Transcript for QAV S04E14
Tony Kynaston [00:06]: How’s Bundy?
Cameron Reilly [00:07]: Bundy is good, hot in this room. But you know, it’s nice. Where are you? Do you want to reveal it to the audience?
Tony Kynaston [00:16]: Oh, we are in Bowral.
Cameron Reilly [00:17]: Where is that? Exactly?
Tony Kynaston [00:19]: Southern Highland. So, about an hour and a half south of Sydney.
Cameron Reilly [00:22]: Is it pretty, I’ve seen your photos, your videos of waterfalls and stuff.
Tony Kynaston [00:26]: Yeah, it’s beautiful. Very, very nice. Yeah, it’s a bit like the UK, its little village towns, every few Ks and lots of green pastures, golf courses, tea shops. It’s good.
Cameron Reilly [00:41]: Lovely, I’ll have to add that to my Viaggiamo list.
Tony Kynaston [00:46]: Is that what the podcast is called?
Cameron Reilly [00:48]: Yeah. Viaggiamo.
Tony Kynaston [00:49]: Okay.
Cameron Reilly [00:50]: Via-jamo I think probably.
Tony Kynaston [00:51]: Oh Viaggiamo
Cameron Reilly [00:53]: I think probably. Can never remember what the proper pronunciations is Viajamo I think.
Tony Kynaston [00:59]: Viaggiamo. Yep.
Cameron Reilly [01:01]: We travel. Hey, it was your birthday. Happy birthday.
Tony Kynaston [01:06]: Thank you.
Cameron Reilly [01:07]: Did you have a good one?
Tony Kynaston [01:08]: I had a great one. It’s been a nonstop party since about Thursday. It’s been fantastic.
Cameron Reilly [01:15]: I got a message that my gift for you has arrived at your place, but you’re obviously not there to receive it. So hopefully it’s.
Tony Kynaston [01:22]: We hit home tomorrow. [Cross Talk: 01:23] Okay.
Cameron Reilly [01:25]: I hope you like it.
Tony Kynaston [01:25]: Thank you. That’s nice of you.
Cameron Reilly [01:28]: What were the highlights of your birthday week so far?
Tony Kynaston [01:34]: Well, we had a big barbecue on Friday, which was the fishy‑Q I was telling you about. That went into about nine or 10 that Friday night, which was good. And then Saturday we went to the races and those same friends had a horse that ran second in the big race that day, the group one. And now it’s one of the favorites for the Sydney cup coach. The horse is called she’s Ideal. So that was very exciting. And then Alex came up Friday night. That’s right, joined us at the barbecue and then Saturday I went and shopped with Jenny and caught up with some of her friends. So, we’ve had dinner on Saturday night and a good chat. And then Sunday spent the day with her and we had people over for lunch. We were at the sweet tarts again for lunch, which was lovely. Had lunch there and A Few Bloody Mary’s. And then I spent the afternoon after that playing pool with Alex and Ruddy which was good fun. And then she went back early Monday morning and Ruddy and I drove down here and we’ve been playing golf and sightseeing and heading the whiskey bar ever since, which has been great.
Cameron Reilly [02:43]: Why don’t you just buy Silly tarts and you’re keeping them in business. I’m sure as it is, just buy it.
Tony Kynaston [02:50]: We are especially during COVID, we used to keep it in business, little takeaways, and stuff.
Cameron Reilly [02:57]: Well, that’s good.
Tony Kynaston [02:58]: Yeah. It’s been good.
Cameron Reilly [02:59]: So, you’ve been paying much attention to your portfolio in the last week?
Tony Kynaston [03:02]: I haven’t looked at it.
Cameron Reilly [03:07]: You are hopeless, call yourself an investor. Well, I’ve got some news items I can talk about before we get into the Q and A, Ray Dalio. I watched a bit of a video interview that Ray Dalio did last week… for people who don’t know who Ray Dalio is, an American billionaire investor of some funds mostly a value investor guy. We did mention a couple of months ago that he posted something where he seemed to be capitulating on Bitcoin because he said it was very interesting or something had proven itself. But in this interview, I heard him say that he’s fairly convinced it’s going to be outlawed by the US government. At some point, he said what I’ve heard you say before that the ability to manage your monetary system is kind of intrinsic to a government and taxation to pay for the government. So, at some point they’re either going to normalize and regulate Bitcoin or outlaw Bitcoin or come up with their own crypto or whatever it is. But he seemed to think that the US government will crack down on it at some point when it becomes a big enough issue. Don’t know what happens to all of the investors in Bitcoin at that point. And he didn’t really say maybe it becomes more valuable if the government bans it because I don’t know something, something, let me stop.
Tony Kynaston [04:38]: I mean, there’s lots of the devil’s crowd getting into Bitcoin now, the big banks and stuff. So, they’ll have to buy all of it, if it gets banned. Well, I think it’s more likely, I agree with Ray, but I guess more likely that what’s happening in China now is what’s going to happen. So, China, I read recently is launching its own digital currency.
Cameron Reilly [04:58]: Right?
Tony Kynaston [04:59]: So why would you use Bitcoin if you can still use the government currency.
Cameron Reilly [05:05]: Currencies already digital currencies though. I pay for everything on my iPhone. I haven’t seen cash for like five years.
Tony Kynaston [05:14]: Pretty much. They really are.
Cameron Reilly [05:17]: They’re all fair.
Tony Kynaston [05:18]: I mean, who actually buys things with Bitcoin, if you’re not buying drugs or on the dark web who is actually using Bitcoin to pay for anything?
Cameron Reilly [05:26]: You can buy a Tesla with Bitcoin, which is why I believe Elon Musk and Tesla needed to buy a bunch of Bitcoin. Had something to do with the fact that, I don’t know, they needed something, I didn’t understand it. But anyway, I guess the point is I’m not how sure of a good … I just got back from the beach… I’m not sure how much of a good investment something is If it’s about to be potentially banned by around the world?
Tony Kynaston [06:00]: “I just got back from the beach”. Is that code now for, I just tried the Kalki Moon?
