Transcript QAV 405

Episode Name: QAV 405 Club

Length of Audio: 1:16:23

Tony Kynaston  [00:06]: Ready, Freddy ready? Steady go!

Cameron Reilly [00:07]: Welcome back to QAV TK episode 405, recorded Monday the 8th of February, 2021. How’s your week been?

Tony Kynaston  [00:21]: Good! Yeah, lovely back in Sydney now, good. I just finished watching the Superbowl with an American friend of mine, good fun. A tradition we used to get into in Toronto.

Cameron Reilly [00:34]: Oh, okay. Well, I wouldn’t.

Tony Kynaston  [00:37]: It was Sunday night.

Cameron Reilly [00:39]: I could pretend that I give a shit, but I’m not good in this case, I’ll ask you any questions because it would be all meaningless to me.

Tony Kynaston  [00:47]: Fair enough.

Cameron Reilly [00:48]: I did see you, Jenny all dressed up at the races

Tony Kynaston  [00:53]: Yes. For BELLA PATINA‘s million dollar run.

Cameron Reilly [00:55]: And how did she do?

Tony Kynaston   [00:58]: She finished fifth, so $20,000 run. But no, I ran well, she did well up against some very good horses and that was her first start coming back and a different state, so yeah, she goes back to Melbourne now to keep going and I think she might win the race one of these days.

Cameron Reilly [01:18]: Well give me some advanced warning before she’s about to win one so I can put some money on.

Tony Kynaston  [01:21]: Sure.

Cameron Reilly [01:24]: What else?

Tony Kynaston  [01:24]: Which on you? Which one? What else paid to the golf last week? Which is good, yeah. That’s about it catching up on all the admin when I was away.

Cameron Reilly [01:34]: Your lovely daughter got accepted into her Master’s of Fine Art?

Tony Kynaston   [01:39]: She did, which is just terrific.

Cameron Reilly [01:41]: Yeah It’s great.

Tony Kynaston  [01:43]: Really pleased with that.

Cameron Reilly [01:44]: Yeah. She must be really happy.

Tony Kynaston   [01:48]: She is. So, she’s graduated her undergrad going into master’s, which is a great thing. It’s probably a good thing though, at this time in the economy where I can’t imagine as many jobs going for Arts graduates with the moment, so not bad to stay in university for another couple of years, although she’s got an intern job with a [inaudible 02:07] with a high-end dressmaker, which is nice.

Cameron Reilly [02:10]: Oh great!

Tony Kynaston  [02:11]: She gets to get some experience in that world. She’s picking up lots of Portrait commissions and well, what is portrait without Art commissions, which is great, so she’s doing really well.

Cameron Reilly [02:21]: Yeah, that’s great. I was just saying to Ray the other day, we’ve got to get it back on our Renaissance show to help us talk about Leonardo DaVinci or we’re doing at the moment. Sure. She knows way more about him than we do so we should get her on.

Tony Kynaston  [02:34]: Yeah. She loved that.

Cameron Reilly [02:36]: Great!

Tony Kynaston  [02:37]: And it’s your wife’s birthday today?

Cameron Reilly [02:40]: It is and I threw out of a plane yesterday as she did for me on my birthday last year and it was great. She loved it , she did.

Tony Kynaston  [02:54]: I couldn’t think of a worse birthday present.

Cameron Reilly [02:57]: She did a beach landing, jumped out, sort of on the sunshine coast and came in on the sand over the water. She said it was lovely and thrilling and yeah, she loved it and now Fox is just like, when can I go? When can I do it? When can I do it? He’s kind of a really cranky that we tell him he can’t do it until he’s 12.

Tony Kynaston  [03:21]: About 12 ? Well tie a big sheet up with a few, [cross-talking 03:23] on the corners.

Cameron Reilly [03:25]: Throw them off the roof. Yeah. You can’t give a financial advice, but you’re giving parenting advice.

Tony Kynaston  [03:35]: I am for the trampoline, that’s my parenting advice.

Cameron Reilly [03:38]: Which we should just point out that Tony is not qualified to give either financial advice or parenting advice when he comes, when he says things like that. Let’s talk about GME and AMC, finally enough.

Tony Kynaston    [03:56]: [inaudible 03:56]

Cameron Reilly [03:57]: It was Surprising, I think, to most people and I’m sure you’ll be surprised by this didn’t work out well for the revenues we’re investing in GME.

Tony Kynaston   [04:07]: Oh dear. Did we find out yet whether the guy, the deep f-ing value guy made money or not?

Cameron Reilly [04:13]: Look, I stopped paying attention last week, so I don’t know, no I don’t know what’s going on. I do know that the guy who started wall street bets the subreddit and I think left it, but they started it way a years ago. His life story has been picked up by Hollywood, they’re making a movie about it yeah. Maybe I’ll make a movie about QAV one day, Tony and who would you want to play you in the QAV movie? Who would play a good Tony Kynaston? Do you think? I think if he wasn’t yeah. Are we going to say the same person?

Tony Kynaston  [04:54]: I don’t know.

Cameron Reilly [04:54]: I was going with Phillip Seymour Hoffman, but he’s dead.

Tony Kynaston   [04:57]: Oh, that would be a great one. Yeah. I was going to say Peter Ustinov, but I think he’s dead too.

Cameron Reilly [05:03]: He’s very, he’s even better than Phillip Seymour Hoffman.

Tony Kynaston  [05:07]: I saw him once, he was fantastic.

Cameron Reilly [05:09]: You saw him?

Tony Kynaston   [05:10]: Yeah, he did a tour, when I was just moved to Melbourne and I saw him live and it was just the ultimate record tour. I mean, he probably told the same story every night, but it was fantastic. Just his life story.

Cameron Reilly [05:23]: I mentioned him on my Renaissance show the other week because we were talking about Leonardo da Vinci and an early painting of the Madonna called the Madonna and child with flowers is in the, Hermitage museum in Russia. It was lost for centuries or considered lost for centuries, he painted around 1478, loss for centuries. Then in 1909, the famous Russian architect, Leon Benois , exhibited in St. Petersburg said it was part of his father-in-law’s collection. Hey, you know, he just had a DaVinci, in a back room.

We never saw it. And Leon was a very famous architect, built, you know, ton of like massive palaces and stuff in St. Petersburg but Peter Ustinov was his grandson. So, there you go.

Tony Kynaston [06:18]: Oh really? Well, there you go. And he favored onions too, I think judging by his architecture.

Cameron Reilly [06:24]: Yes. I’m sure that’s what that’s all about. Yeah, so the GME, AMC short squeeze thing, it’s been fascinating. Yeah. Just to stay in the forums and read the people that are still holding on the ones that have jumped out, the people who still believe that Mark Cuban reel on Musk is going to come in and rescue them somehow, but you know, you’ve got to feel sorry for the millions of punters who jumped in midway through that crazy week and invested there. Well, I was going to say harder in cash, but I think some of it was a U S COVID stimulus check money into it, to see it just to .

Tony Kynaston   [07:12]: I just don’t feel sorry for them. I don’t feel sorry for them.

Cameron Reilly [07:17]: That’s why you’re the ice man.

Tony Kynaston   [07:20]: Oh, I’m compassionate to most people, but yeah, this was just mania, just craze, greed squared.

Cameron Reilly [07:28]: It tells us to be greedy when other people are fearful Tony.

Tony Kynaston   [07:30]: And who was fearful on this case?

Cameron Reilly [07:35]: Us? I don’t know.

Tony Kynaston   [07:39]: Alright. Yeah. We should jump into GME now should we, after all that?

