far.

Tony Kynas­ton [29:15]: Yeah. I agree with you. I won­der whether it will become much more of behind the scenes things. Like it will be a lot more diplo­mat­ic dis­cus­sions rather than open ter­raform.

Cameron Reil­ly [29:26]: Rather than Twit­ter.

Tony Kynas­ton [29:27]: Yeah. Rather than Twit­ter. Exact­ly.

Cameron Reil­ly [29:32]: Yes. Busi­ness as usu­al busi­ness.

Tony Kynas­ton [29:35]: Busi­ness as usu­al. Exact­ly. What’s that old say­ing, Amer­i­ca means busi­ness, and busi­ness is Amer­i­ca.

Cameron Reil­ly [29:41]: Okay.

Tony Kynas­ton [29:42]: Some­thing like that. 

Cameron Reil­ly [29:43]: Right. 

Tony Kynas­ton [29:44]: Yeah.

Cameron Reil­ly [29:44]: So you’re not wor­ried about that for now, for our port­fo­lio any­way. 

Tony Kynas­ton [29:49]: No. I mean, if Chi­na want­ed to dam­age us, they’d stop tak­ing iron ore, but that’s not in Chi­na’s best inter­est. So I real­ly think it’s pick­ing and choos­ing ones that they can prob­a­bly source, like com­modi­ties they can source from oth­er places, at least in the short term until they’ve made their point. And I think cer­tain­ly in that arti­cle, most of the cop­per exporters are say­ing, “We can get by with­out Chi­na. It might be a slight dis­ad­van­tage to us, but we’ll get by.”

Cameron Reil­ly [30:16]: And any­way, we don’t real­ly care because we just buy and sell based on what’s hap­pen­ing. 

Tony Kynas­ton [30:21]: Exact­ly. 

Cameron Reil­ly [30:22]: We don’t always wor­ry about. 

Tony Kynas­ton [30:23]: We don’t try and pre­dict.

Cameron Reil­ly [30:24]: Any­thing else you want to cov­er before we get into the Q and A.

Tony Kynas­ton [30:27]: No, I can do a Stock of the Week if you want. 

Cameron Reil­ly [30:30]: Oh, let’s do that.

Tony Kynas­ton [30:30]: Or I can do a group. 

Cameron Reil­ly [30:32]: Yeah.

Tony Kynas­ton [30:33]: So I haven’t done a down­load since about last Wednes­day, I think, or even ear­li­er maybe. But I was read­ing anoth­er arti­cle a lot on Eure­ka Report from a guy Alan Tread­gold, let’s check that name, Tim Tread­gold, sor­ry. Fun­ny name for an ana­lyst in the min­ing sec­tor, but he’s very good. And he went through talk­ing about the fact that he thought coal was in an upturn. So I went on to Index Mun­di and had a look and yes, it looks like coals just start their three-point upturn. So I decid­ed to go back into the QAV mas­ter spread­sheet and have a look at all of the com­pa­nies in the clas­si­fi­ca­tions for ener­gy and mate­ri­als, which is one of the ear­ly columns in Col­umn C in the QAV mas­ter spread­sheet. 

And if peo­ple aren’t aware of what that means, is ASX has grouped com­pa­nies into indus­try clas­si­fi­ca­tions to allow peo­ple to ana­lyze a par­tic­u­lar indus­try quick­ly, whether it’s finan­cial, retail, mate­ri­als, which often means things like coal or ener­gy. Because I don’t go back to every down­load and check every three-point sen­ti­ment on the watch list because there are a cou­ple of hun­dred shares on the watch list, what­ev­er the num­ber is. It’s a lot. I tend to look for cat­a­lysts or sen­ti­ment changes or inter­est­ing arti­cles that make me go and have a look. So in this case, I went and had a look at those com­pa­nies on the watch list that was in the mate­r­i­al sec­tor, which would cov­er coal and the ener­gy sec­tor because he spoke about some new oil changes as well, I think in the arti­cle.

But any­way, I came up with a whole host of com­pa­nies that had gone through three-point trend changes since I last looked at them. I put it out as a stock jour­nal. Well, I’ll just go through some of those now. NGE Cap­i­tal with a QAV score of 0.31. So NGE is a list­ed invest­ment com­pa­ny, which invests in resource com­pa­nies. But it’s a small com­pa­ny itself, but it has now a good QAV score and a three-point upturn. Yan­coal, I think we may have talked about it in the past has a QAV score of 0.3. And it has had a recent upturn. The inter­est­ing thing about Yan­coal, even though it’s a very large coal com­pa­ny, it has large own­ers, one of at least is Chi­nese. And so it does­n’t have a large aver­age dai­ly trad­ed amount, which I think sits at about $94,000 when I last looked last week. So even though it’s a large com­pa­ny, it’s thin­ly trad­ed. It can be hard to get in and out of when you have a sit­u­a­tion where there’s thin trad­ing because the com­pa­ny has large share­hold­ers. That’s Yan­coal. 

Grand Gulf Ener­gy GGE is now in an upturn, it has a QAV score of 0.14. I’m not sure what hap­pened, but when I looked at GGE it had a qual­i­fied audit flag set. But when I check the annu­al report for GGE, it did­n’t have a qual­i­fied audit. So I sus­pect at some stage I either copied the wrong thing into that line of the buy list or have some oth­er occurred. But that’s been changed now. Again, it’s a small com­pa­ny, aver­age dai­ly trade of only $5,000. But peo­ple might want to have a look at it if they fit their pro­file. Aus­tralis Oil and Gas ATS is now a buy with a QAV score of 0.1. So it’s way down the list. Kingrose Min­ing, I’ll prob­a­bly make that my stock of the week, KRM. So I think it has been on our buy­er list in the past, but it fell off again and it may do again because it’s sort of bounc­ing along the bot­tom of its share price graph, but it has had a recent upturn. It has a QAV score of 0.58. So quite high. So that’s the Kingrose min­ing. It owns gold and sil­ver mines in Indone­sia. So there is a bit of sov­er­eign risk there, but it’s cer­tain­ly on its way back. It’s small, I think that the share price is only about 3.80 cents. So I don’t think it’s nec­es­sar­i­ly a small com­pa­ny, but cer­tain­ly, the share price is in a sense. 

Essen­tial Met­als has a score of 0.14. But I do want to draw peo­ple’s atten­tion to the fact that there are only two points in the trend line at the moment after the upturn. So we might wait a bit longer, one more month any­way, to see if we have a three-point trend for ESS. OM Hold­ings is on the buy list with a QAV score of 0.1. Aeris Resources. That’s A E R I S. AIS is the code, has a QAV score of 0.12. So quite a few came up in that lat­est scan of sen­ti­ment for those com­pa­nies and all based on Tim Tread­gold’s arti­cle and me going and have a look at Index Mun­di for the coal price increase.

Cameron Reil­ly [35:41]: So for new lis­ten­ers, this is some­thing we’ve talked about before. We’ve added some stocks a few months ago, based on you notic­ing that some of these resources pric­ing has been tick­ing up.

Tony Kynas­ton [35:58]: Yes, it’s cer­tain­ly a pat­tern. So it hap­pened to me a cou­ple of years ago with gold. The gold price had been in the dol­drums and being in a down­trend. But then I saw that it had turned up and I applied the same three-point trend log­ic to the five-year month­ly gold price char­ters. I did two [inaudi­ble 00:36:17] stocks and that’s when I start­ed buy­ing gold com­pa­nies. Last year, it hap­pened with nick­el and it hap­pened with iron ore and it hap­pened with, maybe iron ore was the year before. And it’s hap­pened most recent­ly with cop­per, and we seem to get good results out of that kind of turn and sen­ti­ment, which makes sense. I mean, these are all com­pa­nies which trade these things and the prices going up. So they expect their sales to go up. And as we know, with the minors in the indus­try once the price goes above their cost base, their growth prof­it increas­es dra­mat­i­cal­ly as the com­mod­i­ty price goes up. Because it’s just all those extra, all that extra income just drops to the bot­tom line, once they’ve cov­ered their costs. So yeah, I think with­out want­i­ng to be a com­modi­ties trad­er, it’s cer­tain­ly been a dri­ver of some good results with­in the com­pa­nies that mine in those in those areas. 

