Transcript QAV 407

Episode Name:  QAV 407 Club

 

File Length: 01:15:25

Tony Kynaston [00:06]: Hello!

Cameron Reilly [00:07]: Buongiorno! Come va?

Tony Kynaston [00:10]: [foreign language 00:00:10].

Cameron Reilly [00:11]: Yes. Sto bene. E tu?

Tony Kynaston [00:13]: Yeah. Yeah. Perfetto.

Cameron Reilly [00:15]: Welcome back to QAV Episode 407, Season Four, Episode Seven, TK recorded Monday the 15th of February 2021. Happy Valentine’s day.

Tony Kynaston [00:26]: Are you saying that to me or to our listeners?

Cameron Reilly [00:28]: To you.

Tony Kynaston [00:29]: Oh, well thank you.

Cameron Reilly [00:30]: Will you be my Valentine? Chrissy and I don’t do Valentine’s Day.

Tony Kynaston [00:34]: No, we don’t either.

Cameron Reilly [00:35]: We say every day is Valentine’s Day in our house. But you and I, I thought I would ask you to be my Valentine.

Tony Kynaston [00:42]: Well, thank you. I’m touched. Hasn’t happened from a guy before, but that’s great.

Cameron Reilly [00:46]: First time for everything.

Tony Kynaston [00:47]: First time for everything. Yeah.

Cameron Reilly [00:49]: Yeah, it didn’t happen in Vegas when we were there? You and Markham were sharing a room, I thought, in Vegas.

Tony Kynaston [00:54]: No. We had separate rooms.

Cameron Reilly [00:56]: Oh, okay.

Tony Kynaston [00:57]: Yeah.

Cameron Reilly [00:57]: That’s a good thing. What’s your week been like? Tony, what have you been up to since we last spoke?

Tony Kynaston [01:04]: Yeah. Same old, same old. Playing golf, watching horses race. That’s about it, really. Nothing special. A couple of nice dinners.

Cameron Reilly [01:12]: Yeah.

Tony Kynaston [01:12]: All the same. Same old, same old. Yeah. You? I saw you went to Stradbroke Island.

Cameron Reilly [01:17]: We did. Yes.

Tony Kynaston [01:18]: Lovely.

Cameron Reilly [01:19]: Yeah, it is lovely. It’s a bit of a journey getting there for a day trip, get there and back. So I’m never doing that again. The day trip to Straddie. It’s 12 years, it’s crazy. When Chrissy first came here to visit 12 years ago, I took her to Straddie. It’s the first time we’ve been back. Just because of the whole ordeal to get out there, I’m like, “Ah, God, you got to drive, got to park. You have to get on a ferry. Then you get there and you’ve got to get on a bus and you’ve got to go to the other side of the island. It’s lovely though. But I think next time we do it, we’ll spend a few days there and get a house or something.

Tony Kynaston [01:50]: Yeah. Good. Yeah. Okay. You didn’t take your car onto the island. That’s different.

Cameron Reilly [01:58]: Yeah. We thought, you know, we’ll save a few bucks, and then we end up catching buses everywhere and really didn’t save any bucks at all, really. But you know, I’m launching a new podcast. You know, it’s called a Viaggiamo. Viaggiamo, we travel in Italian. It’s basically Chrissy and I traveling around the places and we’re going to do little reviews of everywhere we go. And that way all of our travelers’ tax is deductible, I figure. Because we do check with Mark. I said, “Hey Mark if I start a travel podcast, all my travel is tax deductible, right? And he goes, “Yeah, absolutely.” I go, “Thank you, Mark.” Totally good. That’s my new thing is how to travel.

Tony Kynaston [02:53]: I rang Mark today and we were chatting and I said, “Hey, hang on. You’re not going to charge me for these minutes, are you, while we’re talking?

Cameron Reilly [02:59]: Mark is our bookkeeper, by the way. The infamous Ruddy who lives in Wagga, Wagga, Wagga.

Tony Kynaston [03:04]: He’s coming up this week.

Cameron Reilly [03:06]: To you?

Tony Kynaston [03:06]: Yeah.

Cameron Reilly [03:07]: Or to me or to you?

Tony Kynaston [03:08]: No. To me. Thursday, Friday, Saturday, Sunday. Yeah. We’ve got a friend’s 60th on Friday.

Cameron Reilly [03:13]: He sobered up after your last drinking. That’s not right. I’ve got to go see, Tony. Yeah, Straddie was lovely. Very nice. But yeah, a bit of an ordeal to get there and back. Alan Kohler, Ray, on podcast.

Tony Kynaston [03:28]: What?

Cameron Reilly [03:30]: Alan Kohler, Tony.

Tony Kynaston [03:33]: I know nothing.

Cameron Reilly [03:34]: Yeah, that’s Ray. He’s my other podcast wife. Alan Kohler was reported in the Financial Review last week. They were talking about the Kohler effect. Apparently, whenever Alan Kohler interviews a CEO of a company, their share price goes up.

Tony Kynaston [03:55]: We should send him our QAV buy list, shouldn’t we? Interview these.

Cameron Reilly [04:01]: Well, just the ones in our portfolio. We don’t want him to interview the ones on the buy list and then the price will go up too high and their score will go down, right. Yeah.

Tony Kynaston [04:08]: Yeah. The dummy portfolio. Okay.

Cameron Reilly [04:10]: Yeah. So on January 23rd, he told subscribers to his Eureka report that he’d gone back over the summer and charted the share prices of the 125 companies who CEOs he’d interviewed in 2020, on January 21st, which for some was a year later, the average share price lift was 37%. For comparison, the S&P ASX small ordinaries index most but not all of Kohler’s interviews with small caps are up 7.1% per year, year on year. So 7.1% year on year. So I’m wondering if we should add Alan Kohler has done an interview with them into the checklist.

Tony Kynaston [04:54]: That’s not a bad idea, but I don’t think he’s done interviews with any of the companies that we follow. I saw the article in the Eureka Report and I thought, okay, well should put together a Challenger portfolio, but there are like 120 stocks. He interviews three or four people a week on his show and plus [inaudible 00:05:11] on a really, really small say. It will be hard to buy NUA shares.

Cameron Reilly [05:15]: Right.

Tony Kynaston [05:16]: Yeah.

Cameron Reilly [05:17]: Well, the fallback strategy then is we just put pressure on him to interview the ones that we’ve added to our portfolio.

Tony Kynaston [05:25]: Yeah, that’s right. We should send him a list.

Cameron Reilly [05:27]: Yeah.

Tony Kynaston [05:28]: We should pin 50 bucks to it. Take a look at these [inaudible 00:05:31]. Hey, question on the dummy portfolio. Is that available to anyone to look at or is it only for subscribers?

Cameron Reilly [05:39]: Only for subscribers?

Tony Kynaston [05:41]: Okay.

Cameron Reilly [05:42]: Stephen Maab sent us an interesting link, I like this one, during the week. This was from Marcus Padley up on Livewire. Broker Speak, the things that brokers say and what they really mean. I like this. Research speak buy means it’s a large listed stock that could possibly hand us a corporate deal one day and we do not risk pissing them off. Hold, it’s a sell, but we’re not about to ruin years of relationship building between the analyst of the company and the corporate department by saying sell. Sell means they went with another broker. Conviction sell, they strung us along on that corporate pitch for weeks then did the deal through UBS instead and we are really, really shitty about it. And it goes on. We are moving from buy to hold, that means sell. We are moving from hold to underperform, that means sell. Underweight, sell. And then more brokers speak, “Hi, we haven’t spoken in ages it means damn I hit an old speed dial number.

Tony Kynaston [06:54]: I’ve got a few to add to that list too.

Cameron Reilly [06:56]: Oh yeah. What’s that? What are those?

Tony Kynaston [06:57]: When the chairman comes out and says we fully stand behind our CEO.

Cameron Reilly [07:02]: Yeah.

Tony Kynaston [07:03]: You can translate it as your toast.

Cameron Reilly [07:05]: Yeah. He’ll be gone within the week. Yeah. It’s kind of like when a prime minister comes in and says, we fully stand behind our minister when they’ve been caught in some sort of embarrassing scandal, right?

Tony Kynaston [07:14]: Yeah. Well, when the manager of an LIC comes out and says, “We like issuing options in our LIC because being bigger brings us better deals.” What they translate that to is and we get a bigger mandate, bigger a fee income from a larger base too.

Cameron Reilly [07:31]: Ah Right.