Cameron Reilly [07:44]: Yeah. Well maybe that’s the time. You know, I quoted buffet. I was watching a Howard Marks video over the last week from his pre capitulation stage, so November a couple of months ago. And he was doing an interview with I think the Wharton Finance Professor and he quoted buffet the less the prudence with which others conduct their affairs is very highfalutin for a buffet quote, the less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own. So be fearful when others are greedy and greedy, when others are fearful, and when others are doing stupid shit , we should be really cautious.

Tony Kynaston  [08:36]: Yep. Exactly. Well, I just thought just as a side note, one of my nephews contacted me during the week asking how to get into the stock market.

Cameron Reilly [
08:45]: So they’re an intern?

Tony Kynaston   [08:47]: No, a different one, yeah. And I’m like, why aren’t you saving to buy a house? Oh yeah uncle Tony I’ll do that, but when I get into the share market. I’m like save for your house mate, just keep saving for your house. This is just like almost every week , that I just pick up another thing on the chalkboard all the reasons to be thinking we’re back in the.com bubble again.

Cameron Reilly [09:08]: Yeah. Signs of a bubble?

Tony Kynaston  [09:12]: Yeah. Signs of mania, signs of mania.

Cameron Reilly [09:17]: Well, speaking of mania, something that happened during the week, the UK government announced that they’re going to start regulating buy now pay later stocks in the UK.

Tony Kynaston  [09:28]: It’s about time.

Cameron Reilly [09:32]: But nothing seems to have happened here as a result. I mean, I think we were laughing about this last week going, Oh, wait, we’ll see what happens to After pay stock now. No, nothing went up.

Tony Kynaston   [09:42]: Nothing.

Cameron Reilly [09:43]: Went up. It was like it’ll never happen here.

Tony Kynaston    [09:48]: As you went through the looking glass. Well, they had a review over here, Isaac, I don’t know, maybe three or four months ago, I cleared them of any sort of need for a normal credit policy regulation, which I just couldn’t believe. I mean, here’s the pub test, right? If you take goods and you don’t pay for them, you’ve either stole them or you’ve got them on credit. They are a credit provider. But Isaac said, no there’s no interest charge going on inside another credit provider, therefore you don’t have to do any sort of credit check on them, you don’t have to make sure they can pay the money back. The last time there was an IC review of them, they put in the barest requirement. Like you got to make sure they’re at least 18 because kids were taking out after pay accounts and then buying boots from [inaudible 10:37] without being any sort of check on their age at all. So, it is the wild west and it shouldn’t be, it’s a credit provide, if you take the goods and you haven’t paid for them, you’ve either stolen or they’re on credit. It’s different to what labor used to be, they keep saying this is just labor in a digital age but you know, you used to pay your equal installments before Christmas and when they are fully paid, you get the goods, you didn’t walk in, take the goods home with you on promise to pay for equal payments. You didn’t get the goods until you paid.

Cameron Reilly [11:10]: Well, this time it’s different Tony and by the way, the lawyers for QAV, we’d like to point out that when Tony says they’re a credit provider, that’s his opinion, not the opinion of the show and this is not financial advice, I don’t know.

Tony Kynaston   [11:25]: I’m not sure it’s any sort of legal problem with saying they’re a credit provider.

Cameron Reilly [11:31]: I’m just being careful. Paul has told us BK, you know me, I’m Mr. Careful. I never say anything that could potentially give me

Tony Kynaston    [11:45]: Mr. Carefully. Just really [inaudible 11:47]

Cameron Reilly [11:50]: Well, yeah, he’s pretty careful.

Tony Kynaston   [11:54]: It worked.

Cameron Reilly [11:54]: Yeah. I did think, Oh God, if she died

Tony Kynaston   [11:58]: [cross-talking 11:58] for the beach, what’s the problem? Yeah, It’s a soft landing.

Cameron Reilly [12:02]: There was water nearby. I mean, she could have, you know, any problems you just hit the water. Okay. Nothing could go wrong there. Yes, so the UK government has concluded the market should be brought under regulation as a matter of urgency, as there was significant potential for consumer harm. The treasury said interest free being P L agreements will now be regulated by the FCA that it means that providers will need to want to take affordability checks before lending and ensure that customers are treated fairly, especially those who are vulnerable and struggling with repayments anyway.

Tony Kynaston    [12:39]: Yeah, that’s what should happen. I don’t have any evidence for this, but I suspect what’s happening is someone wants to buy something, so they go and put it on buy now pay later plan with company A and so they’ve got four equal installments there. Then they want to buy something else that they go and visit buying our pilot company B input for requests installments on there. And it just becomes a round Robin of Ford; buying things forward and without being able to pay for them. Once you’ve done that maybe four times, and there are four or five providers in the market, you’re stuffed, you’re always on the treadmill of paying someone back, and that’s exactly what happens with credit cards. People get the problems with their credit cards, they take out another credit card.

Cameron Reilly [13:20]: Yeah. But you’re looking at it the wrong way Tony. You see what happens is, if these people rack up debts, they can’t pay after pay, then sells those to credit Corp credit Corp share price goes up and my portfolio benefits from that, so I’m all for this, I’m coming at it from the back end. Credit Corp is up 78%, no my spreadsheet just updated since I bought it in September so yeah. I wonder how much of that uptick is after pay debt collection that they’re doing.

Cameron Reilly [13:54]: It could be some, yeah.

Tony Kynaston   [13:56]: Image resources on the other hand.

Tony Kynaston    [13:58]: This is called, this is called hedging. [cross-talking 14 :01]

Cameron Reilly [14:03]: No, we don’t, we’re not buying Afterpay.Our friend, Roger Montgomery who, according to Steven Mabb, his funds aren’t doing too well, sent us an email about that today. He Wrote an article last week saying that in his esteemed opinion as it stands today, the Australian stock market is not in a bubble and to work this out, he’s doing some hocus pocus magic where he’s comparing it to Australian 10-year bonds, I don’t know. Did you read this? Did you understand it? I didn’t. It went over my head.

Tony Kynaston   [14:44]: Oh Yeah. So, and thanks to Doug, I think for sharing that with us as well.

Cameron Reilly [14:49]: Doug! Thank you Doug.

Tony Kynaston   [14:49]: Yeah, so one quick and dirty measure of whether the stock market is overvalued is to take the yield on long-term bond rates and invert it. So, by inverted, I mean divided into a hundred to get the PE of what the stock market should be trading it because the PE is basically the inverse of the earnings yield for the stock market. And so generally what the calculation is, you take the long-term bond rate, you add the risk premium and in Roger’s case, you use4%, but I’ve always use 6, which is I guess, a bit more conservative. So, the long-term bond rate 10-year bonds in Australia around 1.1%, something like that at the moment. So, you got the 5.1, and then if you divide that into a hundred by 5.1, you get a P of just under 20, which is, at the high end of average for the Australian share market but certainly not in bubble territory but I think just a couple of comments I’d make on that when I read the article that’s for the overall Australian market. So, if you think of the market as an average, all the growth stocks to buy now pay later is, and the tech stocks and the software as a service stocks and all the other various high PE companies are inflating that PE. And so, the rest of the market, your banks, your miners, your industrial companies are trading on a P below 20, and probably a long way below 20, given that most of the growth stocks are on PEs of a hundred or so. So yes, I think if you take out the gross stocks, which are on ridiculously high PEs and are in a bubble, then the rest of the market is very safe compared to its average long-term PE. The other comment I’d make is that the U S market however is on a much higher P than 20.

And if you look at the NASDAQ P it’s in the thirties from memory, I think last time I looked at it, so it’s very high as well, the high thirties. So, the risk in the market is again like it was in the late, .com bubble, it’s with the tech stocks and the growth stocks. And even though if they come off, if they implode that may not affect the Australian market, it must’ve some extent. And, you know, which spoke last week about what happened after the.com bubble burst and there was probably a year or two of flat to slight growth in the market. Although I had a couple of good years because, there was a rush to value and the stocks our holding went up quite well in the years after the growth bubble burst, and this just feels like that to me. So, Roger is right in an average sense, but wrong, I think, in where the problems are, which is in the growth end of the market, and particularly in the US.