Cameron Reil­ly [37:09]: And if peo­ple want to check out Index Mun­di. It’s Mun­di with an I. Mundi.com, basi­cal­ly looks at the com­modi­ties mar­kets and tracks the prices and com­modi­ties mar­kets.

Tony Kynas­ton [37:22]: Yeah. And that’s part of it. It actu­al­ly tracks a whole heap of oth­er things, like world pop­u­la­tion and oth­er things like eco­nom­ics, GDP. 

Cameron Reil­ly [37:28]: Oh real­ly. 

Tony Kynas­ton [37:29]: Yeah. I think Mun­di, isn’t that Ital­ian for the world. So it’s Index World and sort of dif­fer­ent graphs in it, a lit­tle dif­fer­ent index­es in it that it tracks.

Cameron Reil­ly [37:38]: Right. Yes. Famous Leonar­do Da Vin­ci paint­ing, what was it called? The Mun­di or was just the Sal­va­tor Mun­di, Sav­ior of the World. 

Cameron Reil­ly [37:53]: Right. Long thought to be lost. Any­who. He’s in the news a bit recent­ly, that’s why I men­tioned. So KRM stock of the week, Kingrose Min­ing. And so again, for new lis­ten­ers what we have done in the past most recent­ly with cop­per and alu­minum, I think, is we bought a cou­ple of stocks, even though they weren’t the high­est on the buy list, but they were rel­a­tive­ly high on the buy list. But that com­bined with the Index Mun­di uptick in the com­mod­i­ty price, you decid­ed that they were worth ele­vat­ing in terms of our buy list. We did well out of those.

Tony Kynas­ton [38:33]: No. Exact­ly. Again, these aren’t rec­om­men­da­tions, please do your own invest­ment analy­sis.

Cameron Reil­ly [38:41]: Indeed. All right. So onto Q and A. Doug. Doug says, “Hey, CR and TK, [inaudi­ble 00:38:51] a tech­ni­cal ques­tion. I’ve been read­ing a bit about using log­a­rith­mic, I can’t say that, log­a­rith­mic price scale for long-term share price charts. And I find they give a much bet­ter overview of a per­cent­age price change. How­ev­er, I’ve also noticed that it can impact the three PTL quite a bit. That is sen­ti­ment can go from being a con­firmed to two QAV points to not cross­ing the line at all. Have you ever inves­ti­gat­ed this? And do you think it is worth inves­ti­gat­ing? Doug”.

Tony Kynas­ton [39:23]: I haven’t inves­ti­gat­ed it. The log­a­rith­mic charts aren’t that wild­ly pop­u­lar. From mem­o­ry, they’re used more when you want to com­pare the per­for­mance of two stocks on the same graph because a log­a­rith­mic chart shows you the per­cent­age increase. Where­as the charts that we reg­u­lar­ly use to show you the dol­lar increase or dol­lar move­ments in a share price or cents per share move­ments in a share price. So yes, it will pro­vide a dif­fer­ent shape to the share graph. It’s inter­est­ing that you’re get­ting dif­fer­ent results. I mean I can’t explain that. I’ve always used the ones that we use now, which are the dol­lar share charts and that’s how I read about and learned to use the three-point trend line sys­tem. So I’ll be con­tin­u­ing with that. So I don’t know much about log­a­rithm charts oth­er than they use for com­par­isons.

And just to explain that, so if you’re try­ing to com­pare Fortes­cue Met­als with BHP on the same graph, you know, one will be much high­er on the graphs than the oth­er. And because BHP is a, I don’t know, what is today $40 and Fortes­cue Met­als is $24. And so you’ve got to have a fair­ly big y‑axis to com­pare them. And then, you know, a dol­lar move­ment in the small­er stock, who’s going to make the graph go up a lot more than the dol­lar moves on the BHP stock. So that’s why you use a log­a­rith­mic chart. Gen­er­al­ly, they’ll start then at the same point on the y‑axis and they’ll move accord­ing to their per­cent­age changes and you’ll see which one has done bet­ter over time. So I’ve only used it for price com­par­isons or sor­ry, com­pa­ny com­par­isons on the same chart.

Cameron Reil­ly [41:03]: Okay. Thanks, Doug. Greg, “My only ques­tion right now would be if Tony or you have any thoughts on the blue chip­pers in the ASX, and which cur­rent­ly looked like the best ones to buy for some­one with only a lit­tle bit of cash to invest who wants to buy and hold for the long term as a rel­a­tive­ly sta­ble, but small start to their own port­fo­lio to build over the long term.” My guess is that you would say the most under­val­ued out of the Top 20. 

Tony Kynas­ton [41:31]: Yeah, it’s a time­ly ques­tion because we’ll know that in the next month or so. So by the end of Feb­ru­ary, all the com­pa­nies will have giv­en us their Decem­ber results. And we can con­struct a fair­ly sim­ple spread­sheet of the Top 20 Stocks and look up their cur­rent share price com­pared to their future IV. Hope­ful­ly, Greg’s been able to lis­ten to some of our past episodes where we talk about putting the earn­ings per share over the hur­dle rate, or sor­ry, the future earn­ings per share, the fore­cast earn­ings per share over our mar­ket hur­dle rate, which sits at about 6.1% now. And that gives us what we think is the best guide to val­u­a­tion for next year. And then look at the dif­fer­ence between the share price now and that val­u­a­tion and then buy the one that has the biggest gap. That’s been a fair­ly suc­cess­ful process for me over the years. And it’s a great way to get into the mar­ket and start to under­stand con­cepts like val­u­a­tion and the dif­fer­ences even between blue-chip com­pa­nies. So yeah, so if Greg can hold on for a month, I’m sure he’ll have his answer towards the end of Feb­ru­ary.

Cameron Reil­ly [42:39]: And if you want to know more about Tony’s thoughts on that process of the most under­val­ued, I think Episode 301 or 303, we prob­a­bly go into that where we talk about Tony’s invest­ment let­ter con­cepts. So if you haven’t already, Greg, check those out 301, 303 and it’s in the Bible on page nine. But it’s only a cou­ple of bul­let points there, bet­ter lis­ten to the pod­cast where Tony goes into it in some depth. Thanks, Greg. Here’s one from Alice. “Hi Cameron, I have a cou­ple of ques­tions about net equi­ty. First one, the man­u­al entry for con­sis­tent­ly increas­ing equi­ty.” Talk­ing about in the spread­sheet. “To find this out. Do you use the Stock Doc­tor finan­cial state­ments, state­ment of cash flows, oper­at­ing cash flows line? For exam­ple, TRS.” I love TRS. “The lat­est June 20 amount is 167, 380,000 con­sis­tent­ly increas­ing equi­ty.”

Tony Kynas­ton [43:48]: No. That’s not quite what we do. So she’s in the right ball­park. We use the finan­cial state­ments, but we’re going to the tab that’s head­ed up Stock Doc­tor, [inaudi­ble 00:43:59] a state­ment of finan­cial posi­tion and then brack­ets bal­ance sheet. So it’s basi­cal­ly the bal­ance sheet page, and we take the last 300 last, sor­ry, 600 hours or three years and we see if the equi­ty, in oth­er words, assets minus lia­bil­i­ties is increas­ing over time con­sis­tent­ly.

Cameron Reil­ly [44:18]: And as a ref­er­ence you said the state­ment of finan­cial posi­tion, the equi­ty row. 

Tony Kynas­ton [44:22]: Yes, that’s right. 

Cameron Reil­ly [44:24]: Yeah. If you look at page 25 of the Bible, Alice, that’s what it says. Source Stock Doc­tor finan­cial state­ments, state­ment of finan­cial posi­tion equi­ty row. For our lis­ten­ers and any oth­er new lis­ten­ers, if you’re try­ing to fig­ure out where to get the data from, go to the Bible, AKA, the get­ting start­ed guide. We refer to it only semi-jok­ing­ly as the Bible. And you can find every­thing about where we get it and how we cal­cu­lat­ed it, et cetera, et cetera. Hope­ful­ly, it’s pret­ty clear. And if it’s not, let me know and I’ll make it more clear. But yes, Col­umn V con­sis­tent­ly increas­ing equi­ty, page 25 of the Bible. If you don’t know where to find the Bible, go to the Club Mem­ber Resources page on our web­site qavpodcast.com.au. Go to that page that gives you links to the Bible and the port­fo­lio and the videos and the check­list and every­thing. 