Tony Kynaston [07:32]: Yeah. And my favorite when the CEO starts selling stock, that came up last week as well, I was talking to someone and I said, “What do you think of this company?” I said, “It’s a growth company and I don’t like them.” And he goes, “Why not?” And I say, “Well, it’s basically a roll-up. So they’re just going out and acquiring other companies using their highly inflated P/E ratio and their elevated share price.” “Oh, well, I’m going to tell it to the CEO. I’m having lunch with him next week.” “Okay. Well, what are you doing now? I’ll asked him.” “Well, I sell their shares last year?” Because the standard one is like a CEO, they come out when the CEO sell shares, and they say things like, “The CEO needs to sell for insert reason here, one personal reasons, which means they bought a beach house, be it to sell for tax reasons, which means they’ve got a shit load of options and basically I think the share price is never going to be any better, so they’re selling. My two favorites, the CEO needs to diversify their portfolio. Well, if you don’t think the company’s worth buying, do [inaudible 00:08:35].

Cameron Reilly [08:40]: It’s like saying I’m having a bunch of affairs with different women, because I just needed to diversify my marriage a little bit, really.

Tony Kynaston [08:47]: Yeah, exactly. Yeah. Well, the CEO needs to sell to improve liquidity in the stock. Really? He’s a beneficiary of the index funds and he’s going to buy the stock. Come on.

Cameron Reilly [09:02]: Yeah, yeah. Nice. Back to the [inaudible 00:09:05] Padley list the one that, of course, I liked the most, is I am a value investor means I know nothing about timing the market.

Tony Kynaston [09:12]: Well, it’s probably true. Who does though? Really.

Cameron Reilly [09:17]: In our newsletter today, I’d put a quote. Let me see if I can find this. I put some quotes from Waldron’s book.

Tony Kynaston [09:34]: In Waldron’s book. I can’t recall what that was called. Something like a Building Wealth with Common Stocks?

Cameron Reilly [09:39]: Build Wealth with Common Stocks. Yes.

Tony Kynaston [09:41]: Yeah.

Cameron Reilly [09:42]: We’re in the process of lining up an interview for him to come on. This is him talking about people who try to time the market and play trends. He says, “From purely an investment standpoint, there were just a few market timers in each event who got in with a lucky twist of fate or the rare intuitive sense of market conditions profited and got out. Those are the ones who dominate the financial news feeds and sponsored content, giving a false appearance of the bullishness or the bearishness in the market fad among the masses of well-intentioned investors. The sobering truth reminds us the money-making headliners represent a tiny percentage of the active participants. Too many players in the fad lose money and echoing the typical casino gambler share only the rare winning bets. Just another reminder that market fads make money for a lucky few at the zero-sum expense of the silent investor majority that loses out from the desperate hope to make a lifetime of capital gains in a single market cycle. The list of household names who made fortunes beating the market by owning investments with utility over extended periods is lengthy. Yet, I am unable to name a celebrity investor off the top of my head who adds wealth year in and out on fast money market timing fads. Price is what you pay, value is what you get.” I thought that was a nice end quote.

Tony Kynaston [11:07]: Yeah. Good point. And that’s a warning lesson to all the people who are jumping into the growth stocks now, thinking they can jump out when the market turns.

Cameron Reilly [11:17]: Yeah. It’s very enticing. I get it. And it’s the same thing with Bitcoin or GME or any of these sorts of things. Like I’m sure everybody thinks, well, I’ll just get in and I’ll write it up and I’ll get out when it starts to go backward. But as you’ve pointed out on a number of occasions, well, how far back does it go before you get out? How do you know when to sell? Because nothing goes in a straight line, everything goes up in fits and starts. It goes up, comes back, goes up, comes back. How do you know when the right time to get out is and how do you do it before everyone else decides it’s the right time to get out? So I’m not sure what the answer to that is.

Tony Kynaston [12:00]: Well, the answer is in that quote that you can’t do it. Some people will do it, a small number will do it and they’ll trumpet it and people will use hindsight bias to justify that it can be done. But it can’t.

Cameron Reilly [12:10]: Yeah. It’s survivor bias, right?

Tony Kynaston [12:12]: Survivor bias. Yeah, exactly.

Cameron Reilly [12:13]: Yeah. When you look at the ones that make a million bucks and we go, “Oh, look at that. They can do it. I can do it.” Well.

Tony Kynaston [12:20]: Exactly.

Cameron Reilly [12:21]: Yeah.

Tony Kynaston [12:23]: Yeah. And those ones would do it, do they do it time after time after time? Do they have a track record of doing that over 10, 20 years with those sorts of plays or is it, you know, they win one, lose nine?

Tony Kynaston [12:36]: Yeah, exactly. That’s a good buy. That’s a good analogy. It’s like the PE companies who have a big portfolio on the basis that two will win and two will tank and the rest will go sideways. So these people are doing the same thing. They’re just doing it over market cycles. So they’ll have a couple of wins, a couple of losses and the rest will go sideways. It will take a whole lifetime to realize that.

Cameron Reilly [12:59]: Yeah. And the ones that are influential and have a brand, or have access to journalists, you know, are able to get in, pump it up, and then they know when to get out because they’re playing a pump and dump game.

Tony Kynaston [13:10]: Correct. Yeah. And it’s interesting, you mentioned GMA. That whole thing is a microcosm, isn’t it really? It was beat up by people rushing into, you know, the latest fad and then people got burned. Someone probably sold out at the top.

Cameron Reilly [13:24]: Yeah.

 

Tony Kynaston [13:26]: And we’ll hear about their story eventually, how they, you know, set up their life by trading GME stock through Reddit. But I’d say 99% of the people who bought GME stock are probably ruining it now.

Cameron Reilly [13:40]: Yeah, my mate, Chris, the ex-Uber guy was on Facebook the other day saying, “Be honest. How many of you heard me tell you to buy Bitcoin over the last five years and ignored me?” And I was like, “Me, and I’m still ignoring it.”

Tony Kynaston [14:01]: Yeah. It’s kind of worrying when there’s all these like-to-market people are coming into it now. All the fund managers saying, “Okay, we’ve got to have a bit of Bitcoin. Let’s throw it in. If we lose that money, who cares. If we win, we’ll look like we were pressing it.” Yeah. They know it’s a game.

Cameron Reilly [14:21]: Chris also posted a photo of himself with his new black Lamborghini. But good luck to him. I’m glad that he’s done well out of this, that or the other. But still, you know, it’s speculation. It’s gambling. And that’s okay if you want to gamble, gamble.

Tony Kynaston [14:40]: Absolutely.

Cameron Reilly [14:41]: If you want to be a gambler, then gamble. Yeah.

Tony Kynaston [14:43]: I gamble every week. Yes.

Cameron Reilly [14:44]: Yes, you do. But not with your real money.

Tony Kynaston [14:46]: Not with the real money. Exactly.

Cameron Reilly [14:51]: What else? A hundred billion ETFs. I don’t know if you saw this article. I threw it in the newsletter, I think, you know, I whacked it in the notes. Did you see this one?

Tony Kynaston [15:03]: No.

Cameron Reilly [15:06]: It’s an article that hit, not Livewire, Firstlinks today by Graham Hand, “Any day soon, perhaps now the Australian exchange-traded fund sector will exceed 100 billion. It’s a remarkable rise. It started 2020 at 62 billion giving an increase of over 50% in a year. In the last decade, ETFs have moved from marginal usage by specialist advisors into mainstream investments with 215 products listed on the ASX and another 11 ETFs and QMFs on the Chi-X.” And then he goes on to say, “Well, what’s driving the popularity of ETFs.” Point one, he says, usually very low management fees. Talks about bidder shares, Australia 200 EDF has a management fee of 0.07% a year. Vanguard’s US total market shares ETF 0.03% a year. But I like the second point. No, sorry, the second point is designed for international investments. Point three, rise of thematic funds people are getting into.

But at some point here, oh yeah, this is in the first point. He says, “In addition, there is strong evidence that most active managers fallow outperforms the index after fees over time. S&Ps SPIVA Australia scorecard reports on the performance of active funds against their respective benchmarks over different time periods evaluating over 900 equity funds in large, mid, and small-cap categories as well as 463 international equity funds. Although some dispute the analysis, the latest report shows, wait for it, 92% of global equity managers are outperformed by the index over 10 years and 82% of Australian equity funds.” That’s a good gig. That’s a good gig. What do you reckon? What do you reckon these fund managers are making? Taking home, a year 400 grand, 500 grand.

Tony Kynaston [17:16]: Yeah. That’s an average.

Cameron Reilly [17:17]: Outperform the index.

Tony Kynaston [17:18]: Yeah. But they don’t.

Cameron Reilly [17:21]: Yeah.

