Transcript QAV 423

Episode: QAV 423 Club

Cameron Reil­ly: [00:09] Wel­come back to QAV. This is episode 423 TK, how are you?

Tony Kynas­ton: [00:15] Good, good now recov­ered.

Cameron Reil­ly: [00:18] From? Tell them all what hap­pened.

Tony Kynas­ton: [00:21] I had an AstraZeneca virus jab on Thurs­day, pret­ty vio­lent reac­tion to it Thurs­day night for about five or six hours. I was shak­ing and sweat­ing, and my heart rate was up to I don’t know what it was, it felt like 200 beats a minute for about six hours and limbs ached. Yeah, and by the next morn­ing, I was bet­ter. Just had to spend the day in bed recov­er­ing from it. No sleep that night.

Cameron Reil­ly: [00:51] That’s just Bill Gates’s secret chip. Embed­ding itself in your neur­al cor­tex, just get­ting you to, you know, to opti­mize as Win­dows is reboot­ing. Basi­cal­ly, to get ready to con­trol every­thing.

Tony Kynas­ton: [01:06] I tried to resist.

Cameron Reil­ly: [01:10] Because you’re a Mac guy. The ghost of Steve Jobs was fight­ing it inside you.

Tony Kynas­ton: [01:14] Give me the Steve Jobs one.

Cameron Reil­ly: [01:18] That’s not good. I haven’t had mine yet I’m wait­ing for my doc­tor to tell me they’ve got some I mean to give it to me but hope­ful­ly, I don’t have that kind of reac­tion.

Tony Kynas­ton: [01:26] It’s strange for all that, I mean I could have dri­ven out to Olympic Park and got­ten I sup­pose ear­li­er but it took until last week to get one from our local area, Dr. Stone.

Cameron Reil­ly: [01:38] Well in oth­er news, I sold IMA dur­ing the week, Tony. A lot of peo­ple on Face­book told me it was a bad deci­sion, you should hold on, should have held on longer, they think.

Tony Kynas­ton: [01:49] What hap­pened with it?

Cameron Reil­ly: [01:49] Well it just breached the sell line, you know, it had been hov­er­ing around the sell line for about four months. And it final­ly went down to 16 cents. And so, I dumped it, of course it’s back up to 17 cents now, where it was before that. But I had a loss on it, and you did say on a recent episode if you have any loss­es going into the end of the finan­cial year, you want to take advan­tage of your cap­i­tal gains loss to off­set some of your gains, like the  mil­lions that I made out of TRS last year. I thought I should do that so.…

Tony Kynas­ton: [02:30] Hav­ing a look at image resources now it’s pret­ty close to its sell line, isn’t it?

Cameron Reil­ly: [02:36] Yeah. But it dropped out or came back up, some­body said though I should have wait­ed until the end of the month, and I know some­times we have done that but hon­est­ly, I was look­ing for a good excuse to dump it.

Tony Kynas­ton: [02:47] You must have sold it close to the end of the month any­way.

Cameron Reil­ly: [02:53] Oh, no.

Tony Kynas­ton: [02:54] When you sold it last week?

Cameron Reil­ly: [02:56] Yeah. Last week, I think it was so…

Tony Kynas­ton: [02:59] I would­n’t wait three weeks for the end of the month if some­thing were drop­ping. I think you’ve done the right thing.

Cameron Reil­ly: [03:08] That’s good. Yeah. Now I’m going to sit down at some stage this week with Tay­lor, and one of his mates who’s into QAV now, we’re going to sit down togeth­er and do all the man­u­al data entries and do it all togeth­er. Okay, we divvy up all the man­u­al data between the three of us for a day and, yeah, give them an oppor­tu­ni­ty to roll their sleeves up and get their hands dirty. And a shout out to Ed, I caught up with Ed for three hours and did a mini-work­shop, it was Ed that sug­gest­ed the idea of a work­shop, and he hap­pened to be in town yes­ter­day, he’s trav­el­ing around the coun­try, retired, trav­el­ing around, liv­ing the life. And, you know, I sat down for three or four hours in a cafe yes­ter­day and went through it all, which was great, it’s always great to meet QAV Club mem­bers and hear a bit about their sto­ries and see how they’re going but he’s fired up about QAV, which was nice.