Tony Kynas­ton [45:22]: Just adding to what Alice has said. So for TRS, The Reject Shop, the equi­ty has­n’t been ris­ing over the last six halves. On Decem­ber 7th, so we’re going back from June 20, for six halves, Decem­ber 17 was 154.32 mil­lion and then, but July 18 was 150.986. Decem­ber 18 went up to 158.6, but then June went down to 125.3. So it fails our test of con­sis­tent­ly ris­ing equi­ty.

Cameron Reil­ly [45:55]: No. Not TRS.

Tony Kynas­ton [45:58]: That has it, I guess, that may be increas­ing equi­ty cor­re­sponds to Steve Mavs met­ric of gross prof­it ris­ing, gross prof­it growth per year. In that, if gross prof­it is ris­ing it’s prob­a­bly drop­ping more equi­ty onto the bal­ance sheet. Just a guess, but we might actu­al­ly be dou­bling up with that met­ric.

Cameron Reil­ly [46:21]: Okay. That’s inter­est­ing. And it depends on how much debt they’ve got, would­n’t it?

Tony Kynas­ton [46:27]: Oh yeah. Look at it. I’d say the cor­re­la­tion would­n’t be one to one, but there might be a cor­re­la­tion there. But again, I haven’t researched that.

Cameron Reil­ly [46:33]: Right. Okay. Let’s see. TRS is down to 670 today. Glad I sold them when I did. 

Tony Kynas­ton [46:45]: And I still own them. 

Cameron Reil­ly [46:47]: Do you?

Tony Kynas­ton [46:47]: Yeah. It’s been going side­ways; I think since I bought them too. Any­way.

Cameron Reil­ly [46:53]: Well, they’re up to like eight bucks at one stage. I think I sold it for about 780, only because I need­ed the cash to pay bills. But yeah, well I did very well out of TRS. I was very hap­py. Much to Eddie Dona­to’s cha­grin, I did very well out of it. Anoth­er one from Alice. I think you just answered part two of a ques­tion, right about, you know, it’s look­ing in the wrong place. She’s got to look in that oth­er place. 

Tony Kynas­ton [47:24]: Yeah. 

Cameron Reil­ly [47:24]: Her sec­ond ques­tion, “Is for the man­u­al score, is there a recent pos­i­tive upturn? I under­stand this being, it says the share price breached the buy line since the last report. Using TRS as an exam­ple, the last report was the 30th of June 20, but I’m unclear what the answer is.” I think we’ve got anoth­er ques­tion about that too recent upturn. So maybe we can kill two birds with one stone here. 

Tony Kynas­ton [47:52]: Yeah. So Alice is right. It has the three-point trend line been breached since the last results or at least the last results were announced which usu­al­ly occurs two months after the results staged. But any­way and it gets a bit long in the tooth in Feb­ru­ary that we’re still going back to June of last year or at least August of last year. And it will click over again in Feb­ru­ary com­ing up that the recent upturns won’t be recent any­more. We’ll have been in the last six months. So it has less and less many, I guess, as it goes for­ward. But yes, so when the TRS breach, it looks like it went through its three-point up turn­ing around May of 2020. So it prob­a­bly does­n’t have a recent upturn because we’ve got June’s results which would have come out in August. So it’s been going side­ways since then. So Alice is right. We’re test­ing for a new three-point upturn since the last results were announced.

Cameron Reil­ly [48:54]: So the first peak with TRS is obvi­ous. The sec­ond peak, you’re tak­ing it sort of around, was it Feb­ru­ary 2020?

Tony Kynas­ton [49:03]: Yeah. Jan­u­ary 2020, prob­a­bly. Yeah. There are actu­al­ly three peaks here. I’m tak­ing March 2016, and then I’m tak­ing July 2016, then I’m tak­ing March 2018. And that three-point trend line then cross­es in that peak in Jan­u­ary 2020. And that the share price does­n’t retreat back to the sell line since then. 

Cameron Reil­ly [49:30]: Yeah.

Tony Kynas­ton [49:31]: That hap­pened back in Jan­u­ary 2020. In fact, it crossed again on that same line around April 2020. So yeah, it’s not a recent one.

Cameron Reil­ly [49:39]: Well while we’re speak­ing about 3‑point trend lines and recent upturns. Let me find the oth­er ques­tion. Dun­can said, “I’ve got a ques­tion I’ve been mean­ing to ask. What is the dif­fer­ence between the check­list ques­tions that you have list­ed Columns H and I, they sound very som­me­li­er, what, sim­i­lar? Clear­ly calls…

Tony Kynas­ton [50:00]: Some­one said som­me­li­er?

Cameron Reil­ly [50:03]: Col­umn H. I need a som­me­li­er right now. Col­umn H is a sen­ti­ment. Col­umn I is a recent pos­i­tive upturn. He says, “Col­umn I sim­ply ques­tion about there being a hock­ey stick moment, as well as a breach of the buy line. And if so, is it since the date of the last report, the date it was issued, or is it report­ed in the Bible a ref­er­ence to the last time I did the analy­sis.” No, it’s of the last finan­cial results and I’ve just changed that in the Bible to make them more clear, since the last finan­cial results. 

Tony Kynas­ton [50:38]: Yeah. 

Cameron Reil­ly [50:39]: But can you explain for us again, just the think­ing around this?

Tony Kynas­ton [50:46]: What’s the rea­son why it’s on the check­list, you mean? 

Cameron Reil­ly [50:49]: Yes. For Col­umn I.

Tony Kynas­ton [50:51]: Yeah. So it’s a bit like the…

Cameron Reil­ly [50:52]: Recent pos­i­tive upturn.

Tony Kynas­ton [50:53]: It’s a bit like the Index Mun­di thing. I’ve found that if some­thing’s in an upturn, you may have missed the start the upside by def­i­n­i­tion won’t be as much. But if it’s just recent­ly turned and that’s prob­a­bly the max­i­mum upside you can get from it, it’s basi­cal­ly pick­ing the start of the upturn from the trough. So, you know, these all go in cycles, and if some­thing is going to rise 30% and then turned down or what­ev­er the num­ber is, try­ing to get in as close to the start as pos­si­ble, it gives you that 30%, or as much as you can raise. Where­as, if we come along in six months’ time, and we’re halfway through that upturn, you’ll get 15%. So, yeah, get­ting the upturn as close to the bot­tom is the most prof­itable way of buy­ing. And so it gets an extra point on the spread­sheet.

Cameron Reil­ly [51:43]: And to take The Reject Shop, as an exam­ple, you just said that it’s been in an upturn since March of 2020. So that’s a lot longer than six months.

Tony Kynas­ton [52:00]: Yes, that’s right. So it’s been in an upturn for longer than six months. But again, that’s my point. I think I said just then, just let me have a look at The Reject Shop. I think I said it was in an upturn from Jan­u­ary 2020. So Jan­u­ary 2020, the price was 4.60. It’s now 6.70. That’s a bet­ter return than if you had­n’t bought in, as I did when it’s been going side­ways. So, you know, after the upturns already start­ed, you know, buy­ing at say, I don’t know, I can’t remem­ber when I bought in. Say June 2020 where the price was $7.04 you might actu­al­ly lose a bit of mon­ey since then. So yeah, the whole point of that recent upturn is to try and get in as close as we can to the bot­tom.

Cameron Reil­ly [52:45]: But it was $4.66 in Jan­u­ary 2020. Then it was back down to 2.69, 2.70 in March. 

Tony Kynas­ton [52:53]: Yep.

Cameron Reil­ly [52:53]: Isn’t that where the upturn start­ed after that?