Cameron Reilly [17:46]: And if something to the sexy stock bubble here in Australia, or something happens to the US, what happens to the rest of the market when people start jumping out of those things, the market in general?

Tony Kynaston   [18:05]: Well, I think it will, it didn’t in the.com bomb bubble to a large extent. So, you know, the non-tech side of the market kind of went sideways for a couple of years. Might’ve gone down slightly in 2000 back again and like by 4 or 5% in 2001, I can’t recall the exact numbers, but that’s my recollection of it. The value side of the market did very well in the year or two after the.com bubble burst but I think funny enough, this time is different because of index funds and ETFs. And that’s one of the reasons why the after pace of the world are going up and the Teslas in the US is because once they keep rising above the index hurdles, like the ASX 300, 200, 100, and now 20 for after pay, all of the index funds have to buy them. They have to it’s their mandate and so if they crashed, if after pay went like the companies did during the.com bubble burst, if it drops by 80%, then those index funds are going to go down as well and people are going to, when they see that their performance start to drag, are going to take money out which will just become a sort of self perpetuating, a feedback loop for the market And my gut feel says that the index is when they start to have redemptions will force the market down and so that might drag the market down, but it probably won’t affect us too much. Like, I don’t think index funds hold much credit Corp or some of the other smaller companies, they won’t hold some of the smaller companies that we have in our portfolio and they may well do well, and I suspect gold miners will do well. So, we’ve got some gold stocks in our portfolio. So, yeah, I think the old saying use of America , if America coughs the rest of the world catches cold, and there’ll be an element of that, but if we don’t play in that growth space, I think we’ll be okay going through it.

Cameron Reilly [20:00]: I also wonder about how leveraged a lot of the market is to buy these things. If they’ve got low interest rates, massive amount of leveraging, it’s all going into sexy growth stocks. If those start to go backwards people, I don’t know how that market psychology works, but anyway, it doesn’t change anything we do, right? We just play day by day.

Tony Kynaston  [20:27]: Correct. Yeah, and I think it might have even been in the Roger Montgomery article trying to tell him when that bubble burst is very hard because, I think I could have this wrong, I think it was him. He was saying that, you know, a year before the bubble burst, he went to cash, but then the market went up another 180% in that finals leg up, and so he missed out on that. So yeah, trying to time the market is a fool’s game. We just stick to our knitting, stick to our system.

Cameron Reilly [20:55]: Stick to the system. Thank you to all of the people who emailed us after last week. Show that, to say that commodity prices are now available in stock doctor. Apparently there was an update a few months ago, and you can find them in advanced charting.

Tony Kynaston  [21:10]: Yeah. So I wasn’t aware of that. So thank you. So, if people want to know where it is, they go to the homepage and on the right-hand side of the home page, there’s a part of the screen called “Markets”. If you look at the top tabs, there’s AU, US, EU, AS, FUT and then CMD, which I think has commodities, if you click on that one.

Cameron Reilly [21:33]: oh! Yeah, there it is. Gold, spot price,

Tony Kynaston   [21:36]: Gold ,oil, iron, ore, and copper.

Cameron Reilly [21:38]: Handy!

Tony Kynaston  [21:40]: Yeah.

Cameron Reilly [21:42]: Good work Eddie and everybody else who emailed us. From now on, I’ll give a prize out to the first person who emails us to tell us that we made a mistake, you get the coffee money.

Tony Kynaston  [21:57]: Parachute jump?

Cameron Reilly [22:00]: Hell No!

Tony Kynaston  [22:02]: Okay. It cost a fortune , those things.

Cameron Reilly [22:05]: Jolly good.

Tony Kynaston  [22:07]: You sure we can fund that? We might go broke.

Cameron Reilly [22:09]: The coffee Mug or the [cross-talking 22:10] mistakes. Yeah, that’s only the first person. Speaking of Sock Doctor, I was talking to them today, just a regular catch-up. They’re liking us more and more as time goes on. I think they did ask me to remind everyone, if you sign up to Stock Doctor as a result of listening to our show, give them my name as the referral, because they want to track how many people come from listening to our show so that way, we can get a better group discount maybe in the future. It also makes them treat us a little bit more nicely. We still haven’t got Tim Lincoln on the show, but one day, who knows. So I’m just trying to remember that if you do sign up or if you have signed up for Stock Doctor in the last few months, as a result of listening to us, shoot them an email and go hey can you connect my account up? And we’d let them know you came from Cameron Reilly/ QAV. It was nice when I rang them today, they just straight up, the guy answered the phone. He went, hi, Cameron, how are you? I was like, Oh, all right. That’s what I’m talking about, .as opposed to Facebook that I had to basically break a pool cue over my knee and threatened to stab them in the eye with it if they didn’t restore my account before they took me seriously last week.

Tony Kynaston [23:34]: Right way they treat customers, isn’t it?

Cameron Reilly [23:37]: Yeah. Victims, it comes here, moving on. You want to talk about journal entries from last week of the week?

Tony Kynaston  [23:46]: Yeah. So I’ve got two; Nick Scali, NCK and Virgin UK VUK. And the reason I have two, so VUK has come in at the top of our buy list after the last download and there were quite a few changes in that last download, so people might want to refer to the stock journal from the end of last week. So, the end of last week, I started to see that the credit Corp numbers were in Stock Doctor, Virgin UK were in, all of the LICs were in. So, I did a download and unfortunately Credit Corp, because of its share price rise has dropped off our buyer list, even though I’m not selling mine. I think it’ll keep going up and up. Virgin UK came out as the top stock on the buyer list, but you have to fudge the graph to get it there and as one of our listeners pointed out a couple of weeks ago, if we’re going to fudge some graphs like eclipse, why don’t we fudge Virgin UK? And like, I couldn’t really argue with that. So Virgin UK is on our list, but bear in mind, it’s a fudge in terms of its three point buy-line and [inaudible 24:51] isn’t though it’s come onto our list and it’s going up and up as well since the COVID cough and has now gone above its buy-line without fudging.

Cameron Reilly [25:06]: Can we talk about that chart? Can you bring it up?

Tony Kynaston  [25:08]: Which one?

Cameron Reilly [25:08]: Scali, we did Virgin UK a couple of weeks ago, let’s do the chart, the Scali chart,

Tony Kynaston  [25:17]: The Scali chart MCK. Yeah. Sure.

Cameron Reilly [25:21]: So, what do you take as the first high point here? Are you going right back to 2017?

Tony Kynaston  [25:27]: I’m looking for the last high point before the last sale, I guess is how I’d term it. So I’m using September, 2019. You got that?

Cameron Reilly [25:37]: Yeah. So I’m just trying to process what you said the last high point before the last sell. And so the last sell would have been after COVID?

Tony Kynaston  [
25:45]: Last year would have been during COVID yeah and so I’m looking for, you could use a high point, well, you could use a high point after COVID I guess that would be right. But so, I’m going to use the cut, the buy-line before that last sell line because the sell line follows the buy-line. So

Cameron Reilly [26:00]: Let’s do so the sell line pre like that would have triggered a sell during COVID.

Tony Kynaston  [26:07]: Yep.

Cameron Reilly [26:08]: My chart and it goes back to 2016 here, but low point seems to be April, May, 2016,

Tony Kynaston  [26:17]: April, 2016. Yeah.

Cameron Reilly [26:19]: And then drawing it through like 2019?

Tony Kynaston  [26:24]: Yeah, January, 2019.

Cameron Reilly [26:26]: Okay. So what we would have sold during the COVID cough?