Tony Kynaston [17:22]: It’s an indictment, isn’t it, in the industry?

Cameron Reilly [17:24]: I mean, I know we’ve talked about this before, but every time that number hits me, I’m like, “Why do these people have jobs? Why are they keep getting paid?” Like seriously, how does that work? What kind of a racket is that?

Tony Kynaston [17:40]: Yeah. Well, it’s driven by superannuation too. Isn’t it? In Australia it’s because so much money sloshing around that they’ve got to put it some way.

Cameron Reilly [17:47]: Well, they just put it all into ETFs and go thank you very much. Good night.

Tony Kynaston [17:51]: That’s what’s happening.

Cameron Reilly [17:52]: That’s what’s happening.

Tony Kynaston [17:53]: That’s what’s happening. Yeah.

Cameron Reilly [17:54]: We’ll just go fishing for the rest of the year. Play golf. We’re done. Thank you. And then we put ourselves out of a job.

Tony Kynaston [18:01]: And all I’d say to the people who are doing that, which I think is a valid strategy is again, it’s a long-term investment because I think there is somewhat of a risk in all these index ETFs in particular. But I guess all ETFs is that next time we have a market downturn people will start withdrawing their money and it just becomes a negative reinforcement ring where the ETF has to sell BHP shares to pay out the person who wants to sell the ETF shares, which drives BHP down, which means the market drops even further, which means more people want to redeem. So there is some risk in this rise of index ETFs. If you have more and more people in the index, and they’ve got to stay on the index, even when it goes down because they will amplify the downturns in the market if you’re not careful, which will hurt them even more. Yeah.

Cameron Reilly [18:54]: Yeah. Yeah. Well, my last on this story.

Tony Kynaston [18:58]: No, it’s a good thing. It’s the first step on the investment ladder. Buy the index.

Cameron Reilly [19:01]: Yeah.

Tony Kynaston [19:02]: Yeah.

Cameron Reilly [19:03]: Yeah. No, my main thing was just 82% of active fund managers in Australia underperform the index over 10 years. Like what? That just…

Tony Kynaston [19:12]: So next time you open a Livewire email, just go one, two, three, four, five, six, seven, eight. Okay. Cross those off. Have a look at this guy and this guy, and that’s it.

Cameron Reilly [19:24]: Well, like in what other profession. That’s like saying 82% of doctors misdiagnosed stuff and people die. Eighty-two percent of operations people die. You’d be like, “Oh, well something’s wrong. What’s going on?”

Tony Kynaston [19:39]: Yeah.

Cameron Reilly [19:40]: Can’t get away with it. Well, I’m speaking of Livewire, my last news story for the day, you’ll like this one. Our old friend, Rudi. Rudi Filapek-Vandyck was in Livewire today saying value stocks are back. I got a nice laugh out of this. It’s an interview that James Marlay from Livewire did with our old friend, Rudi from FNArena. And there’s a quote here from Rudi saying that, well he was previously quoted as saying in their last interview with him last year that value investors were frustrated. But it’s back now because reporting numbers are good and value investors back. And I jumped on and I said, “Guys, value investors are doing just fine in 2020. FMG was up 200%. BFG is up 100%. C6C is up 100% in the last few months alone. Like value investors are doing fine. I don’t know what the hell are you talking about? Or what you’re looking at or who you’re talking about?

Tony Kynaston [20:48]: Well, look, it’s got to do with the indexes. There is a value index and there’s a growth index. And my understanding is, all I do, is I take all the companies in the stock market and rank them by their P/E and the sort of top decile becomes the growth index and the bottom decile becomes the value index. So it’s a very simple sort of calculation.

Cameron Reilly [21:09]: Yeah, but he’s not talking about indexes. Here’s the quote, “As recently as last August, Rudi told me that frustrated value investors should expect to remain just that for the foreseeable future.”

Tony Kynaston [21:21]: Yeah. If they’re doing value investing and not making money, they’re not doing it very well. They must be in those 82% of fund managers who don’t beat the index.

Cameron Reilly [21:29]: Do you remember when we had Rudi on the show, we asked him what his portfolio returns were over five years. Do you remember what it was?

Tony Kynaston [21:37]: It was slightly less in the market.

Cameron Reilly [21:39]: Yeah, I think so. It was about 8%, I think.

Tony Kynaston [21:41]: Yeah. That’s right.

Cameron Reilly [21:41]: On average.

Tony Kynaston [21:43]: Yeah.

Cameron Reilly [21:44]: I know who should be frustrated. Anyway. Good luck to Rudi. Nice guy, a lot of fun, big talker, long talker. Don’t get him started on CSL. Oh my God. Never hear the end of it. Here’s an email following on from something we talked about last week. This is from Dave. Hi, Dave. Dave says, “Hi, Cameron and Tony. Just a quick note on your topic of Roger Montgomery’s method of evaluating whether the market is overvalued. Warren Buffett also has a method of ascertaining whether the market is overvalued. He gave a speech in 1999 during dot.com bubble.” Hold on a second. Yes, Fox. What can I do for you, Fox?

Fox [22:20]: [inaudible 00:22:20] YouTube time now.

Cameron Reilly [22:23]: Yes, Fox. I will give you YouTube time. You’re not supposed to come in here.

Tony Kynaston [22:27]: Hi, Fox.

Cameron Reilly [22:28]: Tony says hi.

Fox [22:28]: Hi.

Tony Kynaston [22:28]: Can you put the refunds in? Hi.

Cameron Reilly [22:34]: Yeah. Okay. Hold on.

Tony Kynaston [22:36]: Is Fox watching Thunderbirds or Captain Scarlet or any of those good old shows?

Cameron Reilly [22:40]: No, he’ll be watching animated Minecraft shows about Minecraft. Or animated Mr. Bean, that’s his favorite show at the moment?

Tony Kynaston [22:51]: Oh, lovely. Okay. I love Mr. Bean.

Cameron Reilly [22:54]: Let me continue with Dave’s email. “He gave a speech in 1999 during the dot.com bubble and reprised it in 2001 after the pullback. They were two of the very few times Buffett commented directly on the level of the market and to me, they are the most interesting speeches ever given on market values generally. Briefly, Buffett’s method was this, take the value of the entire universe of US stocks and divide it by the US gross national product, GNP. By that measure, US stock values peaked in March 2000 at 190%. By 2001 it had dropped to 130% of GNP. Buffett said that if the ratio approaches 200% as it did in 1999 and a part of 2000, you’re playing with fire. I note that the US market is currently at 194%, and they have fire heating up. Even in the depths of COVID panic, at the end of March 2020, the US level had only dropped to 120%. The Australian market is currently only at 113% and dropped to around 80% at the end of last March. As it close, Buffett also said that if the percentage falls to the 70 to 80% area, buying stocks is likely to work very well for you.” Now, I know you’ve talked about this Buffett metric in the past. Is this time, it’s different Tony because of zero interest rates? Or do you think these are good numbers to pay attention to?

Tony Kynaston [24:14]: I think generally they’re good numbers to pay attention to. I mean, it worked in March, didn’t it? When our share market dropped into that 70 or 80% buying range and things have rebounded really strongly since there. Yeah. So yeah, I don’t think this time is different. But whether the US market, as we said last week, is at the top or not, who knows. I think it’s topping. But the last time around when I thought it was topping in 2000, it still had another 140% to go. So yeah. As I said, you can’t call the top but Buffett’s right. Be careful. I’m always reminded that at the start of the Hill Street Blues when they had their morning meeting before they go out and patrol and the last thing the Sergeant says is, “Be careful out there.” You know, it applies to us, especially in this kind of market, be careful out there.

Cameron Reilly [25:00]: Yeah. Well but then again, you also say, always be invested and…

Tony Kynaston [25:08]: Exactly.

Cameron Reilly [25:09]: We don’t try and forecast. And it doesn’t really matter to a QAV investor what stage of the cycle the market’s at, apart from the fact that sometimes there are more buying opportunities than there are other times. But we just play it day by day, watch the numbers and follow the rules.

Tony Kynaston [25:27]: Correct. As we did during the COVID cycle. I mean, it was good to go through. It was bad to go through, I guess, for a lot of reasons, but it was good to go through from a learning point of view. But we sold off what, 60% and then bought back in quickly because you know, the science told us to do that. My forecasts were all completely wrong. So there’s no point asking me what the market’s going to do. I’m just going to stay invested and follow the system.

Cameron Reilly [25:51]: Yeah. Speaking of your forecast, I think about every time I fill up petrol.

Tony Kynaston [25:55]: Yeah.