Tony Kynas­ton [52:56]: Well, I think it was an upturn prob­a­bly back in you know, the real bot­tom would have been the low­est price, which is June 2019 at $2. But we’re look­ing for the sen­ti­ment to be con­firmed. And if you just look at the graph with­out know­ing what’s com­ing, so you kind of cov­er the last cou­ple of months or last 12 months and you look at how it turned up in Jan­u­ary 2020, it does look like it’s begin­ning to start its growth. But in this case, in TRS’s case, in par­tic­u­lar, you have plen­ty of time to get into that, as you say, went down for a while first and it starts to grow again. 

Cameron Reil­ly [53:33]: Right.

Tony Kynas­ton [53:33]: Yeah. 

Cameron Reil­ly [53:34]: Okay.

Tony Kynas­ton [53:34]: And that’s the only thing I should say that the caveat is that this is sta­tis­ti­cal in nature. Not every upturn will con­tin­ue. And so, you know, there’s been cas­es with their own dum­my port­fo­lio where we’ve said, okay, so recent upturn let’s buy it and then next month it’s turned down again and we’ve sold it. So it can be volatile, that sort of change of sen­ti­ment, but it can also be prof­itable. 

Cameron Reil­ly [53:58]: Right. So get­ting back to Alice’s ques­tion, the last report for TRS was in June, but it sort of it start­ed crack­ing up before that. 

Tony Kynas­ton [54:08]: Yeah.

 Cameron Reil­ly [54:09]: Yeah. So the answer would be a no in the check­list for that.

Tony Kynas­ton [54:12]: Cor­rect. That it would be a blank. Yep.

Cameron Reil­ly [54:14]: Mark says, “Hi Cam, could you please run through GGE, NHC, and ESS three PTLs from Tony’s jour­nal entry on Thurs­day.” He says, “The sell lines are unusu­al.”

Tony Kynas­ton [54:31]: Yeah. It could be. Let me have a look.

Cameron Reil­ly [54:33]: Let’s do them one at a time and I can post them on our web­site and every­one can have a gan­der. GGE Grand Gulf…

Tony Kynas­ton [54:43]: Ener­gy.

Cameron Reil­ly [54:46]: Not golf. 

Tony Kynas­ton [54:48]: Yeah.

Cameron Reil­ly [54:49]: No. You’ve got grand golf ener­gy. How many games of golf have you played in the last month, do you reck­on?

Tony Kynas­ton [54:57]: I’d say…

Cameron Reil­ly [54:57]: One a day?

Tony Kynas­ton [54:58]: No, not that much. I’d say maybe 15, one every sec­ond day. 

Cameron Reil­ly [55:02]: Right.

Tony Kynas­ton [55:03]: On aver­age. Yeah. 

Cameron Reil­ly [55:05]: How’s your golf game? How’s your back hold­ing up? 

Tony Kynas­ton [55:09]: Back­’s good. I’ve got lots of exer­cis­es the physio has giv­en me, so that’s good. And my golf game is improv­ing, which is good. 

Cameron Reil­ly [55:14]: Wow. Good. Good to see. Did you know, I meant to men­tion this to you. I saw this in the finan­cial review this morn­ing, too. So I think a 16-year-old kid won the US Fort­nite Cham­pi­onships. Do you know what Fort­nite is?

Tony Kynas­ton [55:30]: Yes, I do. 

Cameron Reil­ly [55:32]: Com­put­er game for those who don’t. He took home $3 mil­lion which was more than Tiger Woods took home for win­ning the US Mas­ters.

Tony Kynas­ton [55:40]: Wow.

Cameron Reil­ly [55:42]: So that’s what you need to get into now, Tony, is Fort­nite.

Tony Kynas­ton [55:48]: I’m not sure how much time I’ve got in my golf­ing career left because it’s get­ting hard­er and hard­er. 

Cameron Reil­ly [55:55]: Real­ly. 

Tony Kynas­ton [55:55]: So maybe play the games. Well, yeah, I mean.

Cameron Reil­ly [55:57]: I thought golf was one of those games you could play until you’re real­ly old.

Tony Kynas­ton [56:01]: Well, you can. But yeah, even­tu­al­ly you’ll ride in the car and rather than walk it and you deal with all the back issues, et cetera, which I deal with now, but it gets hard­er and hard­er as you go through it too. Yeah. Hope­ful­ly, I’ll be play­ing it for anoth­er cou­ple of decades, but we’ll see. 

Cameron Reil­ly [56:17]: Oh, okay. And then you’ll get into Fort­nite.

Tony Kynas­ton [56:19]: Yes. Yeah.

Cameron Reil­ly [56:22]: I say GGE Grand Gulf Ener­gy cur­rent­ly trad­ing at $0.011, 1.10 cents. Wow!

Tony Kynas­ton [56:31]: Yeah. So small com­pa­ny. A small com­pa­ny of $5,000 on aver­age dai­ly trad­ed. But you can see just from look­ing at the graph, it’s an upturn now.

Cameron Reil­ly [56:39]: So doing the sell line, which seems to be what Mark is inter­est­ed in, say the low­est price on the five-year chart, March 2020.

Tony Kynas­ton [56:51]: Cor­rect. 

Cameron Reil­ly [56:52]: And the sec­ond one would be April 2020 or June 2020. I think there were all the same.

Tony Kynas­ton [56:58] All the same. Yeah.

Cameron Reil­ly [56:58] Say 0.003.

Tony Kynas­ton [57:01]: Cor­rect. A third of a cent each time. Yeah. 

Cameron Reil­ly [57:04]: Yeah.

Tony Kynas­ton [57:07]: Imag­ine what next week’s ques­tion will be. What’s the sell line? Is it 3.3 of a cent or is it going to be high­er? If you do it by the num­bers, it’s 0.3 of a cent. But you can fudge it if you like, if you’re wor­ried about the share price going right up to, I don’t know, 20 cents and then falling all the way back to a third of a cent before you sell it. Then you can cer­tain­ly take the last of those points. The 0.3 that occurred in June 2020 and use that and then go to the right for the next low­est point which looks like it would be Octo­ber 2020 and draw a line from there.

Cameron Reil­ly [57:46]: You can do that because we don’t judge the fudge.

Tony Kynas­ton [57:49]: We don’t judge the fudge. You saw that link I sent you to the Uranus Fudge Shop.

Cameron Reil­ly [57:55]: I did.

Tony Kynas­ton [57:58]: That was so hilar­i­ous. So areas, where does fudge come from, Uranus?

Cameron Reil­ly [58:04]: Tip of the hat to who­ev­er came up with that. That’s some pret­ty bold mar­ket­ing right there. All right. New Hope Cor­po­ra­tion. NHC is the next one Mark wants us to talk about. I see a low point in Octo­ber 2020, and then the next low point would seem to be Novem­ber 2020 which means the sell line kind of goes straight up.

Tony Kynas­ton [58:30]: Yeah. That was one of the rea­sons why I think I made the note that I’m going to watch it rather than put it on the buy list just yet. But it is a coal com­pa­ny, that was what trig­gered my look at these com­pa­nies was the turn and the three-point trend line for coal. But yeah, it’s cur­rent­ly one of those recent upturns where the sell line is track­ing the upturn as well. And it’s both a buy­ing sell at the same time.

Cameron Reil­ly [58:56]: Okay. A Schro­ding­er.

Tony Kynas­ton [58:58]: Yeah. But it’s def­i­nite­ly a sell at the moment. It’s yeah. Its low point is Octo­ber 2020 and then the next low­est point would be Novem­ber 2020. So it’s well below a line. If you draw a line between those two points and extend it out.

Cameron Reil­ly [59:14]: And the last one Mark has asked us to look at is ESS, Essen­tial Met­als. And again, I’m say­ing the low point is prob­a­bly Decem­ber 2020 when it was at 0.0823 and it’s gone up since then, it’s 0.175 today. We’ve only got one low point.

Tony Kynas­ton [59:41]: Well, we have two. We’ve got today as well. So the sell lines going up along that cur­rent upturn line. So again, it’s a buy and sells at the same time. 

Cameron Reil­ly [59:52]: Real­ly. 

Tony Kynas­ton [59:55]: We’ve had these before. We’ve only got two points on the line. So, you know, I’d wait until we see what the Jan­u­ary point does and whether we have a trend there or not with three points in it.

Cameron Reil­ly [01:00:06]: With the buy line, what would you take as the most recent point? The sec­ond point?