Cameron Reilly [06:07]: That was last night. Now we just been down the beach. It’s lovely here. I’m at Bundy and where my mum lives been mowing the lawn, helping her dig out banana trees that are coming up under the…, I was here last year and I dug a gutter right around the outside of a house, laid cement down and put in this plastic guttering from Bunnings because when a bucket down here during big thunderstorms it was sort of flooding into our garage. So, this was designed to divert the water around the house, but then she went and planted a bloody banana trees next to it. And of course, one banana tree turned into 12 because they just sprout up and they’ve sprouted up through the guttering, smashed through the concrete, busted up the guttering everywhere. So, it’s just a dog’s breakfast. I was in there trying to dig all these banana’s but she wants to keep the banana. She goes, well, I told now they’re about to give me bananas. I don’t want to cut them out now. Well, I want my bananas, don’t worry about the gathering. I’m like, I spent like a week building that gathering and now it’s all, so I’m in Bundy and it’s hot, but it’s lovely this time of the year. It’s the perfect time of year to come up to Bundy If you’re thinking.
Tony Kynaston [07:17]: You’re looking tanned.
Cameron Reilly [07:23]: That’s just hot. I’m just hot in my little bedroom here. That’s what it is. Alright? So that’s Ray Dalio, then Mark sent me sent me a link to an interview with a guy called Lou Simpson. Do you know that name?
Tony Kynaston [07:39]: If I had to guess, I’d say is he the guy who runs Geico for Buffett.
Cameron Reilly [07:46]: He is the guy who use to run Geico for Buffets.
Tony Kynaston [07:48]: Yes. Right? Okay.
Cameron Reilly [07:49]: He is now the current chairman of SQ Advisors and has been called one of the investment greats by none other than Warren Buffet himself. That is at the time of his retirement from Geico in 2010, he managed a portfolio valued at more than $4 billion. And he is now on the advisory council of Kellogg School of Management. He was interviewed by one of the professors of finance there. You probably haven’t had a chance to have a look at this year. I’ve added it to him [Cross Talk 8:27] yesterday. Just some really interesting quotes.
Tony Kynaston [08:30]: I think it’s called the Kellogg School of Management too. Not Kellogg’s as in the…
Cameron Reilly [08:35]: Yes. The Kellogg School. Yes, well it says he is easy to.
Tony Kynaston [08:42]: It is like the Ponds Institute.
Cameron Reilly [08:45]: The Weet-Bix Institute, it says he’s a senior fellow and adjunct professor of finance at Kellogg and a member of the advisory council of Kellogg’s asset management practicum.
Tony Kynaston [08:57]: Okay.
Cameron Reilly [08:58]: We need something, the QAV practicum. I don’t know a practicum is.
Tony Kynaston [09:01]: I have no idea.
Cameron Reilly [09:01]: But it sounds fancy. Anyway, Mark says…
Tony Kynaston [09:06]: Isn’t a practicum a small particle, like a microbe?
Cameron Reilly [09:09]: Yeah, it is. Yeah.
Tony Kynaston [09:10]: That describes our dummy portfolio. Doesn’t it? The paracetum.
Cameron Reilly [09:15]: That’s the new name for it now, the paracetum. Mark said, he thought this guy sounded like one of your kind of people, he gets asked, what would you say is the essence of your investment philosophy? Lou replies, the essence is simplicity. The base case for investing in any area of the market is a passive product, such as an index fund. That’s something, any investor can access. If you are a professional investor the question is how can you add value? The more you trade, the harder it is to add value because you are absorbing a lot of transaction costs, not to mention taxes. What we do is run a long-time horizon portfolio comprised of 10 to 15 stocks. Most of them are US-based. They all have similar characteristics. Basically, they are good businesses. They have a high return on capital consistently good returns and they are run by leaders who want to create long-term value for shareholders while also treating their stakeholder’s right. So that sounds familiar.
Tony Kynaston [10:19]: Does sounds good. Doesn’t it? Does it talk about his returns at all?
Cameron Reilly [10:25]: I think it does. I’ll get to that, but he says you can only know so many companies, if you’re managing 50 or a hundred positions, the chances that you can add value are much, much lower. So far this year we bought one new position and we are looking pretty seriously at one more. I don’t know what we will decide to do. Our turnover is 15 to 20%. Usually, we add one or two things and get rid of one or two things. Again, that kind of sounds like you.
Tony Kynaston [10:51]: Yeah. That’s what I try to do anyway.
Cameron Reilly [10:54]: But he’s another thing that had jumped out at me. He said, one thing a lot of investors do is they cut their flowers and water their weeds. They sell their winners and keep their losers, hoping the losers will come back even. Generally it’s more effective to cut your weeds and water your flowers, sell the things that didn’t work out and let the things that are working out run.
Tony Kynaston [11:16]: So, we should ask Jan for advice from now on, because she waters the banana trees and cuts the concrete.
Cameron Reilly [11:21]: That’s my mum, Jan, in case people are scratching their head wondering who that is. Yes, I like that. You may have used that before, but I don’t remember it, what does he say? Cut your weeds and water your flowers. I like that.
Tony Kynaston [11:39]: It’s a good saying, as opposed to rebalancing.
Tony Kynaston [11:46]: Which is even worse, that’s give more money to the weeds from the cut flowers.
Cameron Reilly [11:49]: And people ask us this all time, when should we sell, like these have gone up so far. They are not going to go any further. Should we get out? You always say no, hold on to it if it’s doing well. No, it doesn’t talk in this about what his returns are, could probably look it up though. But anyway, there you go. That was the main point I wanted to pull out. Cut your weeds and water your flowers.
Tony Kynaston [12:21]: It’s good.
Cameron Reilly [12:21]: Well, that’s it for me with my news. I didn’t do an end of month. Not yet I have not done an end of month thing on our portfolio because I’ve been in holiday mode since the end of the month. But we seem to be doing okay at the moment according to Sharesite and all those sorts of places. I will just bring up our portfolio on Sharesite… for the financial year, as of today, we’re recording this by the way on Thursday, the 8th of April, late in the afternoon, 2021 says for the financial year, we’re up roughly 32%. And the ASX is up 22%.
Tony Kynaston [13:02]: Okay.
Cameron Reilly [13:02]: So, we are outperforming not by as much as we normally are, but we are still 10 points up on the ASX.
Tony Kynaston [13:12]: There has been few dividends come in recently. Have you kept the portfolio up to date with dividends?
Cameron Reilly [13:16]: I have, it normally shows me here on the Sharesite page if there’s anything I need to confirm.