Tony Kynaston  [26:32]: So in March, 2020, and then looking if we sort of stop the graph there and we look for when the buy-line would happen, we would go back then to the high point prior to that sell, which is going to be September 2019 price of $7.50 and the second high point is February 2020 price of $7.15. So it ‘was going to be a buy somewhere in that sort of change range in July 2020. The trickier one is probably the current sell line though looking at this because we take the COVID cough as the low point. And then again if we sort of work forward from that without knowing what’s going to happen, the second low point would have been April the next month, so.

Cameron Reilly [27:20]: Because it’s trading now.

Tony Kynaston  [27:21]: it’s showing. So, it immediately fell below that line, even though soon after that it was a buy. So it kind of like goes buy sell, so the current line I’m using is that the trough in October 2020.

Cameron Reilly [27:36]: So if you draw that sell line all the way through to the current date, it goes right off the top of the chart like it means the sell price would be like, I don’t know, 20 bucks.

Tony Kynaston  [27:49]:Yeah, exactly. Yeah.

Cameron Reilly [27:52]: So it’s never coming out of that. It’s never going to be a bias. So what are you doing?

Tony Kynaston  [27:56]: So what I’m doing is again, just simply putting the ruler on the COVID cough in March, and then rotating it to the right, looking for the other next point, that touches the ruler, which is in November, 2020 and so that’s now the base, I guess, of the shared graph going up. And so our sell line goes through those two points and it’s below the current share price, it’s going to be not much below it, it’s going to be around sort of $11 I think, just looking at it,

Cameron Reilly [28:29]: The sell price, yeah and it’s currently $11.32, so it’s just above that.

Tony Kynaston  [28:36]: Yep. So that’s two points there that we need to just kind of go back over the one is that if you’re not sure what the buy-line is, look for the sell- line that proceeded it and then work out the next buy-line, following that and then the second point is that we go to the lowest point and then just like what I do with the buy-line is find the lowest point, put the ruler on the trend and it’s the next lowest point that touches the ruler we actually draw the trend line. Right.

Cameron Reilly [29:15]: Right. Okay, well that’s a nice one, a little bit tricky,

Tony Kynaston  [29:20]: A little bit tricky, but it’s a nice upward graph. If we think what we’re trying to do here is to buy things that go from low left to high right on the stock price graph this is as good as it gets really.

Cameron Reilly [29:29]: And remind me what they reported that makes them look so sexy.

Tony Kynaston  [29:36]: Nick Scali is a furniture company and like a lot of other homewares companies during COVID, they had a good year and people were staying home, locked in and decided they needed new sofas and tables and beds and whatnots that’s pumped up his cash flows and now when he reported his results last week, when I say he one of the Scalies, is the founder, large shareholder in Nick Scali, I think it’s Anthony Scali from memory, but I could have that wrong. Anyway, he said that he was now going to start look for acquisitions in the market and grow the company by acquiring. So he’s pretty bullish about his future prospects.

Cameron Reilly [30:18]: When I just wondered, like, does he say this?

Played recording [30:24]: Grand Sale! Grand Sale! Grand Sale! Where? In [inaudible
30:22]
  ever the pleasure, to present to you in modernisimo, bedroom suites, dining room and wonderful [inaudible 30:32]. Why don’t you come for yourself and develop this Magnifico, ir modernisimo honorican found from Franco Cuto.

Cameron Reilly [30:44]: Oh yeah, they really want to do well. They need to, you know, do the old Franco cut so ads and that’s the magic, that’s where it’s right out there.

Tony Kynaston  [30:56]: If people haven’t lived in Melbourne and he was on the TV all the time, wasn’t he ?

Cameron Reilly [
31:01]: In the 80’s , yeah.

Tony Kynaston  [31:03]: With the stores in Footerscray.

Cameron Reilly [31:11]: Somebody on YouTube said, this should be on the Australian citizenship test. Grand sale! Grand Sale! Grand Sale!

Tony Kynaston  [31:17]: Now Nick Scali is a bit more upmarket than that so yeah, he does the subdued advertising, right. You know, the soft fleet furniture, yeah.

Cameron Reilly [31:31]: With WACA music in the background, Barry white? Oh yeah. Okay. Anything else in the journal entries you want to talk about? There’s a lot of them, I don’t think we want to go through the whole thing. Any highlights?

Tony Kynaston  [31:47]: I don’t think so.

Cameron Reilly [31:47]: Any other highlights?

Tony Kynaston  [31:48]: No, I just credit Corp came off big Scali comes on the other point to make about a company like Nick Scali and I made this point about JB Hi-Fi and CBA. They come on to the bottom of our buy- list, they’re very good quality companies and I don’t know how long they’ll last because their prices are going up.

Cameron Reilly [32:05]: Yeah.

Tony Kynaston  [32:07]: So if you want to break the rule and buy from the bottom middle of this, this is one of the companies you might consider.

Cameron Reilly [32:12]: Totally good. All right, well I did our end of month report for the QAV portfolio seeing as I couldn’t get anything useful out of the [inaudible 32:30] or share site, I did it myself. According to that since inception we’re 23.6% versus the All Odds, total return index up 7.2% in that period. So that’s all right. End of month though, we didn’t wait. like for the month of January, we went backwards, 1.86% and the total return index went up 0.3%. So we underperformed by about 2%.

Tony Kynaston  [33:04]: Okay. That’ll come back. So that’s starting from, when was it? September, 2019, right?

Cameron Reilly [33:10]: Yeah.

Tony Kynaston  [33:11]: So that’s 23% in what’s that for 16 months. That’s pretty much bang on target. Really? Isn’t it?

Cameron Reilly [33:20]: Well, I don’t know. What do you see as in the target 20% a year?

Tony Kynaston  [33:25]: Yeah. So that’s probably just slightly behind, so,

Cameron Reilly [33:28]: But it’s also double the All Odds and the All Odds.

Tony Kynaston  [33:32]: Yeah, more than double.

Cameron Reilly [33:32]: Well, it took a beating, you know, over the last year and we started at the beginning of that September 19 period with 20,209, it grew, it grew, and then COVID hit and it went back down to like 16,000, the total value of the portfolio and by March of 2020 in the middle of the COVID cough took us few months to get back to where we started at, so we really got back to zero roundabout, July, 2020. So that growth has mostly come, since then last seven months, so that’s pretty good for the last seven months. But if you take the whole period, obviously COVID just smacked everybody around.

Tony Kynaston  [34:18]: Yeah. But us less than most, that’s good.

Cameron Reilly [34:21]: Well, that’s less than the All Odds, total return index. If we put all their money in After pay, it’d be very different.

Tony Kynaston  [34:28]: Yeah. Except after pay dropped back to what was it? Seven bucks or something when COVID cough hit ?

Cameron Reilly [34:33]: I don’t think it was that much. Was it?

Tony Kynaston  [34:36]: You think it was less?

Cameron Reilly [34:40]: I don’t know, but it’s at 153 bucks or something now, so.

Tony Kynaston  [34:43]: Oh, wow.

Cameron Reilly [34:44]: Yeah. It’s crazy. All right, what else have I got in the new section? Oh, I just want to remind everyone that we’re doing a zoom call this week for QAV club subscribers anyway, live zoom call. You should know about it if you’re a club subscriber and you don’t know about it, email me as soon as you hear this, because by the time you hear this, it’ll probably be happening. I’ll get this out on Tuesday morning. It’s happening Tuesday night, 6:30 PM. Brisbane time, whatever that is. 7: 30 Melbourne Sydney, 1986 in Perth and I’m half an hour into the future, I think in Adelaide. So just jump on zoom. And there’s no agenda few people have had a couple of questions they might want to ask, but I think people will probably want to get you , particularly the new folks that jump on might want you to do a couple of three PTLs live? They’re always fun, always a good time.