Tony Kynas­ton [01:00:12]: The sec­ond point. So I’d start with the high­est point and then just drop my ruler along. And there are two points on that line. What’s that, August 2019, and then Sep­tem­ber 2020 are also on that sort of line, which has just bro­ken through in the last month. 

Cameron Reil­ly [01:00:38]: What! 

Tony Kynas­ton [01:00:39]: What? 

Cameron Reil­ly [01:00:39]: What!

Tony Kynas­ton [01:00:41]: I’ll start again. The high­est point is May 2016. 

Cameron Reil­ly [01:00:45]: Yeah.

Tony Kynas­ton [01:00:46]: And if I start my line going down from there.

Cameron Reil­ly [01:00:49]: Yeah. 

Tony Kynas­ton [01:00:50]: I’m going through Jan­u­ary 18 and August 19. And they’re almost touch­ing. Cer­tain­ly, August 19 is touch­ing and so is Sep­tem­ber 20. But there’s actu­al­ly a whole like a ridge of peaks along that line.

Cameron Reil­ly [01:01:13]: Oh, sor­ry. Yeah, it has gone above that. Yeah. I can’t see it’s gone up because I’ve got a red line over now where I drew the sell line. That’s why I was con­fused. 

Tony Kynas­ton [01:01:20]: That’s a buy and sell at the same time. 

Cameron Reil­ly [01:01:24]: Real­ly. Real­ly?

Tony Kynas­ton [01:01:29]: Yeah.

Cameron Reil­ly [01:01:30]: Come on, man. Can’t we fudge this one? Like it’s gone right above the buy line.

Tony Kynas­ton [01:01:34]: Yeah. Well, you can fudge that one. Again, it just depends on what your risk at the time is.

Cameron Reil­ly [01:01:40]: Yeah. So by the book, it’s a Schro­ding­er. But it kind of looks like a buy, it’s shot up mas­sive­ly in the last cou­ple of weeks. 

Tony Kynas­ton [01:01:51]: Yeah. I agree. But an alter­na­tive argu­ment is that all the way down, it’s a falling knife and it does have these upswings and they turn south again. So this could be anoth­er one.

Cameron Reil­ly [01:02:01]: It does. Yeah. Yeah. I won­der why that is. It’s done that over and over again. You’re right.

Tony Kynas­ton [01:02:06]: Yeah. And often­times when they’re being done peri­od­i­cal­ly like that it coin­cides with announce­ments, usu­al­ly the results. So the peaks, let’s have a look. Well, no, May does­n’t real­ly fit the pro­file. But there is a peak in Jan­u­ary. So that’s going to be just before the Decem­ber results. There’s a peak in August, which is the half-year results. And then we’re see­ing a peak now com­ing into their four-year results again. So I sus­pect that peo­ple get excit­ed that this is going to be good news in the results and buy the stock. And then it does­n’t even­tu­ate and they sell it.

Cameron Reil­ly [01:02:42]: Or they for­get. And then a year lat­er they do it again. It’s lithi­um and a cesium min­er. 

Tony Kynas­ton [01:02:50]: Right. But yeah, that’s just my spec­u­la­tion. I don’t know why it had got that pat­tern.

Cameron Reil­ly [01:02:57]: Cesium was dis­cov­ered by Julius Cae­sar, hence the name. A lit­tle known fact.

Tony Kynas­ton [01:03:04]: Prob­a­bly named after him, I would think.

Cameron Reil­ly [01:03:06]: He was a chemist and when he was occu­py­ing gold, he has to dig around. You know dig up new min­er­als and melt them down. See what he could do with it. Fas­ci­nat­ing guy. The guy is a sci­en­tist, politi­cian.

Tony Kynas­ton [01:03:21]: What would JC use cesium for.

Cameron Reil­ly [01:03:26]: You know, he did­n’t have a use for it. He was just curi­ous. Just curi­ous. You know the prop­er­ties of radi­a­tion, very short shelf life cesium, I think, and he want­ed to know what he could do with it. I don’t know. I’m just mak­ing shit up.

Tony Kynas­ton [01:03:42]: You sound like Cliff Clavin.

Cameron Reil­ly [01:03:44]: Clif­ford Clavin. Lit­tle known fact. Let’s move on. Thank you, Mark. Sam, “Bon­jour Cameron, I was read­ing a book on invest­ment and in the win­ter sell sec­tion, they talk about the few rea­sons why to sell, giv­en that the book gives the prin­ci­ple on how to buy only the win­ners. It is unlike­ly you will ever want to sell nat­u­ral­ly. And one of the rea­sons to sell was the change of per­for­mance, such as increased debt caus­ing low­er ROCE and oth­ers.” That’s the return on cap­i­tal employed. I just had to look that up. “Now, I know that Tony’s phi­los­o­phy is to sell only when the shares break­ing the sell line. But let’s imag­ine that for exam­ple, a com­pa­ny we pur­chased in Feb­ru­ary 2020 presents a new set of finan­cial state­ments in Feb­ru­ary 2021, show­ing a very poor QAV score due to, for exam­ple, a drop in return on equi­ty, drop in prof­its, increase in debt which means it is no longer rat­ed a star stock by Stock Doc­tor, et cetera. But the share whilst going down a lit­tle is nowhere near break­ing the sell line. In fact, it would take a drop of 25% for it to break the sell line with­in the next six months. Would Tony not be con­cerned by the drop in per­for­mance or try to inves­ti­gate more or would he stick to the mar­ket and the trend line trig­ger? I would like to end by thank­ing you for the pod­cast and all the resources online, as well as the com­mu­ni­ty cre­at­ed around QAV. I enjoy it very much, Sam.” Well, Sam, as I said to you in my email, yeah, Tony sells on bad news, man. That’s one of the rea­sons to sell.

Tony Kynas­ton [01:05:21]: Yeah. But I don’t usu­al­ly sell on bad news like that like he’s talk­ing about increas­ing in debts or low ROCE or the QAV score goes down. I will fol­low the sen­ti­ment. The bad news I tend to sell on oth­er things like the CFO resign­ing sud­den­ly. 

Cameron Reil­ly [01:05:35]: Yeah. 

Tony Kynas­ton [01:05:36]: Yeah. And even then I might just wait and see what hap­pens with the sen­ti­ment, but that could be a trig­ger. Yeah. I mean, com­pa­nies, the share price can still go up, even if they increase their debt for exam­ple which were, you know, or do some­thing else which reduces their return on cap­i­tal employed. Even real­ly good com­pa­nies that hap­pen to all the time. Ama­zons ROCE, I’m sure goes up and down gen­er­al­ly up. But you know, there’ll be times when it goes back. So yeah, I wait for the trend to breach. But look, you know, Sam, as I say, all the time, the exam­ple you talked about there, where­as the shares went up. It’s 25% above its sell line. If it’s start­ing to trend down and you had some good rea­sons, it’d be a fudge, but yeah, you can sell it if you’re wor­ried about it.

Well, I tend to find those Sam, there are a cou­ple of things. First of all, if it’s a big com­pa­ny with you know large dai­ly trades and lots of peo­ple look­ing at it, peo­ple are usu­al­ly bas­ing their invest­ment deci­sions on the for­ward num­bers or what they think the for­ward num­bers might be, rather than the cur­rent num­bers. And so if it’s pos­si­ble, they could have had a bad result, but the mar­ket’s tak­en the view that the [inaudi­ble 01:06:51] will turn it around again next half. And there­fore the share price may not drop, even though there’s been some bad news. So there are lots of sec­ondary effects on this and lots of com­plex­i­ties. And that’s one of the rea­sons why that the trend line and sen­ti­ment can be help­ful for us.

Cameron Reil­ly [01:07:07]: Right. So the bad news for you has to be real­ly bad.

Tony Kynas­ton [01:07:14]: Yeah. It’s going be a red flag thing, like a CFO resign­ing, like a qual­i­fied audit in the last results, that kind of thing. 

Cameron Reil­ly [01:07:24]: Yeah. 