Tony Kynaston [13:24]: Okay.
Cameron Reilly [13:24]: I can’t see anything outstanding.
Tony Kynaston [13:25]: If you are using Sharesite, it picks up the dividends, you are right.
Cameron Reilly [13:28]: Yeah. But yeah, so we’re doing okay. Particularly, we’ve read out last week or the week before, how most of the funds in this country do, the actively managed funds, certainly doing better than the vast majority of those. There are some doing well.
Tony Kynaston [13:42]: And we have been fairly stable since the COVID cough last year as well, haven’t we, which is good, too.
Cameron Reilly [13:54]: We dipped down, I’m looking at the chart here, round about November. October, November. We actually dipped a little bit below the All Ords, I don’t know exactly what happened then. Well, I can’t remember what was going on and November we dipped for about a month but then we came back up above it again.
Tony Kynaston [14:11]: Sorry, what I meant was we haven’t been very active in the market once we bought what came in after COVID.
Cameron Reilly [14:18]: No, we have hardly traded much at all since then, just been sitting on them. And of course, some of our big winners, like FMG, have come back a lot in the last couple of months with the iron ore price in decline. But so, we aren’t outperforming it as much as we were mostly due to some of those coming back, but there’s still I think FMG was up 200% since we bought, and now it’s more like back then or 160% or something. Yeah.
Tony Kynaston [14:53]: That’s okay.
Cameron Reilly [14:55]: Yeah, that’s good. 160% is okay, I’ll take it.
Tony Kynaston [15:00]: So, I did some stock journals. I know you’ve been away, but I sold out of my holding of ING, Inghams Group.
Cameron Reilly [15:07]: You did.
Tony Kynaston [15:08]: Their CEO left or resigned unexpectedly, which is probably innocuous enough, but the share price drop when that happened. And it breached its sell point. So, I sold out and I bought into, I had already had sort of half a holding in ANZ, so I topped that one up and then put the rest into JB Hi-Fi, which was the next big sort of market cap on the buy list. I did skip round Silver Lake Resources, I think, which was a gold miner, which I think was above JB Hi-Fi. But I didn’t feel comfortable buying more of Silver. I already own some, until I work out whether gold is a buy or sell at the moment, in the long-term it’s still a buy, but if I could take a shorter timeframe, it’s probably a sell.
Cameron Reilly [15:58]: Right.
Tony Kynaston [16:00]: So that’s that, Stock of the week I think I’m going to make Mayfield. It’s a childcare company and that crossed it’s by line a day or two ago. So, it’s on the buy list now with the QAV score of 0.31.
Cameron Reilly [16:14]: This is the one that’s a husband-and-wife operation out of New Zealand that we’ve talked about before.
Tony Kynaston [16:20]: Could be. Mayfield I think was mentioned during the zoom call. One of our Melbourne listeners was talking about it and it’s been close to a buy for a while but it’s just crossed over in the last couple of days.
Cameron Reilly [16:29]: So just a reminder for the new people, stock of the week just means worth checking out.
Tony Kynaston [16:38]: Have a look.
Cameron Reilly [16:39]: If you’re looking for something to do an analysis on this week. Do not buy or sell anything because you heard Tony talk about it, go do your own homework on it, but we are just highlighting the fact that this might be one that is worth checking out.
Tony Kynaston [16:52]: So, I’m just looking them now.
Cameron Reilly [16:56]: Dean Clark and Michelle Clark, husband and wife team.
Tony Kynaston [16:58]: You are right.
Cameron Reilly [17:01]: So, in Australia, they are based out of Malvern down in Victoria, but I seem to remember them having a New Zealand connection. Although that might be just my memory.
Tony Kynaston [17:12]: I think I may have confused them with the New Zealand childcare company, but it’s definitely one in Victoria.
Cameron Reilly [17:17]: Okay. Right. Cool.
Tony Kynaston [17:20]: They own 21 long day childcare centers located in and around Melbourne.
Cameron Reilly [17:24]: Right?
Tony Kynaston [17:25]: So not a big company, that’s only about $20,000 on average daily traded, but that might suit some people who are starting their portfolios. But I just raise it because it’s been like, it dropped off dramatically during COVID and it’s been going up since then, but it’s just breaks this bar line.
Cameron Reilly [17:46]: Right. I guess probably little bit of a tough time for childcare centers during COVID.
Tony Kynaston [17:52]: Well, if everyone’s at home they don’t need childcare do they.
Cameron Reilly [17:57]: Yeah. Well, they, they probably still had frontline workers, kids, and they would have had job keeper coming in and that kind of stuff, but…
Tony Kynaston [18:08]: So, I have a look at that. That’s my stock of the week. That’s all I have in terms of stock two camp.
Cameron Reilly [18:16]: Okay. So, Q and A time.
Tony Kynaston [18:18]: Yeah. Q and A Time.
Cameron Reilly [18:19]: This one is from mark. He says TLS scrapes into Tony’s buy lists. That’s Telstra. I was thinking The Reject Shop. It’s TRS.
Tony Kynaston [18:30]: TRS Yeah.
Cameron Reilly [18:31]: No doubt. Tony will have read Alan Kohler’s bearish, and Roger Montgomery’s bullish, recent musings on TLS. Not sure that you would have, would you be too busy playing golf?
Tony Kynaston [18:42]: And yeah, I’ll probably scan them but I haven’t really taken them in too much, again their opinions.
Cameron Reilly [18:49]: He says, I know Tony’s answer will be no, just look at the numbers, but does the proposed TLS break up into four discrete hence separate, separate [inaudible: 19:03].
Tony Kynaston [19:04]: Separated.
Cameron Reilly [19:05]: Separately, salable entities have any bearing on Tony’s thinking and perhaps prioritize a TLS buy ahead of other higher scoring stocks.
Tony Kynaston [19:19]: No, it doesn’t. No, not at all. I think, I don’t have a problem if someone wants to promote something up the buy list or take it as a, a preference over something else. We have done that in the past when we bought some copper stocks, when even though they weren’t the highest on the list, but I think you would have to be a fairly good analyst of Telco’s to have a punt on Telstra, just based on what Roger Montgomery or Alan Kohler says. I mean, they find people, but unless you are a deep Telco analyst, it is the who knows what will happen with Telstra and, and just as background Telstra’s been struggling because they sold off their copper network to the NBN code. And now it is trying to position itself to buy that NBN network back from the government. Now that the roll out substantially finished, even though the government hasn’t necessarily said they are going to sell yet.