Cameron Reilly [25:57]: Remember at the beginning of COVID we were talking about, I think you’d heard from one of your contacts at Shell.

Tony Kynaston [26:02]: Yeah.

Cameron Reilly [26:03]: That was Joe.

Tony Kynaston [26:03]: Yeah.

Cameron Reilly [26:04]: That they were going to start doing pay at the pump.

Tony Kynaston [26:08]: Yep.

Cameron Reilly [26:09]: Yeah. It still pisses me off that I can’t pay at the pump. Why the hell do I need to walk. I do have apps now. But you need to…Don’t use your phone. But then they have to pull out your phone to pay, download their app and you can pay. I always forget to do that, though. I have to walk all the way in, stand in the little line and they try and sell me a chocolate bar or some bullshit donut, you know.

Tony Kynaston [26:32]: Very, very profitable for service stations to do that.

Cameron Reilly [26:35]: Yeah.

Tony Kynaston [26:36]: The other interesting thing that Joe was telling me though was, I mean the whole rise of the convenience stores because there was no margin in fuel. Back when I was working at Shell, fuel margins in the city were down to like 2 cents a liter, which was nothing. But now, I guess it’s been a bit of a shakeout. There are a lot of the refineries are closing, so the fuel is being imported. The supermarkets are running the big chains. Like BP’s only the big chain left that runs itself. And the fuel margins are back up to like 10, 20 cents a liter in the city. So I don’t know if that means that they’ll rely less on the convenience store income, but yeah it’s a different market now than what it was back then. Interesting.

Cameron Reilly [27:20]: Gravy. It’s gravy, isn’t it?

Tony Kynaston [27:22]: Yeah.

Cameron Reilly [27:23]: When that happens. Yeah.

Tony Kynaston [27:24]: Yeah.

Cameron Reilly [27:25]: Bonuses for the execs. New yachts, new beach houses.

Tony Kynaston [27:30]: Exactly.

Cameron Reilly [27:32]: All right. Let’s move on to your journal entries, you’ve had I think three journal entries in the last week, including one this morning. Not lot going on. In particular, before we get into the stock of the week, I wanted to talk about the Chris Corrigan Hawthorn Resources situation. This popped up during our Zoom call. And thanks to everyone who jumped on our Zoom call last week. It was huge. The room was packed. I think we had 27, 28 people on the call at some point. Very, very busy. A lot of people asking questions and they were from all over the place and new and old subscribers. It was great. But somebody did point out during that Chris Corrigan, who is a major shareholder of Hawthorn had resigned from the board and wanted to know your views on it. And you came back and said, yeah, it didn’t worry you too much. Why not talk to us about that?

Tony Kynaston [28:30]: Yeah. Well, I think it was, I didn’t know much about it and I haven’t been able to find out much about it. But yeah, I mean Chris Corrigan, I don’t think he count as a founder, even though we’d probably scored it in the QAV checklist as a founder-owner. I think there’s another person on the board who’s probably has a large holding toll. I’ll just check that. Anyway, Chris Corrigan isn’t the miner. Yeah, another guy called Mr. Li, L I, it’s still about 36% shareholding. Chris Corrigan, if it’s the Chris Corrigan, I’m thinking of is known for the waterside docks disputes back in John Howard’s days. So he’s been an investor since then.

Yeah, but there’s been a total absence of news around this, which I find really strange. They should have by now given some kind of commentary to the market about what happened. I suspect that there’s a falling out between a director and management around where the company’s going. There’s been short-term you know, price depression because of it. So it’s obviously a significant event, but we haven’t reached out three-point sell lines, which are quite low for Hawthorn Resources. So yeah, it’s in our dummy portfolio and I’m keeping it there until we either breach or we get some more information to go on. But at the moment we’re operating in a vacuum.

Cameron Reilly [29:56]: Yeah. I think it is the same Chris Corrigan.

Tony Kynaston [29:59]: Okay.

Cameron Reilly [30:00]: I did a little bit of research on it. On their website Hawthorn, it says he was chairman of Cube Holdings Group.

Tony Kynaston [30:08]: Yeah. That’s the one.

Cameron Reilly [30:08]: I think Patrick’s Corporation, Chris Corrigan ended up also being involved in. Yeah.

Tony Kynaston [30:14]: Yeah. Correct. And I did read something on one of the sites, it might have been HotCopper or one of those kinds of sites, as I was trying to search for information saying that he had somehow been granted a lot of those shares. So that was seeming to imply that he’d bought shares in the company and it paid a special dividend soon afterward, which went a long way to, you know, topping him up for what he paid to get into the company. So I’m not sure if that’s true or not. I don’t know much about the company. But you know, he’s picked up his stumps and gone home for some reason.

Cameron Reilly [30:50]: Well, I know that his departure did nothing at all to the share price. It didn’t flinch. Didn’t go up. Didn’t go down. Still around 9 cents where it’s been for quite a while. So yeah, unfortunately, because it’s down 33% since from when we bought it. But as you’ve pointed out in the past when you look at the dividends that it’s returned in that period of time, I think it’s a little bit underwater, but nowhere near 33%. Maybe a couple of points but nothing that’s worth worrying about.

Tony Kynaston [31:23]: Yeah. I’m kind of surprised though that there hasn’t been an announcement from the company I’ve heard and the ASX hasn’t said, Hey, what’s going on here?

Cameron Reilly [31:32]: Yeah. Right.

Tony Kynaston [31:33]: I would have thought it was material in that respect. But no, it was just a two-page letter saying that he’s resigned. That’s it?

Cameron Reilly [31:41]: Right. Okay. There you go.

Tony Kynaston [31:44]: But look, as I said at the Zoom call if you were worried about it, if you think that’s a significant event and you know, you’re a shareholder and you feel more comfortable selling them, then you know, go ahead and sell.

Cameron Reilly [31:55]: Yeah.

Tony Kynaston [31:55]: As we said, there’s been special dividends paid out, so hopefully you’re not too far underwater and you can get out if you’re uncomfortable. But at this stage, I’m going to at least keep it in our dummy portfolio. I don’t own shares in this company at all.

Cameron Reilly [32:11]: Right. Okay. Well you’ve posted a lot about a lot of things. We don’t have to cover them all. Do you have a pick of the week?

Tony Kynaston [32:21]: Difficult. Possibly Bank of Queensland, which came into the buy list this morning after the latest download. But it’s only got a QAV score of 0.10. So I’m kind of hesitating to make it stock of the week. But in the absence of that, there isn’t really a stock of the week. There’s a couple of which are coming close to their buys like Telstra, which is not a company I like anyway, but it is a big solar company and it’s about a cent off it’s buy price in terms of sentiment. And Mayfield Childcare, which we spoke about in the Zoom call is about half a cent off its buy. So I suspect at some stage this week, both of those will become buys and people might want to look at those and do some research on those for themselves.

The other one was CVL. I’m just going to look at CVL which is a small engineering company, civil and mechanical and their share price went on a tier recently, went up quite a lot. So that came close to stock of the week, but I didn’t like to recommend it. Not that I’m recommending it to buy, I’m recommending it to research. But their average daily trade is only 7,600 shares. That’s quite small. So even though it’s gone up and it scores well I didn’t want to recommend it. So that was the kind of three or four hours tossing up, but I’d probably use Bank of Queensland. Again, it’s following the same sort of story that most of the banks are now and particularly Commonwealth Bank did when it joined our buy list a few weeks ago. After it reported, a lot of these banks have done well for a couple of reasons. One, because most of their operating cash which is interesting to us is coming from, you know better borrowing conditions in terms of when they borrow money to then lend out as mortgage with the customers or credit card debt or whatever, or personal loans because you know, interest rates were still coming down last year and particularly in response to COVID they were coming down a lot.

And then sentiment is kind of coming back to the banks. Because last year there was lots of doom and gloom talk around people not being able to pay their mortgages. There were lots of people taking up the option of taking a mortgage holiday for six months on repayments. But the wash-up from all of that is that most people, the vast majority of people are backed to repaying their mortgages. And one thing that’s happening, which is often a big driver of Bank Sentiment is that the banks would have taken provisions against all those things last year. And they’re starting to what’s called write those back in their latest results. So that means that they kind of provided for the worst-case scenario which when a company provides for something, it means that they take money out of their profit and loss account and transfer it to their balance sheet account, which means that they can draw it down in the future if they need to, to cover expected losses in this case because of people not paying their mortgages.

But they’re starting to pull those back off the balance sheet, which means they’ll get written back into profit, which inflates the profits. So there’s a little bit of that going on, which is a good sign for banks. It means things haven’t turned out as bad as they forecast. And so most of the banks are in an upward trend at the moment. Certainly, Bank of Queensland is, and it reported just recently over the last couple of days and I’m just looking at it now, it’s at 5% today as we speak.