Tony Kynas­ton: [04:01] Yeah, good. What a great lifestyle too.

Cameron Reil­ly: [04:04] Yes, he’s real­ly liv­ing the life. And he was intro­duced from a mate of his, James, down in Can­ber­ra. So, thank you, James. Thank you to every­body who’s rec­om­mend­ing their friends. We added anoth­er mem­ber of the Coady fam­i­ly, I think we’ve got the entire Coady fam­i­ly now as QAV club mem­bers.

Tony Kynas­ton: [04:25] Can we make a foot­ball team shirt with Coady on the back. Coady num­ber one, num­ber two, num­ber three. They could fight about who’s num­ber one but yeah.

Cameron Reil­ly: [04:36] I think it’s in order of who signed up. I think that’s our first full fam­i­ly QAV sub­scrip­tion, we have to do like a fam­i­ly Sub­scrip­tion Plan or some­thing, some sort of dis­count for fam­i­lies. All right, what else have I got my notes for this week? Oh, there’s a new video that Andrew Flit­man and I made last week. On him walk­ing through his ver­sion of the check­list with the tables and that kind of stuff. So, if you did­n’t see that on Face­book, go up to our videos page if you’re a QAV club mem­ber and you can have a look at that, or if you down­load the lat­est ver­sion of the Andrew Flit­man check­list from our drop­box fold­er, you’ll see I’ve stuck a lit­tle link to the video in the first tab on that to make it easy, so I hope that helps. A cou­ple of peo­ple emailed me over the last month, ask­ing for a video. So, Andrew was good enough to make some of his time avail­able recent­ly and he and I did that so hope­ful­ly that helps when peo­ple are work­ing their way through com­plet­ing the check­list. What else have I got…  insid­er trad­ing ‚Tony, talk to me about insid­er trad­ing?

Tony Kynas­ton: [05:44] yeah good piece of research done by some, I guess they’re econ­o­mists, Researchers from Queens­land Uni recent­ly. And they were look­ing at data, I think, pre­dom­i­nant­ly from the US, and they’re look­ing into announce­ments by com­pa­nies and sales of shares by insid­ers, so CEOs, board mem­bers, CFOs, that kind of thing. And what they found was real­ly inter­est­ing. So, there’s obvi­ous­ly a lot of rules and laws around when an insid­er can trade, and you can’t do it when you’re in pos­ses­sion of news that could move the mar­ket you meant to announce that news and then trade if you still want to after that. And most com­pa­nies in Aus­tralia have trad­ing win­dows in place. Gen­er­al­ly, a CEO can trade this stock, I think usu­al­ly about a month or some­time dur­ing the month after their com­pa­ny results come out twice a year. So, the rest of the time they’re in what’s called a black­out. I imag­ine there are sim­i­lar rules in oth­er coun­tries, but what the researchers found was that it looked like, and I guess you have to be care­ful, alleg­ing things here, but it looked like com­pa­nies were putting out lots of infor­ma­tion just sort of mud­dy­ing the waters, just dump­ing every­thing, and then using that as their, you know, here’s the bad news, I’m going to sell and sell­ing after that. And yeah, there was some research to show that that kind of murk­ing of the waters was being used by insid­ers who were try­ing to sell their shares with­out com­ing out and just say­ing here’s the bad news, which is going to affect the com­pa­ny.

Cameron Reil­ly: [07:26] So dump­ing so much stuff that peo­ple can’t wade through it in time to exe­cute as quick­ly as the CEO does.