Tony Kynas­ton [01:07:26]: Which is more about the qual­i­ty of the com­pa­ny rather than its num­bers. The fact that the QAV score drops, you know, as I said, it might come back. And what I find, espe­cial­ly with well-run com­pa­nies are when they have a bad half, they worked real­ly hard to fix those prob­lems. Man­age­men­t’s incen­tivized to do so. So they can turn it around quite quick­ly.

Cameron Reil­ly [01:07:50]: And of course, once we’ve bought a stock, the QAV score after that point is some­what irrel­e­vant. Right?

Tony Kynas­ton [01:07:58]: Cor­rect. Yeah. We’re hop­ing that when we buy some­thing, the QAV score drops off our buy list because that means oth­er peo­ple are bid­ding up the stock. The stock price is increas­ing, which by the very nature of our process has to reduce the QAV score. But all that means is that we got in ear­ly. It does­n’t mean the com­pa­ny’s nec­es­sar­i­ly not invest­ment growth. It just means that we did what we try to do, which is to buy as ear­ly as pos­si­ble into a com­pa­ny that’s going up.

Cameron Reil­ly [01:08:24]: And if we’ve done well out of it, and it’s gone up, then you will tend to more often than not, you will just hold regard­less of what their num­bers are until it breach­es the sell line.

Tony Kynas­ton [01:08:35]: Yeah. Or until some­thing ter­ri­ble hap­pens that we just spoke about.

Cameron Reil­ly [01:08:38]: Real­ly ter­ri­ble. 

Tony Kynas­ton [01:08:40]: Yes.

Cameron Reil­ly [01:08:42]: Okay. Thank you, Sam. Damien Park­er, “Tony and Cameron, I heard you referred to NTD in the last pod­cast. I am a fan as you well know. And Fri­day’s announce­ment after the bell was a crack­er. This is a very con­ser­v­a­tive board hav­ing been nailed for the SP col­lapsed post-delist­ing. the upward move­ment in the AUD can­not be over­stat­ed for a com­pa­ny that imports every­thing. I believe…” This is Nation­al Tires, right? NTD, I seem to recall.

Tony Kynas­ton [01:09:13]: Yes. Cor­rect.

Cameron Reil­ly [01:09:15]: I believe they might like­ly claw back as much as 8% on their gross mar­gin, which makes a huge dif­fer­ence to the bot­tom line. Huge. You did reflect in a pre­vi­ous pod­cast as to why they fell so much after list­ing in 2017. The answer is they failed the fact in the fall in the AUD from around 80 cents to 65 cents. But hey, we are now back at 77 cents and it changes every­thing like rain in the Out­back. I do believe we will see an impact in FY 21 of around 20 mil­lion, which is around 20 cents EPS and with a 50% DVFF.” What’s DVFF? Ful­ly franked. 

Tony Kynas­ton [01:09:56]: Ful­ly franked, yes it is. 

Cameron Reil­ly [01:09:56]: That’s good, that’s a great [inaudi­ble 01:09:58]. Fan­tas­tic Four. I’m like, ’ ” The Fan­tas­tic Four. Real­ly, that’s awe­some.” That’s what FF means to me. I’m a sev­en­ties super­hero com­ic nerd. That’s a gross stock return of 14.3% worth­while for the income stream alone. But there is still plen­ty of oxy­gen left in the SP, which I see at $1.60 to $1.80. Con­verse­ly, the KOV first-half results weren’t that excit­ing when you strip out the net effect of job keep­er. Even includ­ing job keep­er EPS for FY 21 will be around 39 cents on a $5 share. It is over­val­ued in my own opin­ion. And I sold a par­cel this morn­ing and added it to NTD. Why would­n’t you? When a $1.10 gives you a 20 cent return ver­sus $5 for 39 cents. But just my opin­ion, and don’t fol­low me as I may well be lost on the road to nowhere. Damien Park­er. ” Oh Damien, that says a lot of good stuff in there. I did­n’t under­stand most of it but I’ll throw it to Tony now for intel­li­gent com­men­tary.

Tony Kynas­ton [01:11:02]: I think Damien is much more intel­li­gent on busi­ness analy­sis than I am. So he takes it to the next lev­el of real­ly drilling down look­ing at the…He’s a bit more like the chap we spoke to from Collin Street Fund, who does the deep dive and under­stands the com­pa­ny in detail. Where­as I, you know, look at the check­list num­bers rather than going through lots of busi­ness analy­sis in terms of how the Aus­tralian dol­lar is affect­ing it, what’s hap­pen­ing with man­age­ment, et cetera. But you know, he’s made some good points. I sus­pect just some com­ments on there. I sus­pect that if the Aus­tralian dol­lar drop­ping was a prob­lem for them, that they prob­a­bly have hedg­ing in place now to safe­guard against that hap­pen­ing again. Again, that’s the way, you know, this is kind of the self-cor­rect­ing nature of our busi­ness, when they make a mis­take, they insure against it ever hap­pen­ing again.

So the share price is going up. Cer­tain­ly, the announce­ment on Fri­day, which Damien’s referred to as basi­cal­ly a prof­it upgrade. So it’s say­ing that trad­ing in the first half of 2021 has exceed­ed expec­ta­tions with all busi­ness units per­form­ing bet­ter than pre­dict­ed. Blah, blah, blah. It goes into some more detail after that. So we’re in con­fes­sion sea­son. So that’s good to know. And you can see that reflect­ed in the share price in the last cou­ple of days. It’s gone up quite a bit sort of, I think it went up from about 95 cents to a $1.7ish. What’s it today? $1.65, today. Yeah, so that’s been well received in the mar­ket. 

As for Kor­vest, I had a quick look in Stock Doc­tor, the num­bers haven’t hit Stock Doc­tor yet. I’ll just call up that com­pa­ny graph and have a look. And this is worth know­ing is that the com­pa­nies are mak­ing their announce­ments now because of con­fes­sion sea­son. So we’ll see what­ev­er they’re announc­ing reflect­ed more on the sen­ti­ment before we get the fig­ures. At least the fig­ures as they are released by the com­pa­nies which we’ll see in the paper or because of the alerts we set, but cer­tain­ly the fig­ures in Stock Doc­tor. So it does pay to watch the sen­ti­ment graphs at the moment. I’m look­ing at Kor­vest though when it’s still in an uptrend. So, I’m not going to wor­ry about tak­ing any action with Kor­vest and we’ll see what the results I want to come into Stock Doc­tor in the next sort of three or four weeks.

Cameron Reil­ly [01:13:33]: Now for new lis­ten­ers, con­fes­sion sea­son some­thing sounds like some­thing that the Vat­i­can does when they’re in the mid­dle of anoth­er child rape inves­ti­ga­tion. “Mea cul­pa. Yeah. Yeah, we did do that. Sor­ry, we did cov­er that up for 50 years. Whoops. Our bad. Whoop­sies.” But that’s not what you’re talk­ing about here. Would you explain con­fes­sion sea­son?

Tony Kynas­ton [01:14:00]: Def­i­nite­ly, not talk­ing about the Catholic church in that way. The con­fes­sion sea­son is there’s a thing called a con­tin­u­ous dis­clo­sure, which is the pol­i­cy of the ASX and binds com­pa­nies that once they have infor­ma­tion that may affect the share price, that they must declare it to the mar­ket. And so what’s going on right now is they’re rul­ing off their books for Decem­ber 31 and they’re work­ing out their P&L, et cetera. And again, by the ASX rules, they have to announce their fig­ures to the mar­ket by two months after they rolled them off. But dur­ing that peri­od, obvi­ous­ly, they brought a fair idea of what the results are going to be. So it’s called con­fes­sion sea­son because they have to dis­close that they now have a par­tic­u­lar view of what their prof­it has done in the last six months or their sales have done, whether they’ve gone up or down and they have to tell the mar­ket. And so if the sales have gone down or the prof­its have gone down, it’s a con­fes­sion, sort of sim­i­lar to reduc­ing share­hold­er returns. But in some cas­es, it’s also they’re very proud to tell the mar­ket, like in Nation­al Tires case that they expect to have results exceed expec­ta­tions.