Tony Kynaston [20:17]: But Telstra believes that if they did buy the NBN back, they wouldn’t be able to hold some of their other infrastructure assets because then there would be the deal might be vetoed in terms of it being a monopoly and being highly competitive. So, they’re, they’re sort of breaking up the poles and wires breaking up the core Bible business and breaking up the two other sections. Anyway, I’m not sure what they are exactly so that they can hive off something quickly. If they need to satisfy the ACCC when they bid for NBN. So first of all, it’s almost like you would rather work out the odds of all this happening in the science and probabilities. No one has said the NBN is going to be sold. I think the government may have hinted that they will do. And even if they are going to sell it no one said when or for how much so Telstra might not even want to bid.
Tony Kynaston [21:11]: And then we don’t, once it gets into a deal, we don’t know what it means to the hive off. So, there’s all the water, the flow under the bridge at the moment at Telstra. And I know the share market will be forward-looking, but yeah, I wouldn’t certainly position Telstra higher on the buyer list because of what it’s done recently. It’s on the buy list. It’s a big company, if someone wants to buy it, Sure they should be familiar with it. I have to say I had another run in with Telstra on the weekend and I would not be buying if you held a gun to my head. Probably because it’s a bad company, but that is bad customer service. It is just woeful every time I deal with Telstra, I scratch my head and wonder how they even exist as a company. Because as a sample of one am a very disgruntled customer with them. But anyway, so the answer is no don’t buy, I wouldn’t push it up to list because of what they have done recently. They still all have water the flow under the bridge. And but if you feel you want to do that, go ahead.
Cameron Reilly [22:09]: Well, tell us about your Telstra customer service experience. Now we want to hear that.
Tony Kynaston [22:15]: Well, so I’ve had some friends staying at Cape Schanck over Easter, and I get a text message on Sunday saying your Wi-Fi is broken and it’s saying the modem is saying it’s been disconnected. So, have you paid your bills? So, I jumped on, the bill is being paid, everything’s working trying to get ahold of Telstra went to their chat page and the chat bot thing and a guy comes on hi, like to help you answer these 5 questions, which I answered and the whole thing goes dead. And so, 20 minutes later the chat bot shouts and says, you have been in active for 20 minutes. I am shutting you down, he still has not replied to my answers to these questions. So, it took me about 10 minutes to log back into Telstra and find how to get back into the chat I was having. And I said, are you still there? Oh yeah, trying to help you. And then 20 minutes later, chatbot shuts down again through an activity. So, two sessions both canceled and got no further than I was the Wi-Fi still out in shape probably I have my wife fixing it, terrible.
Cameron Reilly [23:23]: Don’t they know who you are?
Tony Kynaston [23:25]: Exactly.
Tony Kynaston [23:28]: Anyway, that’s my soapbox. I don’t like Telstra and their customer service.
Cameron Reilly [23:32]: Have you ever heard of a little thing called the QAV podcast? If that’s what you wanted to say. You decide to say no don’t worry about it then. Thank you, Mark. Here’s another one from Mark, Mark getting sneaky. I can see three questions from Mark this week. Well three questions from people called Mark, there may be different Marks.
Tony Kynaston [23:59]: I can get around the limit of one per person. If everyone puts their questioning and calls themselves, Mark, we won’t know how many questions from each person.
Cameron Reilly [24:07]: I’m Spartacus. No, I’m Spartacus. He says Tony has said in a selling scenario, enough alliteration for one day, he’d prioritize selling low dividend payers. Tony has said that in a selling scenario, he’d prioritize selling low dividend payers, people investing for the long haul outside of super and leveraged.. un-levered?… unleveraged may prefer low or no dividend paying stocks, or you prefer capital gains incurred on sale, perhaps in the distant future over dividends, incurred bi-annually and taxed as income. Were Tony this type of investor, would he change his checklist particularly regarding the dividend versus mortgage rate preference?
Tony Kynaston [25:01]: I mean, yes and no. So, I do use the dividends to pay for the mortgage and I also live off the dividend income as well. So, there is that angle, but if you take my sort of individual situation aside, I think as a broad rule of thumb, yes. Warren Buffett’s never paid a dividend from Berkshire Hathaway. And if you look at a company like Amazon with Jeff Bezos, they take it one step further and have not made a profit for years by reinvesting all their income that they can back into expanding the company. So certainly, a dividend is a break or a handbrake on long term gains because it is money that is leaving the company. But on the other side, like in our checklist, we do give items a one if they pay a dividend, because it’s also I guess a vote of confidence by the board that the company is going to continue to make at least a certain level of profit thereby pay out a dividend.
Tony Kynaston [26:04]: Because one thing that companies don’t want to do is to stop paying a dividend or reduce it because it generally starts to sell off. And the company is people panic that the profitability is not going to be good in the future. And then sometimes boards get into trouble when they decided to keep paying a dividend in the hope that profit will turn around and they find that it doesn’t and then they are borrowing to pay the dividend. And eventually that becomes a problem and they crash. But companies paying dividends is a sign that the company directors think that they are profitable. So, it has some value, but I take Mark’s point. The flip side is also the case that if you’re not paying a dividend and the money is being reinvested wisely, that is a better company to invest in.
Tony Kynaston [26:50]: But again, there is a couple of things you have got to be careful with. With that first of all, is the company not paying a dividend because it can’t? So, for example, it might not be profitable, but also it may be like I say a mining exploration company where it’s pouring money into, I guess a drilling in the hope that it will make money in the future. So that can also be kind of a speculative way to invest. So just because a company does or doesn’t pay a dividend is not necessarily a good way to just at first blush look at investing in a company. So yes, in terms of selling things first, I’ll sell the non-payers because I need to live off the dividends and pay my costs out of that. If I didn’t have to do that, I would potentially favor companies that didn’t pay dividends. But again, it’s kind of like you’ve got to, you’ve got to drill down a bit and just explore that if it is paying a dividend that is a tick for me because I know it is going to be. The directors are pretty comfortable it is kind of like money in the future. But if it is a company which is wisely reinvesting that dividend back into the company, then probably in the long term, that’s better. So, it is kind of a case-by-case situation really.