Tony Kynas­ton: [07:34] And not just wade through it but find that rel­e­vant infor­ma­tion, as I said, they’ll dump a haystack worth of infor­ma­tion and the impor­tant stuff in the mid­dle some­where.

Cameron Reil­ly: [07:45] sneaky, very sneaky.

Tony Kynas­ton: [07:49] very sneaky Yeah. You know, it’s still one of our, I guess, not a hard and fast rule but one that we look at is insid­er sell­ing. So you can just prob­a­bly ignore what they say, just look at what they do.

Cameron Reil­ly: [08:03] Excuse me well I just take a sip of my drink here.

Tony Kynas­ton: [08:07] your mer­chan­dise, I actu­al­ly got mine out I for­got.

Cameron Reil­ly: [08:10] Yeah, come on, man. Get it out. Look, it’s got the maxmis on the back.

Tony Kynas­ton: [08:18] It actu­al­ly looks real­ly good.

Cameron Reil­ly: [08:18] Yeah, the max­im mug is avail­able, and the golf balls. You’ve got some golf balls now, you’re too sick to hit them, I guess.

Tony Kynas­ton: [08:28] I’ll go out tomor­row and play.

Cameron Reil­ly: [08:30] Yeah, still try­ing to fig­ure out how to send peo­ple golf balls. I think what I will do is I’ll send them a mug and put a golf ball in the mug and then just send the mug, I think. Right. Any­way, if you want to buy one your­self, if you want to buy a cof­fee mug, go to the shop link on our web­site, QAV.podcast.com.au. Go to the shop, buy your­self a QAV mug or buy one for a friend, give it to a friend and say some­thing. Say some­thing clever I can’t think of any­thing but that’s how you get them into QAV, here you need this trust me just say that.

Tony Kynas­ton: [09:09] Speak­ing of golf balls. Do you remem­ber Dan Rowan and Dick Mar­t­in’s laugh­ing? They used to give out an award called the Fly­ing Fick­le Fin­ger Of Fate.

Cameron Reil­ly: [09:16] I remem­ber the show but not that no.

Tony Kynas­ton: [09:18] Oh yeah, the Fly­ing used to have a stat­ue with a hand. Yes. And I was just think­ing out of yes­ter­day I was watch­ing the golf a guy called Jon Rahm, Span­ish golfer, was hav­ing like a day to remem­ber it’s like the third round of a four-round cham­pi­onship. He’s the defend­ing cham­pi­on from the year before. No one’s ever won back-to-back since Tiger Woods and Tiger Woods is the only per­son to ever do it. He’s like five shots in the lead­er’s head, a hole in one. It’s like every­thing’s going his way. Steps of the 18th career, they tap him on the shoul­der and say Oh, real­ly sor­ry. But your Covid test has come back pos­i­tive. We have to dis­qual­i­fy you from the tour­na­ment, you can’t play.

Cameron Reil­ly: [09:57] Could­n’t he just wears a mask and keeps play­ing? Oh, yeah, it’s hor­ri­ble. Yeah. Well, speak­ing of gold.

Tony Kynas­ton: [10:10] Were we?

Cameron Reil­ly: [10:10] Well you said, golf, and I just, I sort of move that to gold. You post­ed an arti­cle about some US prop­er­ty barons Sam Zell, who is capit­u­lat­ing on gold. He said he’s been say­ing gold as invest­ing his gold has done for decades now, he’s invest­ing in gold. What did you make of that?

Tony Kynas­ton: [10:35] I just thought it was, I thought it was inter­est­ing, Sam Zell is a real­ly inter­est­ing char­ac­ter who has prob­a­bly the best prop­er­ty investor in the US for decades. I’m just read­ing his biog­ra­phy at the moment which is real­ly good. It’s called, AM I BEING TOO SUBTLE, he’s got a rep­u­ta­tion for that just being a straight talk­er.

Cameron Reil­ly: [10:58] I know the feel­ing. Yeah, my moth­er’s nick­name for me is Cameron the blunt, right.