Cameron Reilly [35:54]: Nice. But not that exciting.

Tony Kynaston [35:58]: Correct. It’s not shooting the lights out, it’s at the bottom end of our buy list. But again, as I said, in the Zoom call, some people might feel more comfortable buying companies that they know a lot about because they’re out in the communities that we visit and trading and Bank of Queensland is certainly one of those. And that you know, these companies, if they keep going up won’t stay on our buy list for long. So if you do feel the need to invest in blue-chip companies that are a bit, you know, beaten down by things like COVID, but they’re coming back, this is your opportunity to do it at a good price.

Cameron Reilly [36:34]: Yeah. All righty. I do note though that their share price was going backward for a long time before COVID. I just did the chart on it. It’s just crossed over the buy line, but sort of a falling knife for the last few years.

Tony Kynaston [36:47]: Yeah, true. It has been what. Now you’ve got me there. Bank of Queensland, I’m speculating now. I shouldn’t speculate. It’s had its issues. Obviously, the Hayne report was in there, Hayne Commission beat up the bank stocks. I know Suncorp has insurance. Bank of Queensland may have had insurance as well. Insurance hasn’t done well lately over the last couple of years. So it could be a bit of that. But I think the banks have just had a general issue with Hayne and with COVID and with other things like that.

Cameron Reilly [37:26]: Right. Well, yeah. Okay. COVID obviously, it was last year, but they’ve been going backwards for a couple of years. Maybe it’s the Hayne thing that you mentioned. Alrighty. Well portfolio updates. Not much to talk about. We went up a little bit last week. The market didn’t really do much last week. It’s kind of flat. We went up a point or so, but just ticking along waiting for the other shoe to drop, I think.

Tony Kynaston [37:54]: Yeah. Well the other shoe to drop will be the companies that report for the rest of February.

Cameron Reilly [37:59]: Yeah right.

Tony Kynaston [38:00]: That’s going to be the big drive in the market. I think it always is in February.

Cameron Reilly [38:04]: For the market to crash.

Tony Kynaston [38:06]: Or to crash. Correct. I think we’re going to, I mean, I think the sort of feeling is that this reporting season will be pretty good because they’re cycling off, you know, sort of COVID numbers. So they’ll look good. And most companies have come through COVID pretty well. So there’s a bit of relief out there I think when we actually see the numbers that they’re okay.

Cameron Reilly [38:29]: Right.

Tony Kynaston [38:31]: Yeah. But when I say that the market will move, what we generally see, what I often see in company reporting month is that all of the stocks we hold might jump 10 or 20% because they’ve got good numbers. And the classic example of that is Credit Corp, which reported very early in the season and jumped up straight away.

Cameron Reilly [38:52]: Yeah.

Tony Kynaston [38:53]: Yeah.

Cameron Reilly [38:54]: Which is good because it’s in my portfolio and I’m happy about that.

Tony Kynaston [38:57]: And me too. [inaudible 00:38:55] I own two.

Cameron Reilly [39:00]: Good. All right. Well moving right along. Let’s get into questions. This first one is from Samuel, “Bonjour Cameron, could you please ask some clarification on the topic of on-market share buy-back facility, which some companies are using at the moment. AFIC is going through that. I know they’re not part of the portfolio or the buy list, but it can happen to any other shares. It’s obviously authorized by the ASX and the regulators. Why would they do that? They say it is for capital management, but what does that mean for them and for me, the shareholder? How does this affect the QAV calculation? At the very least it should be reflected in the number of shares. How does Tony react or plan to act when a company he owns goes through that? The company in answer how many shares they will buy it should lift the price somewhat, but wouldn’t it affect the shareholder who does not sell at least on paper. I would love to have your insight. Thanks, Samuel.” What’s a non-market share buy-back facility, Tony?

Tony Kynaston [40:03]: Yeah. So it’s when a company buys back its own shares on the market. So I actually think these are very positive things. And if it’s happened to a company that I hold shares and I definitely hold them and I don’t sell into the buyback because the share price goes up. Generally, it should. Because if you think about it if a company is worth a dollar a share and there’s a market cap of a million dollars and there are a million shares, then if I buy back 10% of the shares, there’s still the same. It should be still the same you know, profitability for the company. So the share price should rise by 10% to $1.10 because there are less shares. But the company should have the same sort of market cap roughly.

So I wrote it as a good thing. And generally, it’s a sign that management are bullish on the company. So they’re seeing that buying their own stock is preferable to reinvest or to invest in other things. In this case AFIC is also the investment company. So the other things they could invest in is the share market in general. So it was kind of a bit of a telling situation that they’d rather buy their own stock than to buy the shares on-market. That’s one thing. There are cases where it’s it can be a way for the company to release franking credits. And by that, I mean that there are circumstances.

Cameron Reilly [41:33]: What’s that like welease woger?

Tony Kynaston [41:34]: No.

Cameron Reilly [41:35]: Have to release franking credits.

Tony Kynaston [41:38]: Release Frank.

Cameron Reilly [41:41]: Who should I release? Release franking credits. Sorry, continue.

Tony Kynaston [41:46]: No, that’s okay. That’s a pretty dry topic, but a franking credit is generated when a company pays tax. And then when they pay a dividend, the franking credit for the tax they’ve paid on that profit gets added to that dividend and then can be used by shareholders depending on, you know, whether they’re individuals, companies, or superannuation funds or whatever. So it depends on how much tax you’re paying is how much franking credits liable. But if the company’s paying lots of tax and not paying much in the way of dividends and the franking credits build up on an account within the company’s books and so sometimes occasionally what they’ll do is they’ll conduct a buyback at some stage, like maybe once every 10 years and make the payment partially in a dividend so that they can release some franking credits.

So it’s a much bigger dividend than what they would normally pay out in any one given year. So that’s possible too. I don’t know the details of the AFIC case. But yeah, so if I own shares in AFIC, I would definitely hold and I would expect the share price to rise as they buy. In terms of it being a non-market facility, I’m guessing that what’s happened is, is that the AFIC has announced that they’re going to at some stage during the next 12 months, buy shares on market, up to say an X million dollars’ worth of shares. Now that gives them the option to buy shares. They may not buy the shares. They might decide that, you know, that it’s not a good time to buy them shares after all. Something might be happening in the market, which they couldn’t foresee. So just because they’ve announced the facility, doesn’t mean that they will buy on market. But once they do, they have to tell us. So yeah, I would be holding.

Cameron Reilly [43:26]: So A F I C, I would pronounce that AFIC.

Tony Kynaston [43:31]: Correct.

Cameron Reilly [43:32]: From what you said about…

Tony Kynaston [43:33]: Australian Foundation Investment.

Cameron Reilly [43:34]: On market share buyback facilities, as you don’t give AFIC.

Tony Kynaston [43:39]: I liked them. I liked being a shareholder in the company that buys back their shares. It generally results in the share price going up.

Cameron Reilly [43:46]: All right. Well, that’s a good way to stomp on my joke. Come on. You could have given it a little bit of air there. Like laugh for at least. I’m going to have to edit in laugh time there now. You just rode over the top of that.

Tony Kynaston [43:59]: Yeah. There’s no crowd. We have to edit in the laughs.

Cameron Reilly [44:03]: And the applause.

Tony Kynaston [44:05]: Exactly.

Applause [00:44:05]

Cameron Reilly [44:07]: Stupid Freeman. [crosstalk 00:44:08] Thank you, Samuel. James. Jamie Oliver, keen on thoughts on GDG has an interesting structure called a Pooled Development Fund, which seems to confer tax advantages to shareholders.” A Pooled Development Fund, I’ve got a feeling we’ve talked about these before.

Tony Kynaston [44:36]: Yeah. I don’t know. We might have. We’ve probably talked about some other tech structures out there. I think someone asked us about a stapled security where there was a trust stapled to the shares, which is sometimes used. I’m going to read out from GDG website about the Pool Development Fund status, so that’s coming from the horse’s mouth. The PDF program closed to new registrations in 2007. Although the program benefits remain for existing PDFs, including the General Development Group GDG. As at February 2018, there were 23 registered PDFs in Australia. Various tax concessions are available to both the PDF and its shareholders under Australian tax law. Those available to the company shareholders are as follows; shareholders, both resident, and non-resident are exempt from capital gains tax on disposal of their PDF shares. Resident shareholders are exempt from income tax on unfranked dividends. With regards to frank dividends, they may choose to either exempt or be assessed and claim the franking credit. Non-resident shareholders are exempt from income tax and withholding tax in respect of both franked and unfranked dividends. In addition, capital losses on the sale of the PDF shares are not deductible and borrowing costs associated with acquiring PDF shares are not deductible to the extent that the PDF shares produced exempt dividends. So that’s what a Pool Development Fund is.