Cameron Reilly [28:06]: My understanding was that another reason we look at dividends is because there are a lot of investors in the market particularly elderly people who value dividends. So, the companies that are paying a high dividend probably going to be sought after by retirees and funds that have a lot of retirees as their investors and therefore will be an attractive stock. And if we currently think it is undervalued but it’s a high dividend payer then it will have a good chance of preventing to the main. Did I misunderstand that?
Tony Kynaston [28:41]: Yeah, no, you are right but there is also the fact that they are popular. And of course, as we spoke about last week, the companies in Australia are incentivized to pay dividends because it is a way of releasing the franking credits back to their shareholders as well.
Cameron Reilly [28:55]: Good. Thanks Mark. James! The last point on Cam’s instructions on the Flitman sheet, by the way, speaking of that, if you are not on Facebook, Gary picked up an omission in my instructions on the Flitman model, to do with copying. Every time you do a download from stock docks you have to copy the codes from the main page to, I think it is the manual data page or the QAV score page which I confirmed with Andrew. So, I have added that to the instructions. So, there is a new point, a step 6 in the instructions. So please download the latest version from our dropbox folder and have a look at that. Last point on Cam’s instructions is to check the dates are still recent. So now I am wondering what your tolerance for all the data is. In other words when does the data become stale or beyond the use by date?
Tony Kynaston [30:01]: Yeah, so normally six months, so at the moment we should be seeing December 2020 as the most recent data. If we are seeing June, 2020, then that is too old, that means that the company either has not lodged its results or it hasn’t come through Stock Doctor yet. Sometimes they can be late especially if they are small companies. But yeah, six months. I know people will say, oh, but New Zealand Oil was on the buy list with data from 2015, but that was a bit different because it had been delisted and relisted, and we were waiting for the results to come through. But it’s six months. So, at the moment, for example, I did a download last week and when I was looking at which stock to buy after selling Inghams, and I just ran down my list and looked at all the companies that have reported in December or between June and December. Sometimes there are September figures or November, we are getting the retailers who are reporting in January. I left alone all the ones that were still showing June, 2020 as the latest figures.
Cameron Reilly [31:05]: Right.
Tony Kynaston [31:07]: So, sorry, when I say six months, I mean six months in terms of the reporting schedule. So, the most recent figures we’ll be seeing should be December or January this year. So, I don’t want June last year.
Cameron Reilly [31:20]: If you get a report now and the figures, if you run a download and the figures are still June, July last year, why would that be?
Tony Kynaston [31:31]: So, either the companies had a problem and it hasn’t lodged its accounts yet. So, there could be a qualified audit or there could be some reason why they haven’t lodged their accounts. Could be a dispute, for example, like I think I’m not sure what the, they get a certain period of time from the ASX. They have to do it by the end of August, where we are in now and have to do it by the end of March. But if they don’t, they can apply for an extension I think that they have to show good cause. So, they could be having problems themselves, but sometimes I know that the provider of data, the stock doctor just hasn’t gotten around to doing a sweep of all the light colors. So, feel free if you, if you are interested in the company, that’s got June figures in stock doctor to email stock doctor support and just ask them to check and see if there are more recent figures. They are pretty good at that.
Cameron Reilly [32:26]: That’s good. There you go, James. Here is another one from a Mark.
Tony Kynaston [32:40]: I’m Brian and so is my wife.
Cameron Reilly [32:43]: Do you mind if we call you Mark? KRMs health score on stock doctor has recently changed from strong to early warning. Is this a good enough reason to sell or are we still waiting for the three points sell?
Tony Kynaston [32:59]: They are still waiting for the three-point sell. Look, it’s a really good question from mark and I will add it to our list of things to research, but generally no. And the reason I say no is that I have seeing companies bounce from different levels of stock Dr. Financial health and come back into strong later on. So, I’ll just call up KRM. Now, if I look at the last years, what was it? One, two, three, four, five, six, seven, eight, nine last ten years of financial health for KRM. They’ve gone early warning, early warning marginal, which was worse than early warning, and then strong, strong, early warning, marginal strong, strong, early warning. So, this is a gold mining company, and I suspect that what’s going on is that they try and manage their cash flows and their borrowing. So, when they get into a good situation and they either borrow more money to explore or expand or whatever, which makes their financial health deteriorate in perhaps one or two houses.
Tony Kynaston [34:02]: And then they come back to strong after that. So, it can bounce around. So, at the moment I don’t sell based on a stock doctor, financial health downgrade. I have seen them reverse. But I’ll do some research into that and see if it does help.
Cameron Reilly [34:18]: Okay, good one.
Tony Kynaston [34:19]: My experience is it doesn’t matter too much. I’m just looking at KRM now and it’s up 2.3% today so I don’t think people are paying too much attention to the financial health downgrade. I’m just trying to look at what may have caused that. And a couple of things may have, I think they’ve had a decline in revenue growth, so that could be part of it, which is that could just be caused by the gold price movements, free cash flow though, strong, what else have we got?
Tony Kynaston [34:56]: Let me just go to the financial health, financial statements page, just trying to see if they have taken on more debt… the P/E has actually it’s gone up a little bit, so that’s one thing or the other, sorry, I can’t find there… Let’s have a look. I don’t get a quick look at there debt here. I’ll try their balance sheet, see if I can find it there. No, it’s actually looking like, if I look at their balance sheet, assets are pretty much the same, liabilities are down a little bit. And net equity is down a little bit, not much, less than 10%. So, I’m guessing it’s going to be something in their borrowings, which has changed it. Operating cash flow is down. Where’s the financing. No, it’s actually looking pretty good. So maybe it’s just the fact that they got less sales in this half, and I’ve have to drill down to find out why that happened, whether it was because of the gold price or currencies or whatever, they have definitely had less sales. So, I’m not sure what’s driven that. So that might be the reason why they’ve gone down. But I guess as I said before, they do bounce around between strong and early warning quite regularly.
Cameron Reilly [36:09]: But I guess the key takeaway here for me anyway, is that a downgrade in terms of their financial health from Stock Doctor is not enough reason for us to sell.