Tony Kynas­ton: [11:07] Yeah, yeah. So yeah, I can’t remem­ber what the details were, he’s nev­er thought gold was a good invest­ment, but he’s sort of wor­ried about infla­tion at the moment I guess when he’s buy­ing gold.

Cameron Reil­ly: [11:17] Yeah, but they did­n’t real­ly explain, out­side of that, why, in the arti­cle, like, can he get bet­ter. What’s gold appre­ci­ate by on aver­age, year on year, do you know?

Tony Kynas­ton: [11:27] I don’t know what it will appre­ci­ate by, it’s an upswing at the moment for us but it’s more of an infla­tion hedge. So, it’s a store of val­ue. So, gold does have com­mer­cial uses so it can go up just on the fact that it’s used in man­u­fac­tur­ing sil­i­con chips and jew­el­ry. Prob­a­bly a few oth­er things too. But it’s a great store of val­ue so if infla­tion goes up if you have mon­ey in the bank, for exam­ple, you have mon­ey under your mat­tress and infla­tion is going up and it gets to a high num­ber, even 5% or some­thing. If you have $100 under your mat­tress the next year, it’s worth 95. Yeah, so you get the sort of neg­a­tive com­pound­ing effect of hold­ing cash in an infla­tion­ary envi­ron­ment. But if you’re hold­ing Gold. Gold tends to retain its val­ue. I guess because it’s still used in man­u­fac­tur­ing, and it’s pret­ty much a tra­di­tion­al store of val­ue but it could. I mean, to me, you could hold the iron, or you could hold oth­er com­modi­ties as well like they’re sort of doing the same thing it’s just a golds had this sta­tus as an infla­tion hedge. And for a long time, I guess it as well was always the, you know, things like the cur­ren­cies were tied to gold up until Richard Nixon so it was seen as being a very sta­ble com­mod­i­ty. But I think that’s changed since then.

Cameron Reil­ly: [12:54] I’m just on goldprice.org. Accord­ing to its lit­tle table here, in the last year, gold has gone up by 11%. In the last five years, it’s gone up by 50%. So, on aver­age 10% a year which does­n’t sound over­ly impres­sive but it’s not bad. It’s like the index, right?  But over 20 years, it says it’s gone up by 607%, which would be like 30% a year,

Tony Kynas­ton: [13:24] But yeah prob­a­bly a bit less than that but yeah 20 Odd.

Cameron Reil­ly: [13:27] Yeah 607 divid­ed by 20 is 30.35 Accord­ing to my cal­cu­la­tor.

Tony Kynas­ton: [13:33] Your Cal­cu­la­tion’s right but that’s not how you cal­cu­late com­pound growth.

Cameron Reil­ly: [13:37] What am I doing wrong, how do you cal­cu­late com­pound growth?

Tony Kynas­ton: [13:39] You got to use the for­mu­la of N price over the start­ing price, raised to the pow­er of the num­ber of years minus one, some­thing like that. Google CAGR cal­cu­la­tion, but that’s it.

Cameron Reil­ly: [13:59] Yeah, look­ing at see­ing if gold’s been a good invest­ment over the long term. Sta­tista, rate of return, gold.

Tony Kynas­ton: [14:06] Yeah just tra­di­tion­al­ly peo­ple flocked to gold when infla­tion is going up.

Cameron Reil­ly: [14:09] I know they do but I’m won­der­ing if that means it’s a good invest­ment or not just because that’s what they do, does­n’t nec­es­sar­i­ly mean that it’s good, right.

Tony Kynas­ton: [14:16] Cor­rect, yeah right. Yeah, exact­ly, and Buf­fett and Zell in the past has railed against doing that because they say it’s like putting mon­ey into a rock, it’s got, you know, it’s inert, they do con­cede that does have some val­ue because it’s being used by the jew­ellery mak­ers and watch­mak­ers and chip mak­ers and stuff. Yeah, but that val­ue is, you know the price of gold is much high­er than what that val­ue would actu­al­ly be worth if it did­n’t have this store of mon­ey type func­tion as well.