Cameron Reil­ly [01:15:14]: Unlike the Catholic church, which will avoid telling you what they’ve real­ly done until they real­ly get backed into a cor­ner. And they’re, “All right. We did it. Yes. For­give us. That’s what Jesus would do.” Would he though? Real­ly? I don’t know about that.  Any­way, mov­ing right along. Before I get myself into more trou­ble. 

Tony Kynas­ton [01:15:36]: Yeah. 

Cameron Reil­ly [01:15:39]: Back to Dun­can’s ques­tions. “Hi Cameron, I’m look­ing to restruc­ture my exist­ing pre-QAV port­fo­lio in light of all I have learned from the QAV pod­cast in recent weeks. I’m begin­ning to feel like I have the nec­es­sary knowl­edge to do this with a high­er degree of con­fi­dence than I did pre­vi­ous­ly. I am think­ing that it would be wise giv­en the time of year to await the new report­ing sea­son. Would TK con­sid­ered this to be a smart thing to do? I’m try­ing to work out the trade-off between being out of the mar­ket in the inter­im ver­sus the advan­tage of hav­ing new infor­ma­tion after the report­ing sea­son.” I think you said last week that yes, you would hold off.

Tony Kynas­ton [01:16:16]: I would hold off, but I’m a lit­tle bit con­cerned by the com­ment there about being out of the mar­ket. So I don’t know how Dun­can is tran­si­tion­ing from what he cur­rent­ly does to QAV but I’d try and min­i­mize that peri­od of being out of the mar­ket as much as pos­si­ble, even if he stays in his cur­rent posi­tions for anoth­er month. If the mar­ket goes up, he’ll get that. Con­verse­ly, if the mar­ket goes down, he’ll cop it as well. But yeah, I’d rather stay in the mar­ket and work out your deci­sions when the new fig­ures come out. And then sell one and buy one and just trans­fer that way.

Cameron Reil­ly [01:16:48]: One of your basic rules is to ABT, always, ABI, always be invest­ed.

Tony Kynas­ton [01:16:56]: Cor­rect. Yeah. And times like, not like in the COVID cough when the mar­ket’s going down ter­ri­bly, we sell and go to cash and wait for the upturn. But yeah, gen­er­al­ly it’s always be invest­ed. 

Cameron Reil­ly [01:17:05]: A relat­ed ques­tion is when it is best to start down­load­ing and ana­lyz­ing in the report­ing sea­son?

Tony Kynas­ton [01:17:14]: Yeah. So as quick­ly as pos­si­ble because you know, the infor­ma­tion trav­els at the speed of light, and as soon as the fig­ures are announced and avail­able to ana­lyze gen­er­al­ly with­in even a cou­ple of hours, you’ll see move­ments in the stock price. So as soon as pos­si­ble. One of the dif­fi­cul­ties I have with Stock Doc­tor is it can take a cou­ple of days for the fig­ures to come through and you can see that the share price may have moved up already and you’re miss­ing out. So that’s frus­trat­ing. But again, I would­n’t jump in before I had the fig­ures. Yeah, so I’d do it as quick­ly as pos­si­ble. And in fact, I had looked just before we came on the show, in the tool sec­tion of Stock Doc­tor, there’s a thing called the Recent Updates. If you select that, you’ll get a page where you can select what to fil­ter on. And if you select all com­pa­nies and then look at the type of announce­ment, the update types, they call it and only click on com­pa­ny finan­cials. In oth­er words, click off, the oth­er ones are there, and then refresh the screen, you’ll get the lat­est com­pa­nies that have announced their results. 

And at the moment they’re all list­ed invest­ment com­pa­nies who don’t have much work to do to work out their P&L. So things like Jer­ry War­rah, Mil­ton Cor­po­ra­tion, BKI Invest­ments, Aus­tralian Foun­da­tion Invest­ments, they’ve all report­ed in the last week or so. So cer­tain­ly Dun­can can down­load those and get used to what it’s like to get new results to look at. Typ­i­cal­ly list­ed invest­ment com­pa­nies like those, those big ones that are pop­u­lar, prob­a­bly won’t score on the QAV sys­tem, but you can still do it. As for, he goes on to say that James Hardy has report­ed recent­ly their num­bers are Sep­tem­ber 2020. So the num­bers are a bit old at least in terms of when they were announced. So some­times in Stock Doc­tor, when you’re using these recent updates and announce­ments pages, they’re flag­ging that the com­pa­ny finan­cials have been updat­ed, but they may have just been updat­ed slight­ly from their most recent results. And that could be either cor­rect­ing an error in them, or it could be just some­thing like that the ana­lyst con­sen­sus fore­cast has changed for the earn­ings per share, for exam­ple. 

Cameron Reil­ly [01:19:39]: Okay. 

Tony Kynas­ton [01:19:39]: So basi­cal­ly no results yet. Wait till Feb­ru­ary.

Cameron Reil­ly [01:19:42]: Right. And as I recall from pre­vi­ous report­ing peri­ods, of the sort do them one at a time as they come through for a week or so. And then there’s just a flur­ry and there’s like hun­dreds and hun­dreds. And you do them in bulk.

Tony Kynas­ton [01:19:59]: Cor­rect. Yeah. So usu­al­ly for the first week to maybe 10 days, maybe even the first two weeks, there’s lit­tle activ­i­ty, you can use this Recent Updates Page to go through one by one and have a look at them. But usu­al­ly, by the sec­ond week, you enter the sec­ond week into the third and fourth week, there are lots com­ing through. So it’d be too hard to go through and just fil­ter for the new ones and click on them man­u­al­ly and do the analy­sis. That’s why I start doing down­loads in bulk, as you said.

Cameron Reil­ly [01:20:28]: But if your port­fo­lio is full, why are you both­er­ing to do all of this?

Tony Kynas­ton [01:20:37]: Good ques­tion. The changes in my port­fo­lio that hap­pened the most around report­ing sea­sons. So if for exam­ple, some­one comes out with bad num­bers and we breach a three points sell the line, I’d like to have a buy list ready to go and I know what the next com­pa­nies I’m going to buy. So I’m updat­ing the buy list. It’s ready to go in case I need it quick­ly. 

Cameron Reil­ly [01:20:59]: Right.

Tony Kynas­ton [01:21:00]: And usu­al­ly I do. Because usu­al­ly, some­thing bad comes out in report­ing sea­son. 

Cameron Reil­ly [01:21:04]: Right. But a lot of the stocks you’re sit­ting on, you’ve been sit­ting on for a long time. They must be like a bil­lion tril­lion miles away from their sell price.

Tony Kynas­ton [01:21:14]: Yeah, there are. Yes. I don’t know how many. Prob­a­bly have maybe prob­a­bly half of the port­fo­lio I’ve had for maybe two or three years now, at least. So, yeah. I’m hop­ing that we get the full port­fo­lio invest­ed for the rest of their lives and not have to touch it. That’d be great. But we will. There’ll be sen­ti­ment changes after the new num­bers come out. There’ll be one or two, which I need to sell, and now I need to have a replace­ment ready to go. 

Cameron Reil­ly [01:21:43]: Right. Because you don’t want to lose even a cou­ple of days.

Tony Kynas­ton [01:21:47]: Yeah. I don’t want to hold off on sell­ing because it’ll go down even fur­ther. All the risks as it goes down, even fur­ther wait­ing to work out what the next buy is. I’d rather sell and use the results of that sale to go straight back into the mar­ket and buy some­thing else.

Cameron Reil­ly [01:22:02]: All right. Dun­can’s next ques­tion. “I’ve been lis­ten­ing upon the appli­ca­tion of the sell line, but I can­not seem to fig­ure out how to cal­cu­late how to set my sell alert. I’m hap­py enough know­ing how to draw the sell line, but do I use the sell price based on where the sell line hits the right-hand side of the chart on the day of my pur­chase or the day I’m look­ing at.” I guess hear what he means. “Or do I con­tin­ue to assess the sell line into the future and extrap­o­late it on an ongo­ing basis? If the lat­ter, how often does TK revis­it this in the peri­od after an ini­tial for­ay into the stock where the sell line might still be with­in spit­ting dis­tance of the mar­ket price?”