Tony Kynaston [36:22]: Correct. It’s one item on the checklist and. I’ve seen plenty of companies with the early warning or even marginal financial health do well could because the forward-looking is that they’re going to improve.
Cameron Reilly [36:36]: There you go. Mark. Hope. That makes sense. Here’s one from Alice. Why is ADH a sell?
Tony Kynaston [36:48]: ADH is one of those ones that are going up but the rate of going up is slowing. And so, it is coming back over its sell line. I’ll just call it up so I can talk to it in more detail than that. But so ADH is Adairs, it’s a company which sells fabrics and homemaker… what do you call it? Things for your home. So, bed linen and towels, that kind of thing. And if we have a look at the, oh I just want to make sure I’m doing this properly. I think I’ve made a mistake. Cameron I’ve made a mistake. The low point is actually May, 2017 and the COVID cough is the second one. So, this is not a sell.
Cameron Reilly [37:31]: When did you say it was a sell?
Tony Kynaston [37:33]: Oh, when I call it as a seller, I was using the code, the COVID cough as the low point. And then looking at the graph which has risen steeply since then, but in the last month or two has flattened off. And so, if you use the low points, the two low points on that upward trend, it crosses over to a sell.
Cameron Reilly [37:50]: One going back in May, 2017.
Tony Kynaston [37:53]: Yeah. But I ignored that one. I shouldn’t have. So, the low point is May 17. and then the COVID cough. So, it’s actually still a buy. I’ll put it back on the bottle of Stella well spotted. Thank you.
Cameron Reilly [38:04]: Good one Alice. Alice is also asking for help with the three-point trend lines for HLA and HVN.
Tony Kynaston [38:15]: Let’s have a look at those. So, HLA from memory is healthier a bit of a punk, because it’s not spelled healthier. It’s spelled healthier. I’ll just call it up.
Cameron Reilly [38:36]: Well, this is one of the, so it’s at its peak. It’s five-year peak.
Tony Kynaston [38:41]: Yeah. So, the low point on the graph is the COVID cough. And I’m going to use as the second low point, the trough that happens on the 30th of October, 2020. And then if I draw a line using those two, I’m getting a sell at about just maybe a dollar 45 and the share price is a $1.80 so it’s still a buy.
Cameron Reilly [39:08]: Only seems to go back to 2018. Is that right?
Tony Kynaston [39:11]: Yeah, that’s what I’ve got to say. [Inaudible: 39:13].
Cameron Reilly [39:13]: A couple of years. And so, in terms of the buy line, where would you draw? How would you draw that with this one?
Tony Kynaston [39:22]: So, the buy line, that’s a good question.
Cameron Reilly [39:25]: So, starting January 2020.
Tony Kynaston [39:28]: I would I’d use that peak as the first point. And the second point I’d be using as June 2020.
Cameron Reilly [39:38]: June 2020. So, it would have been a sell
Tony Kynaston [39:41]: I’m sorry you could use February 2020 as a second point. It’s higher than June 2020.
Cameron Reilly [39:50]: Oh, Before the cough.
Tony Kynaston [39:52]: Yeah. January 2020 and February, 2020 would be my buy lines.
Cameron Reilly [39:58]: So that would have given us a buy again, just as sort of May, as it was coming out of the COVID cough.
Tony Kynaston [40:09]: Yes. I agree.
Cameron Reilly [40:12]: But now the sell line is further to the right, so it’s basically been a buy since May, 2020.
Tony Kynaston [40:23]: I think it might have iterated between buy and sell because the sell line would have been from the COVID cough and then rising dramatically. The second lowest point would have been April, 2020. So that would have been a sell probably back in June. And then if he had have used the June, so the peak after the sell and the highest point before that you’re getting another buy in the following month and you know, could be a sell in October. And then after that is going to be a buy from October, 2020.
Cameron Reilly [40:56]: And what was the other one that Alice asked for? HVN.
Tony Kynaston [41:02]: Harvey Norman, it’s always fun to read about Harvey Norman and the back page of the fin review and the rear window. They’ve got into a few shouting matches against each other.
Cameron Reilly [41:18]: Their sell line is going to be straight up out of the COVID cough.
Tony Kynaston [41:21]: Yes. But again, their buy line is going to intersect much lighter than that. So, the highest point is way back in.
Cameron Reilly [41:30]: August, 2016.
Cameron Reilly [41:32]: Correct. Next highest point would probably be February 17 if I run a ruler across those. No February 17 would have been used for a buy at some stage but now it’s going to be September 19.
Cameron Reilly [41:47]: Right?
Tony Kynaston [41:48]: So, drawing a line between those two points we get buy around August, 2020. And then again it been one of these upward buy sell things, because the sell line would have started in the COVID cough and the next trough would have been July, 2020. And so, using those would have been a sell in October 2020, and then the next sell would have been in December 2020 and it’s being a buy since then.
Cameron Reilly [42:24]: If I draw a line straight up starting at the bottom of the COVID cough in March and then through the next point in April. That goes straight up through to the end of the graph which means it’s below that line. And it will forever more be below that line because it crosses at like eight bucks.
Tony Kynaston [42:46]: Yeah.
Cameron Reilly [42:46]: So, we can’t, that would mean it’s a shredding and it’s above, it’s bought and below it sells. That does not make a lot of sense.
Tony Kynaston [42:56]: No. So, I am looking at rather than do just the points I’m looking at the trough. So, I would have said you are right. If we were back in February 2020 then you are right. You would be using that point as the second point on the line. But given we are ahead of that now, in terms of time on the feedback to July 2020 because that’s a trough and then eventually October 2020 and December 2020. So, I’m currently drawing a line between COVID cough December 2020 the sell line. So, I’m getting a sell at the moment at a price of pretty close to where it is now. Really, it’s going to be around just below 5.78. And so, it’s a sell say at 575, but it was a buy. If we go back to where that first line was drawn in say the August of 2020, it’s going to be a buy above say $4.10, sorry higher than that. About 4.42. And it’s a sell below whatever it was I just said but the sell lines being getting higher and higher as the graph goes up.
Cameron Reilly [44:07]: The Current sell line for this, tell me where you started? Did you say May or July 2020?
Tony Kynaston [44:12]: So, I’m going to the lowest point, which is the COVID coughing in April 2020. And then we are drawing sort of sell lines, sell lines, sell line, as it goes up. So, the one I am using currently has as its second point the trough which is occurring on December 2020. I’m looking for trusts, which are below that, every time a trough goes below the sell line, I’m lowering the sell line.