Cameron Reil­ly: [14:46] Right, well I can’t eas­i­ly find that CAGR of gold over 20 years

Tony Kynas­ton: [14:52] Well I will tell you how to do it quick­ly. So, it’s 60, over 20 years. So, 60 years, two to what 64 would be two to the eight is it? So that’s about six dou­blings in 20 years. So, it’s dou­bling every three years, three into 72 years is. Yeah, it’s prob­a­bly going to be about 21, 22% Some­thing like that. 24%

Cameron Reil­ly: [15:26] Bet­ter than your per­for­mance, you should just sell every­thing and put your mon­ey in gold, Tony. What are you doing?

Tony Kynas­ton: [15:34] Yeah, true. Hind­sight is a won­der­ful thing, isn’t it? And past per­for­mance does­n’t pre­dict future per­for­mance.

Cameron Reil­ly: [15:40] And it’s as good as Buf­fet­t’s return. Buf­fet­t’s full of shit, he should just col­lapse Berk­shire Hath­away and put all of his mon­ey in gold. I’m seri­ous. Why shit on gold if it’s at that kind of per­for­mance over 20 years?

Tony Kynas­ton: [15:56] Yeah, good ques­tion. I don’t know, do I trust it to con­tin­ue to get 24% per annum going for­ward, no. Why don’t I trust it? Because I’ve got no way of work­ing out work­ing out its val­ue, no way of know­ing where its val­ue is going. This is where Buf­fett makes sense, he’s say­ing if he was com­par­ing an invest­ment in gold to putting it into dif­fer­ent sec­tors of the Amer­i­can econ­o­my, if he put mon­ey in to farms he can see that, you know farms are going to sell some­thing, improve­ment in agri­cul­tur­al tech­nol­o­gy means that there’ll be growth in the farm­ing sec­tor. If he puts it in rail­way stock, which he did, he can see how that’s going to improve, he can see the dynam­ics of the econ­o­my sup­port­ing that. You know, that’s what he’s com­par­ing it to. If I put my mon­ey in gold, I’m just, I’m either, you know, buy­ing a lump and putting it under my bed and hop­ing that some­thing cat­a­clysmic hap­pens to you know make it more expen­sive than what it is today in the future some­time in the future, it’s prob­a­bly a safe bet, giv­en the way the human race is going. But it’s got to become scarce ever to become more valu­able.

Cameron Reil­ly: [17:07] Well if the human race wipes itself out, I can’t see gold being that valu­able if, you know, we’re all scav­eng­ing for food, it’s the walk­ing dead out there I’m not sure gold’s going to do much good, but

Tony Kynas­ton: [17:22] It’s in the sneak­er cat­e­go­ry, right? Go have a look at the 20-year price increase in a pair of Air Jor­dans that Jay Z signed or, on a par­tic­u­lar like or…

Cameron Reil­ly: [17:31] Michael Jor­dan you mean? No, Jay Z, you don’t even know who Jay Z is, you’ve nev­er lis­tened to a rap song in your entire life.

Tony Kynas­ton: [17:38] I have, he wears sneak­ers.

Cameron Reil­ly: [17:40] So does Jer­ry Sein­feld. Yeah, so it’s in the cat­e­go­ry of gam­bling then,  you’re tak­ing a punt. Buy­ing some­thing ear­ly and hop­ing it does well. But as it turns out, gold has done well over the long term.

Tony Kynas­ton: [18:00] Yep.. Which is kind of strange because the inter­est rates and infla­tion haven’t been. Inter­est rates have been going down and infla­tion has­n’t real­ly been a part of our soci­ety since prob­a­bly the 90s Real­ly. So, it’s kind of strange that gold’s going up.