Tony Kynaston [35:40]: Yeah, good. The [inaudible 35:42] at the ready to everyone.

Tony Kynaston [35:44]: Oh. Oh, I got a screenshot. I meant to say

Cameron Reilly [35:47]: I sent you the script. Oh, I should have put it in the newsletter too. Christie and I were watching this 1950, a Michelangelo Antonioni film last night, his first feature film, called “The story of a love affair” and it’s all about these rich people, and it’s a murder mystery and a bit of a film. Wow., quite nicely done. But at one point somebody says, all right, Negroni is for everyone. I was like, Whoa, like this big elite party and they were drinking the gronies 1950s, so it was already well-established by then.

Tony Kynaston  [36:27]: Yeah. You need to put that on the soundboard.

Cameron Reilly [36:31]: It was an Italian.

Tony Kynaston [36:32]: Oh, okay. Yeah. That’s all right.

Cameron Reilly [36:37]: Okay , give me dummy una Negroni. I’m not sure if Negroni is going to be masculine or feminine, Una Negroni

Tony Kynaston  [36:48]: Its plural now.

Cameron Reilly [36:49]: well, is it?

Tony Kynaston  [36:51]: Negroni patootie

Cameron Reilly [
36:53]: Negroni. Okay. But for all, yeah. Now you said, give me a Negroni. Actually, I just looked at the screenshot, so it’s a yeah, dummy un Negroni, Yeah. All right. Well, let’s get on to Q&A, I guess.

Tony Kynaston  [37:08]: Yeah,

Cameron Reilly [37:08]: Here we go. Brent. I think Brent’s relatively new club member. Welcome. Brent, Good-day Cameron and TK. Oh yeah, he said new subscriber during the 14-day trial, we’ll take up the offer to join this great community. I was looking at the top of the buyer list VUK Virgin money price, the cash flow score is out of this world. Operating cash flow increased remarkably in the September, 2019 year. I know that if we want a story by a book, but can Tony write the first chapter on this one? And then he did send me another email today, which I threw into the notes I’m not sure if you saw this, but he’s just, he’s added CBA and WBC in there as well with a significant increase in operating cash flows, TRS as well. Wondering if you know why they would all be showing significant increases in operating cash flows, whether or not it’s sustainable, it could be a value trap. And he threw some screenshots in there, which I added to our notes, but I know that you probably didn’t have time to prepare all of that. So, let’s go back to the first one on the list. VUK, did you notice anything weird? I know there one of your stocks of the week?

Tony Kynaston  [38:18]: Didn’t notice anything weird? No, like the, probably the thing to note about the UK, which we spoke about before was that it went from negative operating cash flow to positive operating cash flow. So that’s one thing to note about them. A good thing to note about them now, financial services companies are a bit tricky because operating cash flow isn’t like our coffee shop. It could be various other things that are driving that operating cash flow, which it should be just interest payments on mortgages and credit cards and et cetera, less the cost of running branches and paying out interest on savings accounts. But there’s probably often times in the case of financial services companies, I really have to dig into them to know they can also be some other funny things in there like Oh, there could be some investing one-offs if they have an investment or a business banking branch, they could be interest rate movements, which have affected them. You know, like if they’re borrowing money internationally and then lending it out locally, if that is favorable, that should go and invest in cash flows. But sometimes there’s some part of that will go into operating cash flows, so not really sure. Certainly, it’s a flavor of the banking community at the moment.TRS is a different kettle of fish. TRS, the cooperating cash flow is just purely, I think COVID related where people were not traveling overseas, traveling less in Australia being locked down in their homes, therefore spending more on groceries and TRS got their share of that so that’s different. The banks, I’ll talk to them more to the Australian banks.

Tony Kynaston [40:00]: and Virgin UK, although I suspect there’s something similar going on, the banks are now starting to feel a lot more optimistic about coming through COVID without all the kinds of provisioning that they would have taken to help them get through it, so again, I’m not sure where writing back provisions falls in the CA in the cash flow statement. I don’t think it would be an operating cash flow, but there could be some impact of that there but certainly if I take a simple approach to it and say, they’re probably getting better net interest margins and because are expecting to write off more loans or to give people more loan holidays, they certainly would’ve gotten some help from the government in different ways. Without having done a deep analysis on it, and maybe some of our listeners can enlighten me on it, I think basically what this is saying is they’ve come through, COVID better than expected.

Cameron Reilly [41:02]: Just looking at the breakdown in Stock Doctor of Virgin’s financial statements and the thing that jumps out at me is in the March 19 quarter under investing cash flows, they’ve got purchase of property, plant and equipment, which jumped from 596 million in the previous quarter to 7.3 billion in the March 19 quarter, and then 6.1 billion in the September 19 quarter. And then also in the September 19 quarter under a sale of subsidiaries, they’ve got 7.5 billion for September 19 and then 7.5 billion for March 20.

Tony Kynaston [41:45]: Yeah. So, this company has you talking about Virgin UK, I guess aren’t you there?

Cameron Reilly [41:50]: Yeah, I am.

Tony Kynaston [41:51]: Yeah. So this company was sold, used to be owned by National Australia bank here, funny enough it used to be called CBYG, something like that. Clients that are banking CB., yeah so maybe CBFG Clydesdale bank.

Cameron Reilly [42:12]: CYBG.

Tony Kynaston [42:13]: Thank you.

Cameron Reilly [42:15]: You’re welcome.

Tony Kynaston [42:16]: Clydesdale Banking Group. But it was basically a Scottish bank that the NAB took over when it did an international foray and the NIB imploded and originally as part of the wash-up of all the problems they had trying to move overseas, they listed CYBG separately, and it’s done okay since it was listed separately. But now it’s been, I’m not sure what the deal is, but certainly Virgin UK now run it, and I think they actually bought it or paid some kind of money for it. So it possibly what we’re seeing in those two large, you spoke about a purchase of subsidiaries may have been Clydesdale Bank buying other banks, and then bulking up prior to being a, I don’t know if it was a takeover, I know certainly changed their name and when you sign up with Virgin you pay a franchise fee to Richard Branson. So, I might just be a rebranding that I’m thinking of, but I think they actually did change ownership in some respect that they remain listed in the UK.

Cameron Reilly [43:26]: It was just, I did have a look at a couple of articles. There’s one on intelligent investor from December talking about it, but there was nothing really that sort of explain what these big lumps are but, yeah.

Tony Kynaston [43:40]: And going back to operating cash flows, you’re right. If you click on the operating cash flows link in Stock Doctor and you see what makes it up, this is a good example of what I was trying to explain in a very amateurish way, you get dividend received, which is zero interest received, which is 3.8 billion, and then interest paid, which has gone down in the September quarter to 1.2 billion. So, the operating cash flow for the bank looks like it’s just basically what they’re able to borrow money for, and then what they’re able to get as interest income from their customers. And so that’s probably why they’re going up, just looking at the operating cash flows was positive as well. So, I’m not sure what’s another other operating cash flows that drives that, but basically the big drivers of borrowing and lending money.

Cameron Reilly [44:33]: Now obviously you normally don’t drill down into this level of detail and looking at what’s going on with their operations when you’re doing your calculating a QAV score. So, you wouldn’t really worry about whether or not the cash flow is sustainable or is a value trap like Brent, in his follow up email, you’re just taking the high numbers and adding it to the QAV algorithm.

Tony Kynaston [45:04]: Correct, yeah. So, I’m not a banking analyst, neither am I a Cash flow analyst really. So, no I’m taking the number as it’s reported, bearing in mind that the reason why I’m using operating cash flow is the basis of my calculations is because it’s the one that’s the least able to be tampered with because it’s the top number in any sort of financial statement. It’s basically the money coming in, unless the cost of getting that money in. And so it’s very hard to manipulate depreciation, amortization and all the other things that you can do, like bad and doubtful debts, et cetera, with those numbers. So that’s why I use it, but yeah, look it’s not just the only trick in the book, there’s the quality tests and there’s a sentiment test as well and if it is a value trap, then the shares will start going and will sell.