Generally speaking, these kinds of things come along every now and then. This one obviously came along back in 2007 and they would have been set up by the government to meet some kind of need which, you know, I guess it’s attracting investment in this case. It doesn’t say what the caveats are on where they can invest. But sometimes these are set up with very specific targets in mind. Like I know this company produces annuity, so maybe it was to try and inflate the annuities market. Or sometimes these kinds of things are done to attract people to invest in infrastructure or companies that undertake household building or something like that. Just reading through this one though, it’s a bit of a, I think in most cases it would be a zero-sum game, and this is definitely not financial advice. But in this case, what they’re saying is you don’t pay capital gains tax, but you can’t claim capital gains tax losses. So it’s kind of one side balancing out the other and you don’t have to pay income tax on dividends. But you don’t get the benefit of the franking credits. Or you can take the benefit of the franking credits, but pay income on dividends.

So, you know, this is the kind of thing which if you wanted to invest in, you know, you need to talk to your accountant and get advice that’s relevant to your particular circumstances. Like, for example, if you had a big income tax bill this year, there might be some benefits in buying shares in a company like this but I really hesitate to give any sort of financial advice. But I did want to make some general points, Cam, and not specifically about GDG Pool Development Funds. But the general advice I’d want to tell people about is please don’t do things because of the tax advantages. So from time to time, there are schemes out there that are promoted to people as a way of reducing their income tax. But, you know, almost all the ones I can think of and I don’t know GDG, they generally are subpar investments and even though they have a tax benefit to you, you’re usually worse off than if you had found a good quality company to invest in.

So my general rule is if you buy things first based on the investment thesis and if they have a tax benefit, happy days. But don’t do it the reverse way around because generally, you know, it doesn’t produce good returns over the long haul. Definitely stay away from people who promote these kinds of schemes. Again, I’m not talking generally about GDG or Pooled Development Funds, but oftentimes when something new comes into the market like this, excuse me, whether it’s a primary producer fund, so you might get a tax benefit from investing in companies that buy macadamia nut plantations or whatever. Then again, I’m not picking on one particular sector of the market. But when they get promoted as being tax beneficial, again, that’s usually a warning sign for me. Please stay away from them.

And also you’ve got to be okay in the Australian tax code anyway, there’s a thing called Part Four which basically says that if you do anything to avoid tax, you can be held liable. So if you were going to invest in one of these things and we’re doing it for tax reasons, then the good ones have already had an ATO ruling and the tax office, ATO is Australian Tax Office. They will do that for various Pooled fund operators and scheme operators though. I’ll say, look, tell us what you’re doing and we’ll make a ruling in advance to say, yes, it’s kosher or no it’s not. And if you don’t see that, then it’s definitely not worth being involved in because you are always liable for Part Four problems.

So at some stage, the tax office could say to you, well you can’t claim the tax benefits you thought you could because it’s signed too close to the wind for tax avoidance. So and the last point I’ll make is to stay clear of complexity in these kinds of structures, especially if they have overseas components to these structures. Like, you know, I’ve seen cases in the past where Company A runs Company B. Company B’s resident in the Virgin Cayman Islands, and they own a trust, which is, you know, then crossholding in Company A again. Anything with that kind of complexity is just fraught with difficulty, open to being assessed at some stage in the future as being non-compliant and generally structured for the tax benefits and not the investment thesis. So they’re my kind of general rules about investing in things based on tax structures and my overarching comment is don’t. Just do it if you think it’s a good investment.

Cameron Reilly [51:01]: All right. Pooled Development Funds. There you go Jamie. Thanks for the question. The next one in our notes from Brent, we did last week. I think I put it in here because I didn’t know if we’d have time last week and I was getting ahead of myself. So the one about VUK and the banks, et cetera.

Tony Kynaston [51:19]: Yeah, sure.

Cameron Reilly [51:20]: Yeah. Nick Bailey. “Hi Cam, does he…”

Tony Kynaston [51:25]: Sorry. Sorry. Did you want to do Brent’s question or not?

Cameron Reilly [51:28]: No, we did it last week.

Tony Kynaston [51:29]: Oh, we did it. Oh, sorry. Okay.

Cameron Reilly [51:31]: Sorry. I hope you didn’t prepare for it again.

Tony Kynaston [51:34]: I did.

Cameron Reilly [51:35]: Sorry.

Tony Kynaston [51:36]: Short-term memory loss. I must’ve zoned out last week.

Cameron Reilly [51:41]: I just looked at it and went he zoned out. You did the talking. How do you zone out while you’re doing the talking?

Tony Kynaston [51:49]: [inaudible 00:51:49].

Cameron Reilly [51:50]: Let me read what you said. Probably the thing to note about VUK, which we spoke about before, was it went from negative operating cash flow to positive operating cash flows. So that’s one thing to note about them. Good thing to note about them now. Blah, blah, blah, blah, blah.

Tony Kynaston [52:02]: Yep. Okay.

Cameron Reilly [52:03]: Yeah. He zoned out. I zone out. But you can’t zone out unless you’re on freaking [inaudible 00:52:12]. Auto QAV bot.

Tony Kynaston [52:16]: Yeah. [inaudible 00:22:17]

 

Cameron Reilly [52:18]: Yeah. Speaking of Negronis, we were talking last week about whether it’s masculine singular or masculine plural or feminine. It’s named after Count Negroni. That was his name, Count Negroni.

Tony Kynaston [52:31]: Oh okay.

Cameron Reilly [52:32]: So I don’t know. I guess he’s male.

Tony Kynaston [52:35]: Masculine.

Cameron Reilly [52:36]: Damn right, he is.

Tony Kynaston [52:37]: Yeah.

Cameron Reilly [52:37]: Does that mean the drink is? A drink. I don’t know. Are all drinks masculine? Got to ask my Italian coach this week.

Tony Kynaston [52:45]: Okay.

Cameron Reilly [52:45]: Okay. Nick Bailey. “Hi Cam, does he see a pattern?” He, by he. She means either God or you. The Royal He.

Tony Kynaston [52:27]: In small H that’s has got to be me. Hasn’t it?

Cameron Reilly [53:00]: Well, no, that’s what’s confusing. [inaudible 00:52:57] you’re the capital H. God is the small one. Let’s assume he talks about you. Does Tony see a pattern in the way stocks react around reporting season? And would he mind discussing some of the most important things he looks for around this time?” Thank you, Nick.

Tony Kynaston [53:19]: Couple of things. There are often quick moves after the results drop. I think we spoke about that recently as well. But you know, I’ve been in results presentations in the city when 25-year-olds with laptops running and typing and run out again to get to the next presentation. And you know, issuing buy and sell all this based on what they’re hearing at the results presentation. So it doesn’t take long for the stocks sometimes to move 10, 20% in the first couple of days. So don’t take your eye off the ball and it can be a bit frustrating sometimes waiting for the information to come through on the Stock Doctor. So, you know, you might need to go to the company announcements and put the figures in manually if you’re concerned about the share price jumping either way up, or down. But they do move quickly.

Having said that though, it’s never been a real problem for me. I can always get set as soon as the numbers hit Stock Doctor and still get most of the upside if they’re going up, which is what we try to do. And then the other thing to watch around company reporting season is what happens to the share price in the weeks leading up to it because that can often be an indicator of either what the analyst thinks is going to be announced, or there’s been some kind of leak somewhere which is not meant to happen. But it clearly does because shares will move based on either known information or assumed information. So oftentimes it can be a signal that if the company’s share price goes up, you know, 5 or 10% before the results are out, that’s going to be good. And the reverse, if they start going down, it’s going to be bad. So yeah, that can be something to watch out for too. But having said that neither of those really changed the way I invest. I wait for the figures and then I make my decision unless those centimeters are breached either way.

Cameron Reilly [55:07]: Alrighty. Thanks, Nick. Chris. “Hi, Cam and Tony, interested to hear your view on MSV, the impairment announcement on the 12th of February, and the resulting 20% drop in stock price. Stock is well above its three-point trend sell line at 33 cents. While not meeting one of the QAV sell criteria, I’m interested to hear Tony’s view on this announcement and how it impacts his view and sentiment for the stock. Thanks. And keep up the great work, Chris”. MSV. It’s Mitchell, isn’t it?