Cameron Reil­ly: [18:16] Yeah, but, you know, then you had

Tony Kynas­ton: [18:20] Well you had Gulf Wars, you had dot com bub­bles, you had GFCs, all that kind of stuff is what dri­ves called up.

Cameron Reil­ly: [18:25] Trump. Yeah. All right. Well, there you go, Sam Zell might be on to some­thing. Hey Folks, Cameron in the edit­ing room here, I just went and had a look at the his­to­ry of the gold price and what’s inter­est­ing is that, sure in the last 20 years it’s actu­al­ly done quite well, between the year 2000 and the year 2020 it went up, as we dis­cussed, quite well, but if you look at the pre­vi­ous 20 years from 1980 to the year 2000, it actu­al­ly went back­ward by about a half to two-thirds, and the pre­ced­ing 20 years it did­n’t per­form very well either, it was all over the place. So, I think Tony’s got a point, you know, even though it’s done well in the last 20 years, it did­n’t do well before that, and we real­ly have no way of know­ing how it’s going to do in the next 20 years. So, yeah, just thought I’d share that. For peo­ple that aren’t already signed up to Navexa, and are look­ing for an online plat­form, the nice boys at Navexa have cre­at­ed a coupon code for QAV lis­ten­ers, QAV2021, use that when you sign up you get a 15% dis­count on all sub­scrip­tions. So, thank you to Navarre and Tom, for putting that into place.

Jour­nal entries, Tony, you’ve done a cou­ple. You want to talk about those. Your most recent one, on the third of June, you were talk­ing about Ing­hams, had its earn­ings update.

Tony Kynas­ton: [19:51] Yeah, so it’s inter­est­ing like there’ll be a cou­ple of ques­tions lat­er on about some stocks which have had earn­ings down­grades. And Ing­hams was the reverse of one that with an upgrade. And it was dropped out of the QAV top scor­ers list I think around March or so because the CEO resigned and went back to the States, and they appoint­ed a new one and the share price dropped, and it became a sell, and in fact, I owned the stock and sold it at that time. And you know it’s not a bad thing to do because it was­n’t a pre­pared for a change of CEO. So that was a bit of a red flag and there’s also a propen­si­ty when CEOs change for the new per­son to come out and real­ly try and mark the stock down as much as pos­si­ble. Like, they call it clear­ing the deck so they’ll go through and take what­ev­er pro­vi­sion they can, they’ll go through and, you know, make peo­ple redun­dant and try and get the busi­ness into its, you know, finest or its most Bat­tle-ready set­ting. So that they can look good, so from then on, the share price goes up under their watch. All of their options are set off the low price when they came in. And they can point to the good job they’ve done after three or four years when they’re look­ing for anoth­er job.

So, there’s a lot of good rea­sons if you’re new CEO to just real­ly trash the share price, do all the hard work in those first six months, just because you’ll nev­er get anoth­er chance to do it, right. Because if you try and do it after that, you’re going to be wor­ried about not get­ting options that year, or what­ev­er, you’re not get­ting paid a bonus that year because, you know, what­ev­er you’re doing will depress the share price. So, clear­ing the decks is a com­mon thing that hap­pens when CEOs change that’s usu­al­ly a good sign to sell. In this case, it did­n’t hap­pen, and the new per­son has come out with an upgrade about three months lat­er. And so,  the stock has risen again and it’s back on the buy list, back on the top scor­ers’ list right.

For peo­ple who don’t know who Ing­hams are, look at the super­mar­ket, they pro­duce a large share of all chick­ens in Aus­tralia, both, you know, frozen and fresh, huge com­pa­ny. They were owned by the Ing­hams Fam­i­ly until about five or so years ago when they sold off, and now they’re list­ed. So yeah, it’s a pret­ty good com­pa­ny, it’s pret­ty basic. It’s large scale chick­en farms, and it depends on being able to do good deals with super­mar­kets which they have tra­di­tion­al­ly had good rela­tion­ships with, and it’s got a large mar­ket share of that mar­ket, so it tends to do well, just year in year out, you’re not going to get rapid growth from it but it’s been a pret­ty good busi­ness over the years.