Tony Kynas­ton [01:22:42]: Yeah, that’s a good ques­tion. So you do have to review both your sell lines and buy lines over time because they’ll change. It depends how close I am to the sell line Dun­can if I’ve recent­ly bought some­thing, so it’s just going into its three-point upturn, it might be quite close to the sell line, so I might check it maybe every month. But if we’re into you know, a big uptrend, like Fortes­cue Met­als and I won’t need to check the sell line, prob­a­bly not at all until we get some new fig­ures to have a look at maybe. Then, you know, do it maybe once every six months. So yeah, it’s hors­es for cours­es, if it’s close to the sell line and I check it maybe month­ly. If it’s a long way from the sell line, maybe six month­ly.

Cameron Reil­ly [01:23:28]: How do you imag­ine FMG ever breach­ing the sell line. 

Tony Kynas­ton [01:23:36]: I had not.

Cameron Reil­ly [01:23:38]: Yeah. You know, [crosstalk 01:23:40].

Tony Kynas­ton [01:23:40]: You nev­er know. Iron ore prices are on a record high, so who knows. 

Cameron Reil­ly [01:23:43]: Yeah. But of course, as we move along in time that low price, you know, the pre­vi­ous low price falls off the edge of the left-hand side of the chart and we get anoth­er one cen­tral et cetera. 

Tony Kynas­ton [01:23:54]: That’s right. Yeah. And not just that the lines…

Cameron Reil­ly [01:23:56]: And it goes up.

Tony Kynas­ton [01:23:57]: Unless the line is com­plete­ly flat, it will change from month to month. Just by the nature of the fact that you’re extrap­o­lat­ing one more month onto increas­ing or decreas­ing line.

Cameron Reil­ly [01:24:09]: Yeah. I like the low. The low for FMG at the moment is actu­al­ly Jan­u­ary 2016. It’s about to fall off at the end of this month. And because the share price has been going up quite well since then, the next low is prob­a­bly, well, I guess the next low is the month after that. But yeah, it’s going to move along quite well. But you know, it’s going to be a while before it goes up too much though. Well, then the next low quite quick­ly is August 2018.

Tony Kynas­ton [01:24:41]: Yeah. So we’re prob­a­bly wait­ing a cou­ple of years before it starts to track the recent upturn, the sell line starts to track the recent upturn. Yeah. 

Cameron Reil­ly [01:24:48]: It’ll be a cou­ple of years before it goes where a sell­ing price goes, you know above $5 is cur­rent­ly trad­ing at 23.68. So you would­n’t have to plum­met.

Tony Kynas­ton [01:24:57]: Yeah. You’d hope so.

Cameron Reil­ly [01:24:59]: Have to plum­met a hell of a long way.

Tony Kynas­ton [01:25:01]: Yeah. It would.

Cameron Reil­ly [01:25:02]: But to get down to that.

Tony Kynas­ton [01:25:04]: We’re more like­ly in Fortes­cue Met­als group to because of that large increase it might, I don’t know, it might be our sell deci­sions is caused by an announce­ment or caused by some kind of neg­a­tive change to the com­pa­ny. Big neg­a­tive change to the com­pa­ny. 

Cameron Reil­ly [01:25:25]: Yeah. They have to be big.

Tony Kynas­ton [01:25:26]: Yeah, it would be. Yeah.

Cameron Reil­ly [01:25:29]: Thank you, Dun­can and we got a fin­ish sharp, long episode. With Mark D, “Can you point me in the direc­tion of the episode where Tony talks about adding new stocks to an exist­ing port­fo­lio with addi­tion­al funds where he ends up with more than 20 stocks. He men­tioned 30 to 40 stocks and how he allo­cates the new funds across the new buys. I can’t remem­ber how those addi­tion­al funds were appor­tioned across the new buys when the aim is to have 20 stocks, then the 5% rule applies. But not sure what to do in the case of a full port­fo­lio and more funds avail­able.” And I could not point him in the direc­tion of that episode. It’s out there some­where, but I could­n’t find it. So I thought it’s easy just to ask you again, to go over that for us.

Tony Kynas­ton [01:26:12]: I think it was only two episodes ago that we spoke about this because it kind of was a ques­tion at the Mel­bourne din­ner. 

Cameron Reil­ly [01:26:18]: Right.

Tony Kynas­ton [01:26:19]: But yeah, so always buy­ing from the top of the buy list. So if I’ve got 20 stocks in the port­fo­lio, I come into some new funds, I’d start buy­ing from the top down. And that might mean I’m increas­ing posi­tions because, you know, for exam­ple, Fortes­cue Met­als a year ago was at the top of the buy list for quite a while. So you might go dou­ble posi­tion in Fortes­cue Met­als, but you might be adding more stocks. So chances are, you’ll have more than 20 stocks in the port­fo­lio which does­n’t wor­ry me that much. I don’t want to have a whole heap, a large num­ber of stocks in the port­fo­lio. Like I would­n’t want to have 60 or 70, but I don’t think the process that Mark’s ask­ing we’ll get to that sort of lev­el. And even­tu­al­ly, over time, you’ll ratio­nal­ize stocks down through sales and revise. But yeah, so if you start­ed with a hun­dred thou­sand dol­lars and you had that allo­cat­ed and you have anoth­er a hun­dred thou­sand dol­lars, your posi­tion size for each stock is going to be twice as big. And that prob­a­bly means that your new buy­ers are going to be big­ger than your old exist­ing stocks. But that’s just how it is. And even­tu­al­ly over time that will sort itself out through sales and rebuys.

Cameron Reil­ly [01:27:30]: Can you do that again for me? I did­n’t under­stand that. So you had a hun­dred thou­sand, you invest­ed it in 20 stocks even­ly pro­por­tioned. You get anoth­er 100,000. 

Tony Kynas­ton [01:27:40]: So you’re always buy­ing 5% if you have 20 stocks. So you’re 5% of a 100,000 to start off with is, what’s that 50,000? Is that right? Yeah, 50,000. But then when you have a $200,000…

Cameron Reil­ly [01:27:53]: What?

Tony Kynas­ton [01:27:53]: Port­fo­lio, it’s…

Cameron Reil­ly [01:27:54]: No 5,000.

Tony Kynas­ton [01:27:56]: So 5000 sor­ry. When you have a $200,000 port­fo­lio, it becomes 10,000. So your next pur­chase is going to be $10,000 over the next thing on the buy list.

Cameron Reil­ly [01:28:08]: Okay.

Tony Kynas­ton [01:28:08]: I think I have a port­fo­lio where you’ll have some things at $10,000. Some things have grown from when you bought them when they are at $5,000. So they might be at 7,000, $8,000. Some things will be less than what you bought and they might be at $4,000. And you know, obvi­ous­ly, as you start to sell stocks. Say you had a stock to sell, which was only $4,000 in the port­fo­lio. But you need to buy $10,000. Then you’ll prob­a­bly sit on some cash for a while. So you’ll have less few stocks in the port­fo­lio until you sell some­thing else, which will give you that $10,000 to rein­vest in the next thing on the buy list. So over time, it tends to get back down towards that 5% hold­ing for each stock.

Cameron Reil­ly [01:28:50]: Right. Okay. Thank you for going over that. Thank you, Mark. And that is a full lead, Tony.

Tony Kynas­ton [01:28:58]: Long show. Mark and I are head­ing off now to the bird­house to have some Negroni’s on a hot night in Wag­ga Wag­ga.

Cameron Reil­ly [01:29:08]: Wag­ga Wag­ga Wag­ga Wag­ga. Real­ly drink­ing. That’s such a shock for you and Mark. I’m shocked that there’s gam­bling going on in this estab­lish­ment. Give my best to Rudy and you will be back in Syd­ney next week.

Tony Kynas­ton [01:29:24]: Yes, def­i­nite­ly. Plan­ning to be back there on Fri­day.

Cameron Reil­ly [01:29:28]: Good stuff. Well, enjoy your time in Wag­ga Wag­ga Wag­ga Wag­ga and safe trav­els. And thank you, Tony. Thank you, every­body. We’ll be back next week. 

Tony Kynas­ton [01:29:38]: All right. Have a good week­end. 

Cameron Reil­ly [01:29:40]: Thanks, mate. You too. Bye.

Tony Kynas­ton [01:29:41]: Okay. Bye.