Tony Kynaston [55:42]: Mitchell Services. That’s right. Yeah. So they’re a provider of equipment to the mining industry. I think they provide drilling rigs to the mining industry. Well, first of all, it’s sad to hear that this has happened to them. Yeah, so I had a look at their announcement about it. And basically they’re saying the business is working really well, but we had this one supplier who wasn’t paying us and we decided to write off the 7 million bucks that were owed and we’ll try and get it back through the courts or through whatever methods are available. So it’s not a great thing to happen, but it’s not the end of the world either. And I’m thinking about the coffee shop analogy and trying to explain to people what’s happened. So it’d be a bit like if the coffee shop decided to branch out into catering and the proprietor, you know, catered for the office Christmas party and the office building next door, and then the company went bankrupt and didn’t pay their invoice or refuse to pay their invoice.

So yeah, the guy’s going to take or the operator of the coffee shop’s going to take a hit, but it doesn’t affect the underlying business. It might mean he looks differently about catering in the future, or it might mean he asks for significant deposits or he ask for cash up front. But it’s not the end of the world. So I’m sorry, I shouldn’t be so sexist and say he about the manager of the coffee shop, but I guess there’s a balls up. So it’s good to say he when there’s a problem and try and say she when they get it right. But I think that’s what’s the case here. I mean, I think it’s pretty poor of management to let the invoices roll on until it’s a $7 million impairment. They obviously knew they were having problems and you wonder why they didn’t try and step on it earlier. Having said that it’s not going to bankrupt the company and it seems like the rest of the business is doing well and they would have learned from this. So you would hope that they wouldn’t repeat this mistake in the future and will do better. So yeah, I’m sad that the share price has dropped, but again, I’m waiting for the figures to come out when they released their results soon.

Cameron Reilly [57:56]: Right. Okay. So hopefully it’ll come out in the wash if the company’s doing well.

Tony Kynaston [58:04]: Yeah. I think so. I mean they’ll take a short-term hit and they’ll try and get the money back. So there’s even an upside in the future if I get it back. Although these things never end or that, well, they might get some back. I don’t know much about who owes them the money and why. If it to the [inaudible 00:58:17] contract, it’ll probably be sorted out in the courts. But if the company went bankrupt, they’ll get, you know, 10 cents and a dollar as an unsecure creditor. So they won’t get much back.

Cameron Reilly [58:27]: Okay. Well, thanks for that, Chris. Alice. Alice says, “Hello, Cameron Riley, a couple of questions from Monday. Has Tony removed his share analysis scores from last year, especially now the December 20 financials are being updated in Stock Doctor and in the TK buy list last period analyzed column. Is Tony updating these dates, for example Korvest.” I’ve got two questions. Share analysis, have you taken out all your share analysis scores? Or I guess when you’re redoing them.

Tony Kynaston [59:01]: Yeah.

Cameron Reilly [59:01]: You’re redoing the stock you’re taking it out.

Tony Kynaston [59:03]: I am, yes. I’m leaving it until I need to redo it. And it’s not there. So some of them still have share analysis scores in because we don’t have the latest figures. But when we get those figures I’ll take it out.

Cameron Reilly [59:13]: Okay.

Tony Kynaston [59:14]: Yeah.

Cameron Reilly [59:15]: And Alice’s second question in the TK buy list. “Last period, analyze column is Tony updating these dates, for example, Korvest to sell 30th of June 20. The reason for my questions is that I like to use this list as a reference to make sure my checklist is on track.” Nicely said, Alice.

Tony Kynaston [59:32]: Yeah.

Cameron Reilly [59:33]: You’ve been listening to what we say, actually used. Thank you. I think you did. In your buy list today, I noticed you were putting a lot of dates in.

Tony Kynaston [59:42]: Yeah. So I think, first of all, the last period analyze column I should say is downloaded from Stock Doctor. So that’s provided by Stock Doctor and that tells us which period the figures are based on. What I put in is in the manually entered data tab. I have one called data entry date or last date sentiment checked. And I put those in, when I have last checked either the figures or the share price graph.

Cameron Reilly [01:00:08]: Right.

Tony Kynaston [01:00:08]: And I keep those up to date. So yeah, Korvest, as she said, we’re still waiting for December results out of Stock Doctor.

Cameron Reilly [01:00:17]: Right. So the last period analyzed is basically the last reporting that Stock Doctor’s…

Tony Kynaston [01:00:24]: Correct.

Cameron Reilly [01:00:25]: Based its numbers on. Not when you’ve last looked at it.

Tony Kynaston [01:00:27]: Correct. So, yeah.

Cameron Reilly [01:00:29]: Yeah. Okay.

Tony Kynaston [01:00:29]: And that comes from Stock Doctor direct last period analyze that’s part of the filter download that we get.

Cameron Reilly [01:00:35]: Yeah. Right.

Tony Kynaston [01:00:36]: Yeah.

Cameron Reilly [01:00:36]: Good. That is a little bit confusing. I can see why Alice is confused. Ben. “Hi Cam, loving the work you and Tony are doing.” Thanks, Ben. We love your work as well, Ben. Keep it up. “In regards to KRM while it scores highly and is…

Tony Kynaston [01:00:52]: What does Ben do?

Cameron Reilly [01:00:53]: I don’t know. But whatever he does, I’m sure he’s really, really good.

Tony Kynaston [01:00:52]: Yeah, that’s right. Well, that’s the nice thing about our listeners. They’ve got enough money to invest in the stock market. So they’ve been doing something well, haven’t they?

Cameron Reilly [01:01:01]: Yeah, well, hopefully, yeah. Yeah, yeah. Can I keep going now?

Tony Kynaston [01:01:08]: Sorry.

Cameron Reilly [01:01:09]:  “In regards to KRM, while it scores highly and has been on a bit of a run recently, which seems to validate the methodology, the company has just put their mine on care and maintenance, decommissioned the processing plant, and sold the last of the gold and silver from the mining operations. As such, they’ve gone from a producer generating cash to again being an explorer who will only be burning cash with none coming in the front door. How does this affect Tony’s investment thesis? Tony.

Tony Kynaston [01:01:40]: How do you reckon?

Cameron Reilly [01:01:41]: By the rule. Hold on. AFIC.

Tony Kynaston [01:01:44]: AFIC.

Cameron Reilly [01:01:44]: You give AFIC. I think we answered the same question, I think from Daniel last week about this.

Tony Kynaston [01:01:53]: Similar, although there’s more information from Ben. He’s obviously done his research about KRM. I tried to do some research in preparing for this. It looks like they’ve shut down one mine. The other one might still be going, although I’m not a 100% sure because I couldn’t get to the bottom of it. And the exploration they’re doing is around whether they should open up the other mine. Well, they operated two mines, definitely closed one. They may have closed two. One that they closed look like it was closed down to COVID. So they’re just trying to do a little bit of exploration around that model to see if it’s worth reopening. So it may stay shut. And the other one [inaudible 01:02:34] Santo, I think it’s either if it isn’t going now, they’re doing the same thing. They’re doing some further deeper drawing to see if it’s worth opening up.

So they could either way they could open up those mines again. But yeah, look, it does introduce more risk into the operation if they’re basically speculating that they’ll find gold when they explore for it. Although it looks like most of the exploration is within their existing sites. So it does increase the chances, but either way, it doesn’t worry me. They’ll either, you know, fail sentiment at some stage in the future when the cash flow starts going down or strike it rich and open up again. So it does kind of explain why that if you look at their share price graph, they’ve been virtually going sideways. There’s been some slight increase. So that makes sense if they’re not mining and selling. But yeah, it doesn’t worry me that much about their change in their operations and we’ll just see how it pans out.

Cameron Reilly [01:03:40]:  So for new listeners, when we get a lot of questions about the operations of different companies from time to time every week, actually people are, what are they doing here. And as we always remind people, Tony doesn’t really pay a great deal of attention to the minutia of the operations because he’s looking at the numbers and figures. The numbers tell the story about how it’s doing. If the business is doing badly, that will show up in the numbers and in the sentiment and we will act accordingly. It’s not our job to get down into the nitty gritties. You’re welcome to do it if that’s what turns you on. But Tony would rather play golf and just watch the numbers.

Tony Kynaston [01:04:25]:  Yeah. I said this before, there are certainly analysts out there who focus on one industry who know far more about gold mining than I do. I [inaudible 01:04:34] at goldmine, but you can’t invest across the market and apply that kind of detailed knowledge to your investments. You just wouldn’t have time or experience to do it. So you’re either in a vest of like I am paying attention to the numbers and sentiment and happily buy into any company that meets our criteria. Or you’re someone who knows a lot about one particular part of the market and stays within your circle of knowledge. Otherwise fine. But I’m certainly the former rather than the latter.