Cameron Reilly [44:45]: So that brings it pretty much to where the share price is today at 5.78 and yeah. So, I still get yeah. So, it’s not a trading a quiet, but it’s above the buy line but it’s about to hit the sell line.
Tony Kynaston [45:07]: On. Yeah. So, it is above the buy line and the sell line, which is good just above the sell line. So, it is a buy.
Cameron Reilly [45:20]: Hope that helps [Cross Talk: 5:20].
Tony Kynaston [45:21]: I mean these are tricky ones because like every month it’s kind of changed as it climbs up, but clearly you can see it’s going from the COVID cough in a good direction up to the right. You can see where you have three points coming from those three peaks from the highest point back in August 16. And then that it is almost along with free lines, February 17 but really it is September 19. So, you can see it was on kind of a downward trend and it is now on an upward trend. Yeah.
Cameron Reilly [45:57]: But still just means the sell price goes up.
Tony Kynaston [46:00]: Yes, that’s right.
Cameron Reilly [46:02]: But last question from Alice while I am at it, what is Tony’s view on the iron trend line?
Tony Kynaston [46:08]: So, I am just going into the front page of stock doctor into the markets section and clicking on CMD for commodities and then iron ore, and I’ll go to the five-year graph and it is on an upward spike. I will go into advanced charting to give my monthly five-year graph and it is good. It is going up.
Cameron Reilly [46:33]: Why are iron ore stocks taking a beating then?
Tony Kynaston [46:36]: Yeah, it is strange. Isn’t it? I mean the iron ore price is now, I think it is about 70 cents below its all-time high. So, people are forecasting It’s kind of come back because it’s at a high point. So, it’s just as likely a drop back as it is to keep going. But again, that is speculating it’s trying to forecast the iron ore price and eventually it will can I mean, what happens with these commodity prices and it will happen with iron ore as the price rises. Other people open up more iron ore mines to capitalize on that. Especially if they are not profitable at lower prices on your high prices and that extra volume in the market reduces the oil price. So, it is kind of self-defeating but they do it.
Cameron Reilly [47:20]: And there’s a lot of complexities around China and its approach to buying stuff, et cetera, et cetera.
Tony Kynaston [47:27]: That’s right and all the macroeconomic stuff that is going on and there is the Bible, the Biden’s stimulus package led to more infrastructure which will mean more iron or more steel. What we will China do? China is trying to develop its own iron ore mines in Africa. So, it’s not dependent on Australia. All those things are still in the future. I mean, I think I saw something saying that the iron ore mines won’t come into play for China for another couple of years. The current spike is also because of vale, which is one of the big animal producers of the world in South Africa, South America having COVID problems. And it also had a tailings dam disaster, which caused the problems and they had to close the mine. So eventually all those things will fix themselves or play out and the iron ore price will come down, but they haven’t at the moment and until they do, we’ll sit tight?
Cameron Reilly [48:23]: Thank you, Alice. All right. So, Joel, from Gimpy, he has been thinking deep about the checklist and he asked this question.
Tony Kynaston [48:34]: Be careful [Inaudible: 48:34] don’t stress.
Cameron Reilly [48:38]: And he was asking me these questions over Facebook messenger at midnight. So, we have been having several like midnight conversations. Obviously, Joel does not sleep. He asks, so TKs checklist has IV1 calculated as EPS earnings per share divided by 19.5%. That is basically saying EPS times 5 and he wants IV1 to be less than or equal to the price. Therefore, he wants EPS times 5 to be less than or equal to the price. Another way of saying it is five is less than or equal to the price divided by EPS, which is another way of saying that 5 is less than or equal to the PE ratio. So essentially IV1 is asking, is the PE ratio less than or equal to 5?
Tony Kynaston [49:38]: Correct. It’s just, it’s just a different way of saying it,
Cameron Reilly [49:42]: Right? Why don’t we just say that then?
Tony Kynaston [49:46]: Well, we could, the other thing now is that you look at the IV2, remember we adjust the divider to take into account what the interest rates are doing so we could, we could still say it is a P/E of something, but we have to. So, for IV2 we take the future for the forecast earnings per share and we divide by six plus the current interest rate. And that gives us our calculation. And as the interest rate changes, we make that adjustment. So, it’s a bit easy to do that way around and to try and adjust the P/E in the same way but you can do it that way.
Cameron Reilly [50:19]: Because he goes under safe for IV2 it’s just P/E under 14. So, he could get rid of both and just award two points for a P/E less than five and one point for a P/E between five to 14 and zero for a P/E greater than 14.
Tony Kynaston [50:34]: Except that the 14 will change. And it will change in the future as interest rates rise.
Cameron Reilly [50:40]: We could, particularly with the Flitman model we could just change the current interest rate in the little breakout section and it could change the P/E ratio that we are looking at, but it might make it a little bit simple.
Tony Kynaston [50:54]: Well, that’s fine. If people feel more comfortable using a P/E ratio, it’s the same thing, but that’s okay.
Cameron Reilly [51:00]: But how would the future EPS there is a forecast PA I think isn’t there stop to provide a forecast PA.
Tony Kynaston [51:08]: He does [inaudible: 51:09] I am not sure. Let me have a look. I will call it one of those stocks. We just looked at.
Cameron Reilly [51:13]: Because that’s the thing, right? For the, for the IV2, you are looking at forecast.
Tony Kynaston [51:18]: Yes, we are, that’s right. It probably does because that is where we get the EPS forecast from there. This is a good point. The problem in providing a forecast P/E ratio is you do not know what price; you have to forecast the price divided by the earnings. We get a forecast earnings per share, we don’t get a forecast price per share.
Cameron Reilly [51:44]: But do you get a forecast? Well, if they have got a forecast P/E, if there is a forecast P/E, how can they forecast? Well, I guess they can, they forecast what they think the price is going to sometimes.
Tony Kynaston [51:55]: You’d have to look at the calculation. I am guessing they use the current price and then divide it by the [inaudible: 52:00] forecast earnings. But that is in no way, shape or form as a correct forecast of P/E.
Cameron Reilly [52:07]: So, you could maybe simplify IV1 as a P/E less than, or equal to 5. P/E 2 is a little bit trickier.