Cameron Reil­ly: [22:41] Thanks for that. Well, on May 31 You did a jour­nal entry where you said you were sell­ing JB Hi-Fi and buy­ing VUK, Vir­gin UK. I had a cou­ple of ques­tions about that from peo­ple about why you sold JB Hi-Fi so we can start there, then I want to ask you about the Vir­gin UK buy line, because when I was sit­ting down with Ed, we were look­ing at that chart yes­ter­day and I was like, oh no I don’t think that’s a buy, I don’t know why Tony’s got that on the score­card so let’s start with JB Hi-Fi, why, why, JB Hi-Fi, Tony?

Tony Kynas­ton: [23:20] Why JB Hi-Fi. Okay, bet­ter be care­ful how I say this. It is tied in with our dis­cus­sion before about your sale of Image Resources. So, offi­cial­ly I’m sell­ing it because its QAV score is towards the bot­tom of the top scor­ers’ list. And I want­ed to run as I said last week, I want­ed to run a cham­pi­on chal­lenger port­fo­lio look­ing at tak­ing some­thing from the bot­tom and replac­ing it with some­thing at the top. That’s my offi­cial rea­son for doing it. The added ben­e­fit is that may have been sold at a slight loss for me which will have some tax con­se­quences. But that’s not the rea­son. That’s not the rea­son. The rea­son is I’m sell­ing is because the QAV score is low and there’s some­thing bet­ter to buy.

Cameron Reil­ly: [24:14] Right, had noth­ing to do with the announce­ment of the CEO leav­ing,  the group CEO?

Tony Kynas­ton: [24:20] No, no. JB Hi-Fi ? That was a long time ago.

Cameron Reil­ly: [24:24] Was it?

Tony Kynas­ton: [24:24] Yeah, that was a month ago, maybe two months ago, and the CEO was replaced by an ex-CEO any­way, who had a good name.. Yeah, so the CEO was pinched by Sol­ly Lew to go and run Pre­mier Invest­ments, Sol­ly Lew’s retail com­pa­ny, when Mark McInnes announced he was going to retire. And yeah, so the JB Hi-Fi board went back to a pri­or CEO who has a good name and they put him in. So, no issues there with the CEO.

Cameron Reil­ly: [24:57] Okay. But you were look­ing for some­thing to sell for this new exper­i­ment that you’re doing, and it was the win­ner.

Tony Kynas­ton: [25:05] Yes, it did have the added ben­e­fit of being in a slight loss for tax rea­sons too.

Cameron Reil­ly: [25:12] Well you know I was; it was a side point but some­body I think it was Jamie, sug­gest­ed to me in an email the oth­er day that it would be real­ly good to have a quick ref­er­ence guide some­where on our web­site where peo­ple can look up a cou­ple of bul­let points that answer a lot of the com­mon ques­tions that peo­ple will have when it comes to invest­ing, like just you know, remove all the bumpf, just bul­let points, this is what Tony says about x, this is what he says about y. And the first one that I was doing today on that was a ques­tion that some­body asked a while back. If you have to sell some­thing because you need the cash, how do you decide what it is, what to sell? And so, I bul­let-point­ed that, and you said the first thing is you look at, sell loss­es first. You said what I’m try­ing to do is avoid sell­ing some­thing and hav­ing a cap­i­tal gains tax lia­bil­i­ty against that sale, then sell the ones that are trend­ing down even in the short term, even if you think they’ll do well lat­er on, if they’ve trend­ing down you sell them. And then, third­ly, you prob­a­bly sell the ones which don’t pay div­i­dends. That was in episode 413. And so, this would fit that mod­el if you need to sell some­thing.

Tony Kynas­ton: [26:29] It could prob­a­bly add the fourth and the fourth one is like you might want to; I would sell some­thing with a low­er QAV score as well.