Cameron Reilly [01:05:06]:  And, you know, Buffett and Munger and guys of that ilk do get into the nitty-gritty and they like to understand everything about the business they’re investing in and they will spend their days reading reports and, you know, all that kind of stuff, which is great and they’ve done very well out of it. But, you know, I guess one of the things that, as I always say, one of the things that I find exciting about your system is it doesn’t require me to do that. It basically takes more of a meta-view on the performance of the business, by looking at the numbers and also the analyst writings of it. We take into account and Stock Doctor’s, you know, ratings of them, et cetera. Their star ratings and that kind of thing, where all of that kind of stuff, the analysts do their work. And then it shows up in the checklist in those sorts of numbers.

Tony Kynaston [01:05:59]: Yeah. And look, I’m not saying that somebody, or we’ve got listeners out there who are mining experts. I’m not saying that they can’t get better returns in this particular sector. And I’d love to have their input. But yeah, I’m agnostic in terms of these kinds of operational issues. It’ll come out in the wash at some stage and we’ll find out and make a decision.

Cameron Reilly [01:06:17]:  You don’t give AFIC.

Tony Kynaston [01:06:18]: That’s right.

Cameron Reilly [01:06:19]: As you said. And the last question. This isn’t on the list but I wanted to throw this in any way because Andrew, flip man of the new spreadsheet, new listener, new club subscriber was asking me in emails today about the VUK sell line, V U K, and he’s getting worried. I think he bought VUK and he’s worried about where the sell line, how low the sell is at. I just want you to reiterate for the benefit of Andrew your policy on holding until it hits the sell line, even if that means holding for a long time.

Tony Kynaston [01:07:01]: Yeah. The policy is you hold until it hits the sell line. The sell line is going to be; I’m just having a look at it. Just eyeballing it. It’s going to be, you know, around a dollar, I guess. A dollar, $1.30.

Cameron Reilly [01:07:16]: Yeah.

Tony Kynaston [01:07:17]: And the share price is nudging $3 now. So that’s got a long way to fall.

Cameron Reilly [01:07:21]: Yeah.

Tony Kynaston [01:07:21]: Yeah.

Cameron Reilly [01:07:23]: Yeah. Like I said to Andrew.

Tony Kynaston [01:07:24]: That’s a lot of time.

Cameron Reilly [01:07:26]: It’s a question we get a lot. And he’s like, but if it keeps dropping and it’s going to take years to get down there and I’m going to lose money. And I pointed out that what you’ve told me is that in your experience, and actually I pulled up for and sent to Andrew a link to an episode that I’ve actually listed in the QAV Bible for when people ask this question. This is going back about a year ago. I think we did an episode where we were answering this. It was the episode if people want to listen to it, Season Three, Episode 31 ran about the 31-minute mark, you said something to the effect of look, you know, yes, it looks like you could be waiting for years for it to get down there. But in reality, you really only usually waiting six months at the most because the new reporting season will come along, new figures will come out and it will either go up or it’ll go down at that period. And we’ll either hold onto it because it’ll go up or it’ll go dramatically down when they release some bad numbers or something and it’ll hit the sell line and we’ll get out.

Tony Kynaston [01:08:39]: Correct. Yeah. No, I’m not that, I understand the concern that you know, if we’re saying the sell was $1.30 and the share price is three bucks. If it does drop back to $1.30, then you know, we’ll look foolish. But things unfold over time. That gives us a lot of breathing time to see what happens. And it’s possible that you know, that things could go wrong, but there’s a lot of time then for things to go right as well. And oftentimes these shares do have pullbacks and go forward. And it actually helps us be less volatile by having that low sell price in this instance.

Cameron Reilly [01:09:26]:  I should point out that Andrew said in his email that he bought it at $2.34.

Tony Kynaston [01:09:30]: What’s the problem?

Cameron Reilly [01:09:32]: He’s done well out of it so far.

Tony Kynaston [01:09:37]: And look, I’ll say this quite openly, Andrew, if the share price gets back to $2.34 and you want to sell, please feel free. You know, if it makes you feel comfortable, great. I’m not saying that you shouldn’t do that. I’m saying that what I would do is to wait until it’s get back to $1.30. And bear in mind, as the share price rolls for the 1.30 will inch up higher.

Cameron Reilly [01:10:07]: It’s going to take a lot of time in this case.

Tony Kynaston [01:10:08]: In this case, it’s going to be flat, but generally there’s a bit of a slight slope in that it does get bigger and bigger as time goes on.

Cameron Reilly [01:10:14]: Yeah, it’ll be March 2026, before that move, 2025, before that first low point falls off. But you know what I’ve heard you say before, whenever this subject comes up and as I said, Andrew, this comes up all the time. Not normally when a share price is going up though, Andrew, usually when it’s going down or is going sideways.

Tony Kynaston [01:10:35]: It usually [crosstalk 01:10:35] something like [inaudible 01:10:36] or Fortescue Metals where…

Cameron Reilly [01:10:38]:  Hawthorn Resources.

Tony Kynaston [01:10:40]: Hawthorn Resources. Yeah. We’re in a commodity type cycle and we’ve had the upside and now people are worried that we’ll give too much on the downside. We’ll see.

Cameron Reilly [01:10:48]: Yeah. But what you’ve said to me in the past when we’ve asked this, is that your experience over the last 30 years has been more often than not if those companies are doing well like we thought they were when we invested in them, there’ll be regression to the mean at some point and the price will go back up and it’s okay. Sometimes it’ll go the wrong way but more often than not it’ll be right rather than wrong and it’s a long-term thing you just need to hold on and stand with your analysis.

Tony Kynaston [01:11:17]: Yeah. I’m not right every time. This could retrace as well. So we’ll see.

Cameron Reilly [01:11:21]: Yeah. But as long as we’re right 6 out of 10 times, it’s worth sticking to the rules.

Tony Kynaston [01:11:27]: Yeah. And the basic premise is if you look at the VUK graph, we’re buying close to the bottom. So regression to the mean should mean that the stock price goes up before it comes back down again. So that’s the basic premise. It could turn around tomorrow, but you know, I’d expect it to get back up, you know, hopefully around five or six bucks at some stage in the future, right. But I’m not predicting it. We’ll see how it goes. I had a discussion with some banking people last week about Virgin UK. I said, you know, so you guys know banking and we had stock of the week, this week, it was Virgin UK. And I went, what, after discussing it. But we basically decided that was a B-grade bank, which was interesting. But, you know, I said, that’s often times where the value is.

Cameron Reilly [01:12:16]: Yeah.

Tony Kynaston [01:12:17]: You know, the A-grade banks are going to chug along. Everyone knows them and loves them. So the prices are high, but it’s the ones that are regressing back to the mean where the value is.

Cameron Reilly [01:12:26]: We’re turning over rocks to find the good investments, not the big brands.

Tony Kynaston [01:12:30]: Exactly. Yeah. Good companies and otherwise a good investment and vice versa. Sometimes a bad company is a good investment.

Cameron Reilly [01:12:37]: Yeah.

Tony Kynaston [01:12:38]: Although we try not-so-good companies which are undervalued, so they’re good based on the quality scores and they’re cheap based on the metrics.

Cameron Reilly [01:12:46]: Good track record of generating cash, or had a recent turnaround in their cash-generating ability that are undervalued.

Tony Kynaston [01:12:56]: Yeah.

Cameron Reilly [01:12:57]: Good management generating. Good business, good management, good ability to generate cash. And the market’s not really paying them any love.

Tony Kynaston [01:13:09]: Yeah. Or in this case, apparently, they’re B grade management, anyway, allegedly.

Cameron Reilly [01:13:14]: Yeah. Right.

Tony Kynaston [01:13:15]: I’ve done something right in the last few months, the share price has appreciated significantly.

Cameron Reilly [01:13:20]: The people that we’re giving you this feedback, have any of them work for a company that got seriously criticized during the Haynes Royal Commission.

Tony Kynaston [01:13:29]: Maybe.

Cameron Reilly [01:13:30]: Yeah. Well, so yeah.

Tony Kynaston [01:13:34]: Yeah.

Cameron Reilly [01:13:36]: I can say what I think about was…

Tony Kynaston [01:13:37]:  But that was A grade management, Cam.

Cameron Reilly [01:13:43]: Oh I see now. I was confused. I forgot that we were talking about the banking industry. Thank you, TK. Have a great week.

Tony Kynaston [01:13:54]: All right. Thank you. See you, listeners.

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