Cameron Reilly [45:58]: And then you have the Stock Doctor ratings and valuations and all that kind of stuff, which usually comes as a result of their analysts, having a look at the operations of the business which we factor into our score.

Tony Kynaston  [46:18]: Correct, yeah. The financial health for Virgin UK is strong in Stock Doctor, which is its highest rating.

Cameron Reilly [46:24]: Good. Thanks, Brent. Hope that helps. Here’s one from Daniel leftover from last week. I’ve heard others mentioned about the turnaround and commodities as of late, one which actually shows some opportunity in the current market. Now you’ve talked about the recent upturn in the coal price and how it crossed its three PTL yet picked a stock of the week which mind for golden silver, would it not be better to invest in a coal company which doesn’t score as well as opposed to KRM? I’m interested in your overall perspective on this.

Tony Kynaston [47:00]:  Well, yeah, going back a week ago the last time. Well, the time before this download and I haven’t checked this download for coal companies, but the one before there was no coal companies on the buyer list, there were a couple on the watch list, Yancoal Might’ve been on the buyer list, I think. And I think I may have mentioned that, but I wasn’t going to make it stop by the week because it had a reasonably small average daily traded amount because it has a large shareholder on the register. So, I’m a bit worried about companies that do that in terms of when it comes time to sell, the float can go right down to small numbers as people try and get out when there’s a big shareholder. But anyway, so the end call might be there, but there was no other on the buyer-list. And even if I wanted to fudge the watch-list and go a bit lower into companies that had a price to operating cash flow higher than seven, they were still failing to sentiment check. So even though the coal price has turned up, companies like the big ones in Australia, Whitehaven coal and New Hope Coles still weren’t in solid uptrends and I think they’d both just started to tick up last time I had a look at them, but certainly weren’t in an uptrend that we could have any confidence with.

Cameron Reilly [48:20]: Okay. But with a sort of broader perspective looking at commodities that are turning up, I mean, we have used that in recent times to push some things up the buyer list, but generally speaking, that’s not part of the QAV scoring process, right?

Tony Kynaston [48:42]: Yeah. Correct. It’s that was something I noticed had happened in gold and iron ore and nickel was that those companies had, as their commodities had turned up the stocks that were mining, those had rapid increases. So, it was worth looking at but it was something that I wasn’t seeing in coal, I’m just looking at Coronado at the moment was the other company I didn’t mention just before. And it has had a tick up, but I think from memory Coronado was wide down the watch list at the moment, just let me have a quick look. CRN is a ticket for that one year, the price to operating cash flow for Coronado is 7.01 actually, it’s not too bad, so you might want to consider buying some Coronado shares if you like the fact that the coal price is starting to turn up, I’m just having a look at the QAV score for Coronado is only 0.03. So even though it’s priced, operating cash flows seven, it’s not scoring well on the quality side for us, so it would be a big fudge to buy it. [inaudible 09:53] call up Yancoal again because that’s probably a couple of weeks since I last looked at it and just see what it’s doing. So the average daily trade is, oh, it’s up to 115,000, so it’s bigger than the last time I had to look at it but as I say, there’s a dominant shareholder on the register and you could get caught if I look at the graph for Yancoal, it’s probably in a buyer situation, but it’s still I’d say it’s in a buyer situation but it’s basically the share price is going sideways.

Cameron Reilly [50:28]: But again, this gets back to the sort of a macro and microeconomic analysis that we don’t do as part of QAV really. We’re looking at their numbers, but we’re not really looking at what’s going on inside of their businesses because we’re not experts in any of these sectors.

Tony Kynaston [50:48]: Yeah. And like I said, that the reason why for focusing on the commodities is that I have seen stocks rapidly increases the commodity cycle changes for them but this, I guess coal might be the exception that breaks the rule and there’s an awful lot of negative sentiment out there for coal companies in the future, so that could be part of this as well.

Cameron Reilly [51:09]: And just for folks that are relatively new listeners. I think one of the great things for me as a new investor that QAV offers is I don’t need to worry about the ins and outs of what this company’s doing and what that sector’s doing and I spoke to a friend of mine the other day, whose name, well, I’ll leave out of it but he was pitching me this way of predicting which businesses were going to do well in the future. And he said, do you think you might, Tony might be interested in this you know, it was a part of an investment package. And I said, nah, no, I don’t think so because this goes completely against the way Tony invests; he just looks at the numbers. He doesn’t really worry about who’s up who and who hasn’t paid, or what the few doesn’t try and predict what’s going to happen. He goes, oh, I’ve heard it all, what you need to get rid of him, then, he’s not going to do well, yeah I was like.

Tony Kynaston  [52:13]: Was he talking to you from his sky palace?

Cameron Reilly  [52:17]: No, he’s this guy is in his early eighties in he’s skint, completely skint and broke and always talking to me about how broke he is so it’s like.

Tony Kynaston  [52:28]: Well, I can probably make one prediction, but I won’t.

Cameron Reilly [52:34]: Thanks very much for the advice, but I think I’ll stick with Tony. But getting back to what I was saying, I don’t need to do any of that because the system factors that in we’re looking at sentiment, which in part is going to be driven by people that are doing sector analysis and company analysis. We’re looking at Stock Doctor’s writings on health and we’re looking at their valuation or the consensus valuation if they don’t have one, which is partly based on analysts; looking at the sector and looking at how the company is doing, so it kind of factor, and we’re looking at their financial track record and all these sorts of things. So, it’s kind of a way of looking at the Metro analysis, which prevents me from having to do the microanalysis on each company or each sector.

Tony Kynaston [53:26]:  Yeah. And nothing against people who have micro analysis abilities. Like I tend to find though that the good ones only focus on one sector and then, therefore.

Cameron Reilly [53:36]: It’s a full-time job.

Tony Kynaston [53:37]: It’s a full-time job, but also two sectors coming in and out of Vogue. So, you’ll make a lot of money during the upcycle, but then what you do for the next five years? Shorter stocks but I like what I do because I can buy stocks across any sort of industry depending on whether they’re in Vogue or not.

Cameron Reilly [53:57]: Yeah. Good stuff. Thank you, Daniel. Doug asks, given the success of the QAV system TK has used for decades in the recent Subreddit event. It made me wonder if TK has ever considered options, mostly calls on his QAV stocks could be an interesting way to take the returns. To the moon.

Tony Kynaston [54:16]: To the moon

Cameron Reilly [54:17]: Which is a wall street bets thing, if you haven’t been paying attention to that.

Tony Kynaston [54:22]: Yes, I have actually at some stage I did look at whether I could make more money out of options, but I couldn’t for two reasons, one was because the options aren’t free. So, generally, you’re paying sort of around 10% of the share price to buy the option, so there is an investment and I.

Cameron Reilly [54:44]: Never thought about them with After pay, Tony.

Tony Kynaston [54:46]: You’re buying them on credit.

Cameron Reilly [54:48]:
 Buying them on credit yeah, no interest.

Tony Kynaston [54:50]: The other bigger problem with options is they’re time time-limited. So, the company that I like has to grow up in a certain time period and like you said before, I can’t predict when that will be. So we rely on regression to the mean, but, you know, I’d hate to buy a six-month call option on I think the company I looked at the most was Quantas because it was big enough to have lots of option activity in the market and a couple of other ones perhaps for the sku. But yeah, and basically the way a call option works is it says that for the cost of buying the option, which might be 10% of the price, you have the right to have someone sell you a Quanta share for a certain price. That price of course is higher than what the share price was when you buy the option and there’s so much math involved in working out, whether you think that’s a good deal or not, did it just, I just couldn’t do it with any sort of certainty. So, when I sort of did it on paper to see how I go, sometimes, the share price would rise above the call, strike price the month after the options expired, sometimes you’d be in the money, but either way it was costing you 10% along the way and I just wasn’t making enough correct bets to beat just buying a stock and holding it and not being reliant on whatever the time was in the market for it to reach a certain price.