Tony Kynaston [52:17]: Yeah. That’s right.
Cameron Reilly [52:18]: Good work, Joel.
Tony Kynaston [52:20]: And that is a good, I mean, it maybe it happens at midnight, but it is a light bulb moment when people start to understand how the numbers all interact and that they can be flipped and referred to differently, they get their head around the language of investing, which is good.
Cameron Reilly [52:34]: I think that is [Inaudible: 52:39].
Tony Kynaston [52:40]: Good. Well, it’s a little shorter than usual, but it’s a whole day one for us. Isn’t it?
Cameron Reilly [52:46]: Well, and we Just, have not been a lot of questions this week, I assume because people are on holidays, like we are?
Tony Kynaston [52:51]: That is a good point. [Inaudible: 52:52] They become perfect investors.
Cameron Reilly [52:56]: Well, we say that every time it is a quiet week and then next week there is 30 questions, so then we start telling him to cool the jets.
Tony Kynaston [53:07]: Yeah.
Cameron Reilly [53:07]: Oh, cool. Mark. Before you go and hit the whiskey bar with Ruddy, another mark Gaudi reading recommendations, film recommendations, music recommendations, horse recommendations.
Tony Kynaston [53:22]: Well, the horse recommendation is she’s ideal, which is coming up at in the Sydney cup. I think it is Saturday week from memory. So that is going to be a good horse. And we even took some long-range bets on she’s Ideal to win the Melbourne Cup at a hundred to one. So that is probably a very speculative bet, but there were good odds. So, there is that we have princess raffles running an Adelaide on Saturday. She has done well, and she often set this stage. She has had a couple of placing so she is moving up into list of great at the moment, but she is aiming herself for the size in Adelaide in about six weeks, which is more her distance in 1400, but she might be worth a bit. I have not checked the odds out yet. I have not done much reading or watching. So, I am going to have to leave those up to you. I have not seen much at all. I have been partying on my birthday week.
Cameron Reilly [54:19]: Well Christine and I went into a swop shop here yesterday to try and find a cheap booster seat for Fox because he did not like the one that we drove up here with. And they had a massive book section with a lot of $2 books. And I picked up a couple of really interesting looking books. One is called Fidel and Garbo. It’s the story of Fidel Castro’s a multi-decade close personal friendship, his best friend according to the authors of this book with Nobel prize winning writer Gabriel Garcia Marquez, I have read about their relationship before because I went through a period a couple of years ago of reading all of my Marquez books, a hundred years of solitude, love and the time of color, et cetera. He used to, he would finish his manuscripts and would send them to Fidel who would send them back a week later, marked up.
Cameron Reilly [55:23]: He would read the entire manuscript, mark it up and red pen and send it back to Marquez. Which I find that fascinating about Fidel’s character as well. Maybe they should have shared the Nobel Prize. And then I have another one. George Negus, the world from Italy, George, when he retired from foreign correspondent and took his family and lived in Italy for number of years. And he wrote a book about life in Italy, but a little bit more serious than your normal travel or talking about politics and football and the world of the view of the world from Italy which I am looking forward to.
Tony Kynaston [56:08]: I picked up some recommendations I thought you might like, I think it was Oliver stone on his Facebook page today even was rhapsodizing about the secures movies, the Italian director.
Cameron Reilly [56:23]: What’s his name?
Tony Kynaston [56:24]: I think it’s Vittorio De Sica
.
Cameron Reilly [56:28]: Okay. De Sica.
Tony Kynaston [56:29]: Going back a long time. I think maybe even while certainly had young Sophia Loren, lots of his movies, but perhaps even launched it and Marcello Mastroianni, I think you may even go way back to the bicycle thieves, which is a famous most film student’s watch. So, can check out his catalog too? In the future? Once I bundle off Ruddy back to [Inaudible: 56:54] sit and drink a whiskey. Oh, hypnotize me thanks to the Melbourne listeners for sending me up a bottle of whiskey that was great, that arrived on Thursday night and it was almost all gone by Thursday night.
Cameron Reilly [57:08]: What did they send you?
Tony Kynaston [57:10]: What’s it called? Baker gate. I think it is called yeah. Something like [Crosstalk: 57:15] that bottle of whiskey. Yes. It was lovely.
Cameron Reilly [57:18]: Aussie?
Tony Kynaston [57:18]: Yes, that’s right. I think from Victoria, it’s all a blur. So, I cannot remember. But I had ordered some myself not of that whiskey. I had some whiskeys coming in and I opened the box and thought, that’s not what I ordered. And then luckily the card fell out, which was lovely.
Cameron Reilly [57:34]: Oh, that’s great. Yeah. By the way, I remember the couple we met at the whiskey awards from Tasmania. They watched the film Marketing the Messiah, loved it and they are about to read The Psychopath Epidemic. And they have invited me to come down for two weeks and to be their writer and residence.
Tony Kynaston [57:54]: Oh fantastic. You need a publisher in residence, too.
Cameron Reilly [57:57]: Yes, obviously. Yeah. Publisher in residence, will have to go down and they reckon mid-May is the perfect time to come down. So, I think we should do it.
Tony Kynaston [58:08]: Mid May.
Cameron Reilly [58:08]: You can spend a couple of weeks in Tassie in May and do a bit of a tour drink. Some Tasmanian whiskey hit the Loch distillery, hang out with bill lock now mates with bill luck.
Tony Kynaston [58:21]: Yeah. Sounds great.
Cameron Reilly [58:23]: Get Niko to make an intro for us.
Tony Kynaston [58:28]: That’d be cold, May in Tasmania, I would think.
Cameron Reilly [58:31]: Sounds good to me. Find place rug up. Yeah. You can look after Fox while Chrissy and I go out and party
Tony Kynaston [58:39]: Now, Fox, you don’t want to drink the peaty ones, you want to go straight.
Cameron Reilly [58:45]: You want him to go straight to the peaty ones? Alright mate well has a good week. I’ll talk to you next week. Good luck everybody. If you have any questions shoot me an email.
Tony Kynaston [58:57]: All right. Thanks Cam. And enjoy your time in Bundy.
Cameron Reilly [59:04]: Thanks mate, ciao.
Tony Kynaston [59:04]: Ok cheers.