It’s just that extra element of having it reach a certain price by a certain date is really hard and don’t forget the people who are taking the other side of the bit, as you said before, probably know more about the Quantas business and stock than I do, because they researched it every day of the week. So no, it never made money for me. I don’t do it

Cameron Reilly [56:38]:  To the best of your knowledge do Berkshire Hathaway use options?

Tony Kynaston [56:42]: No, I’m pretty sure, I’d be a hundred percent sure they don’t, Warren Buffett’s always guarding against them too.

Cameron Reilly [56:50]: And Warren and Charlie and their team do know. I mean, they are deep analysts; they really know the sector. They know the businesses; they know everything about the businesses and yet they don’t use options to try and increase their returns. Oh, my phone just told me it’s 4:00 PM I don’t why. No, it doesn’t normally do that freaky, there must be a reason why they don’t do it, even though they do know the sorts of things. I’m sure Buffett has talked about it in the past, but I just can’t remember what he’s had to say.

Tony Kynaston [57:31]:  No, I think I can’t remember a pithy quote from him either, but he’s talked about leverage in particular, which I guess options are a form of, and he said that you should avoid leverage as much as you can and that he had leveraged his businesses in the past, he would have been bankrupted twice. So yeah, I can’t, as you say, I can’t recall anything about options but I’m sure he puts it in the same basket as leverage, it’s a form of leverage. I’m paying a premium now to get outsized returns at some stage in the future, that’s a form of leverage but it does have that time element and it’s just, again, that’s part of timing the market. I don’t know when the Yancoal share price will rise, but it’s pretty low in the cold commodity prices turning up. So, at some stage of the probably come across our screens as being a buyer, and do well, build up my win and I don’t know, like in six months what the price will be, it’s just too hard to predict.

Cameron Reilly [58:36]: I hate to make you look wrong and I should’ve put money on that a hundred percent bet, but I just did a quick Google Warren buffet on options. I’ve had an article from 2009 where it’s talking about Berkshire Hathaway’s option strategy. In Berkshires 2008 letter, he discusses the positions that they’ve taken and his thoughts about options and the Black Scholes Model, the most widely used mathematical model for valuing options, we thought it would be useful to summarize the insights from his letter for our option investors and those who are curious about options. Right off the bat were quite pleased to see Buffet comment. I believe each contract we own was mispriced at inception sometimes dramatically. So, it goes on to talk about the Black Scholes Model, I’ll put guests as a quote from Buffet, output contracts, total 37.1 billion at current exchange rates in a spread among four major indexes. Our first contract comes due on September 9 2019, and our last on January 24, 2028 and he was being optimistic. If he thought he’d be around to see that one, we have received premiums of 4.9 billion money we have invested. So that’s [cross-talking 19:52]

Tony Kynaston [59:53]: That’s from memory that was after the GFC and during the GFC, he famously said he was going to back America and took out those options on the, I think on the index over a long period of time, right? As a way of proving to people that he thought the stock market wasn’t going to go away and America would recover. Right. So, I kind of get that as a one-off, he’s not in the market every day saying, I’m going to buy call options on Berkshire Hathaway or apples or whatever and he has also famously made bets with people using options. Like he bet with a hedge fund manager that in 10 years’ time, the index was going to have a better return than the hedge fund and he puts that they put an option, he bought an option to fund his million-dollar wager with the hedge fund manager, which I think actually he won it. Must’ve come to you just recently.

Cameron Reilly [1:00:49]: What was it for? [cross-talking 20:52], big bag or a packet of see’s candy or something?

Tony Kynaston [1:00:55]: It was a million bucks. The million-dollar bet with the hedge fund manager that he would really underperform the market and that I think from memory that was around that same time around the GFC time,

Cameron Reilly [1:01:04]:  It’s a lot of see’s candy. I got another quote from him from 1997, Berkshire Hathaway, annual shareholders meeting borrowed money frequently leads to trouble, and it’s not necessary if you have some compelling reason to double your money by the end of the year, you should use the futures market if you really need to do it. But really you need to figure out how to be happy with the prison amount of money that you have. Once people start focusing on short term price behavior, which is the nature of buying calls or speculating in index futures, you’re very likely to take your money off the main ball, which is valuing businesses. So, it sounds like regularly, he’s not a big fan of options.

Tony Kynaston [1:01:46]: No, he’s not for that same reason. As you said, it’s timing the mark, It’s that time component of the option. I don’t know what he was going to say, a black about Black Scholes, but Black Scholes is a very blunt instrument as well in terms of valuing options. It’s historically how it’s used, but it’s a mathematical formula and mathematics doesn’t drive the share price. So it’s often it’s probably is as wrong as much as it is, right in terms of valuing an option.

Cameron Reilly [1:02:16]:  According to economic times, Black Scholes as a pricing model used to determine the fair price or theoretical value for a call or a put option based on six variables, such as volatility type of option underlying stock price, time, strike price, and risk-free rate , the quantum of speculation, not one of the better James Bond films is more in case of stock market derivatives and hence proper pricing. No wonder if they read this and then dot let’s make a movie about that. That sounds exciting, et cetera. Anyway, I wanted to talk about a broader point here because we get a lot of emails from people saying, has Tony thought about doing this to improve his returns or thought about doing that to improve his returns or thought about doing the other? And if he tweaked it this way, he can improve his returns. And I know that you would like better returns, everyone would like better returns. It’s more money, but I get the sense that you’re pretty comfortable with the returns. Like people often say, why does any invest in the US market or the Asian market or this or that or the other? And my response is normally, look I think Tony’s just pretty happy getting the returns that he’s getting, a relatively low level of effort and a conservative level of risk and he’s happy and it works. And the like is the mess around with it and the other thing that I often point out is I’ve heard Buffett quote that his long-term annual average return over 40-50 years is about 20%., you get about 20%. I think he quotes 19.7, you get about 19.5. And so, if your returns are as good as the greatest investor in history and you’re doing it with relatively little effort and with a conservative approach to risk their motivation to muck around with that going to be pretty low.

Tony Kynaston [1:04:23]: Well, there’s that, but there’s also the rescued and changing old motto” if it ain’t broke, don’t fix it”. So, I’ve got to have some pretty concrete evidence. I’m happy to add things to the checklist or do different things, but I’d rather be confident that they’re not placing undue risk onto what we do. In terms of which I’m happy to work through and one of the reasons for hiring Dylan as our intern is to try and test some of the ideas that we have and that listeners have and there’s, you a dozen things, at least on that list that we’ll get to fairly soon, but things like why don’t I invest in the US? Well, two reasons, one I don’t have a Stock Doctor light product for the US now that’s not saying I couldn’t find one if I applied myself. But two the US has had a good run since the GFC, but there are times when the Australian market outperforms the US and generally over the long-term, I’m talking to say a hundred years here, the share markets around the world are relatively similar in the long-term gains. We might be talking about a percentage point different, which I know means a lot over a lifetime, but sometimes the Australian market does better than the US market. Sometimes US market does better, sometimes they Hang Seng does better, sometimes the VIX or the footsie does better. All those kinds of things come and go. If you chase them, that’s a bit of a recipe for disaster for a start, because by the very nature, if they’ve done better than the average regression, to the mean says, they’re going to flop at some stage and go back below the average. And again, timing the market’s really hard to do, but then also you’ve got the added complexities of currency risk and trying to manage that too. So, one of the reasons why I stay in Australia is just to keep everything as simple as possible.

Cameron Reilly [1:06:22]: 
And you’ve said before that the companies in Australia, the marketplace Australia, you don’t know the US market that well even if you were to make some tweaks well beyond wakes, do something significantly different. I guess the other thing to keep in mind for people to this is you’re interested in long-term results, 20–30-year timeframes and in order to tell whether or not these tweaks are going to deliver a better return, you’d have to run the experiment for 20-30 years. Which you obviously you could do that. You could run a, like a test.

Tony Kynaston [1:07:07]:  I’m happy to test it over a shorter period and when I say shorter, you know, five to 10 years, right. As long as I had some kind of compelling argument, which made me think that it was also going to work for the long-term. If there was some logic behind the change and it back tested well over five years and particularly 10 years, then I’d say, yeah, well, I’ll make that change,

Cameron Reilly [1:07:29]: But it has to be a long period of time, right? To go through various market cycles and see how performance, right?

Tony Kynaston [1:07:35]:  Yeah.

Cameron Reilly [1:07:36]: It’s not a quick decision you would make and dealing with I think your portfolio, you’ve got at least a couple of grand in there now, so you don’t want to be messing with it.

Tony Kynaston [1:07:47]: That’s right. I think it’s a good point, but also too, the really nice thing about having a system, which returns the long-term returns as I get is, I don’t have a fear of missing out. My fear of missing out is stuffing up the system I’ve got now it’s not, oh, I’ve missed out on After pay, it’s now 150 bucks, Yeah good luck to them. They’re not going to chase the latest wins in the market. I’ve got no fear of missing out on any of those things. My fear of missing out is that I do something stupid, which stuffs up my system. Yeah, an associate on the 90 and a half percent returns.

Cameron Reilly [1:08:22]: Yeah. I think the thing for me to remember, as a newbie investor is 20% really good, historically 20% year in, year out on average, over the long haul is Buffet level, that’s good enough. You can try it if you’re trying to do better than Buffet and Charlie Munger. Good luck, I mean, really, you got to kind of look in the mirror and go, do I think I’m smarter at investing than Warren Buffet and Charlie Munger and can get better long-term returns than they’ve been able to get. If your answer is yes, good luck. God bless go do it.

Tony Kynaston [1:09:05]: I look in the mirror, I pinch myself that I can get their returns on the limited amount of work I’ve done now. So yeah, we always try and stuff around with it or turbocharge it with options or whatever and look, you know, I’m not saying these aren’t good suggestions. And I really hope if people feel strongly about it, they amended the QAV system to suit their thoughts and styles and tell us their results.

Cameron Reilly [1:09:32]: Yeah. Come back in 20 years and tell us how you did

Tony Kynaston [1:09:36]: Or even one year would be fine. But don’t forget, they write books about options, you know, call the smartest guy in the room and things like that and they always involve someone making lots of money and then losing it all because it cause the whole thing implodes and that’s the level of risk with those kinds of things is it raises incrementally as soon as you start to try and turbocharge returns.

Cameron Reilly [1:10:01]: So I talked to the guys who run Melvin Capital.

Tony Kynaston  [1:10:03]: Yeah, exactly, All right. Well, we bought GME on call.

Cameron Reilly [1:10:08]: Mark had a question about NCK, but I think we’ve probably answered that TJ asks, if Tony is looking at two companies to invest in with similar scores, both in uptrends and just come into their buy-line, what’s the one thing he’ll look at to determine which he would invest in?

Tony Kynaston [1:10:29]: I’m going to assume that all things are equal. So, my first criteria would be if one has a market cap or an average daily trade which is big enough for me to invest in, I’d take that one. If the other one was small but if all things are equal, it would be the one that’s on the higher up the buy-list has a better QA score is the one that I take first, but the thing is, I invest in both.

Cameron Reilly [1:10:52]: What if they have the same score?

Tony Kynaston [1:10:53]: Flip a coin, I guess, right. If they’re exactly equal and they have exactly the same score and they had exactly the same average daily trade, I don’t know, buy half of each. That’s not something I’ve ever come across in right 30 years of investing. Yeah.

Cameron Reilly [1:11:13]:  
Right. And the last question Angus asks Hi Cam, really enjoying digging through all the content and implementing the QAV method. My question is about the three PTL is a buy/sell activated if price crosses over the line intra month, or does the price have to close above or below the line at the end of the month and register a crossover on the monthly chart? I think we’ve talked about this before, and I’m going to guess your answer is a yes, intra-month.

Tony Kynaston [1:11:44]: Intra-month, exactly. Particularly with the sell- line, we don’t want to wait around, a couple of weeks if we’re that far out from end of month and find that the share price has dropped another 10 or 20% and I take the risk that it does rebound. But yeah, buying a month is that bit of insurance that we’re not going to lose money while we wait for end of month.

Cameron Reilly [1:12:06]: Good stuff. Well, thank you everyone for the questions. If you’re a club, well only clubs’ subscribers will be listening. We’re at the air in 15 Mark, hope you can join us for the zoom call. Details are in the newsletter I sent out this week. They’re also in the Facebook page for those of you on our Facebook group, it should be great fun otherwise have a great week, everybody. What’s on for you this week TK?

Tony Kynaston [1:12:33]: Oh, a bit of golf, a bit of work.

Cameron Reilly [1:12:37]:  No! You don’t say?

Tony Kynaston [1:12:38]:  
Yeah. That’s about it. Yeah. Looking forward to it.

Cameron Reilly [1:12:45]: Oh, that’s good.

Tony Kynaston [1:12:46]: How about you?

Cameron Reilly [1:12:47]: I’m taking Chrisi out for dinner tonight for her birthday and then just the usual man plugging through the week, doing some episodes with Ray this week on Nero. We’re doing Nero and our ancient Rome show life of Caesar’s show.

Tony Kynaston [1:13:05]: No, I think Peter Ustinov played Nero didnt he at some stage?

Cameron Reilly [1:13:09]: Yeah. Probably, played all the Caesars, at some point

Tony Kynaston [1:13:12]: You got to get the Frank Thring clip out though. Haven’t you?

Cameron Reilly [1:13:15]:  Probably, yep. That’s a good one and what’s his face? Christopher Plummer who died yesterday, played a whole bunch of Caesars during his career, a whole bunch of emperors. Don’t know if he ever played Nero though, but I’m enjoying, joining, learning more about Nero and seeing your fees as bad as history paints him out to be popular, a popular imagination, he’s supposedly one of the worst tyrants in history. So, we’ll see whether or not that’s deserved or not.

Tony Kynaston [1:13:44]: Didn’t. I remember when we were in Bryan, didn’t he have the Colossus beside the Coliseum got the huge statue to himself.

Cameron Reilly [1:13:53]: Yeah. They told us all of this when we were at the Coliseum a couple of years ago, yeah. The way the Colosseum now stands, it was a swimming pool. It was his swimming pool was part of his, palace and a huge backyard swimming pool big enough to put ships in to have Naval battles and yes, he had a huge Colossus statue of basically himself as Apollo and when Vespasian and Trojan, and these guys came along after the Juliet Claudius they turned the swimming pool into the Coliseum yeah, and tore down the statue eventually.

Tony Kynaston [1:14:39]: It wasn’t called Mar-a-Lago was it?

Cameron Reilly [1:14:43]
: I think that’s what Trump aspires to is Nero’s palace. Yeah.

Tony Kynaston [1:14:50]:  Good luck too. Wish Christi a happy birthday for me, please.

Cameron Reilly [1:14:55]: I will thank man! Thank you, man. Have a good one. Okay. Cheers everyone.

Tony Kynaston [1:14:59]:
 Cheers. Bye

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