Cameron Reil­ly: [26:45 Right. Okay. I’ll add that in, some­thing with a low­er QAV score.

Tony Kynas­ton: [26:48] Yes, so I’ve def­i­nite­ly fit that mod­el with the sell­ing of JB Hi-Fi, noth­ing against JB Hi-Fi I think it’s a fan­tas­tic com­pa­ny it’s got a great retail cul­ture. I love going into their stores, their ser­vice is real­ly good. The staff look like and act like and speak like com­put­er nerds, which is great because I nor­mal­ly need help try­ing to get the right Don­gle for my Apple Mac or what­ev­er. Because the frig­gin dick­heads there keep chang­ing them every time they release a new iPhone, it piss­es me off. Just have one inter­face, guys. I just want to plug the

Head­phones into the new iPhone.

Cameron Reil­ly: [27:27] Tech­nol­o­gy, you’re sup­posed to have air pods by now air pods have been out for like four years Tony. They’ve giv­en you four years to catch up to the Blue­tooth rev­o­lu­tion, it’s not their fault if you’re cling­ing, like cling­ing to near death to your old, cord­ed head­phones. Tech­nol­o­gy moves on, Tony. It evolves, there are bet­ter things bet­ter to have, what do you want them to not use the best tech­nol­o­gy in Apple devices.

Tony Kynas­ton: [27:54] I’ve lost two sets of Blue­tooth head­phones.

Cameron Reil­ly: [27:57] You’ve lost them?

Tony Kynas­ton: [28:00] Yeah.

Cameron Reil­ly: [28:00] How do you lose them?

Tony Kynas­ton: [28:04] Well, one flew out of my ear when I was walk­ing and went down a sew­er. It was like, thank you, Steve Jobs, fuck you.

Cameron Reil­ly: [28:11] He’s been dead for 10 years.

Tony Kynas­ton: [28:14] Lucky guy. And then the oth­er one I think fell out of my pock­et when I went whale watch­ing in a chop­py sea. Where­as these things you don’t lose them, they get tan­gled up and they are like a 10th of the price. Yeah, so like, yeah.

Cameron Reil­ly: [28:35] I’ve nev­er lost a Blue­tooth head­phone that’s all I got to say.

Tony Kynas­ton: [28:38] You don’t go out.

Cameron Reil­ly: [28:41] Well that’s true. You’ve got me there. Hard to lose stuff when you just sit in one spot every day. Okay. Oh, so that’s your JB Hi-Fi expla­na­tion. What’s your VUK jus­ti­fi­ca­tion, bring up the chart for me.

Tony Kynas­ton: [28:56] It’s a fudge, if you look at the top scor­ers’ list, it’s list­ed as a fudge.

Cameron Reil­ly: [28:59] Well I did see that, but you did­n’t explain how or why. So exact­ly how are you fudg­ing it?

Tony Kynas­ton: [29:08] Okay, so I’m just call­ing up the chart. So, Eclipse is anoth­er one that looks like this as well. Yeah, so this is some­thing that, I’ve been con­sid­er­ing even mak­ing a rule and the work that I have been doing with Dylan to auto­mate the three-point check line process is mak­ing me even more con­vinced it’s the right rule. When you have a, if you look at the Vir­gin UK chart, and look at the two high points, they are fair­ly sim­i­lar. They’re almost like a flat plateau, so the first one’s July 2018 at a price of 6.06, and the sec­ond one is Sep­tem­ber 2018 at 5.95. That’s with­in, like, what 5% of each oth­er. If even clos­er than that. And if you draw a line using those two points which is the clas­sic way of doing it, then you’re right. that the share price is just slight­ly below the buy price. But what I’ve been find­ing is that when you get those kinds of plateaus where you have two or three lines at a sim­i­lar sort of price, you’re bet­ter off just using the right­most one as if that were the high point and then draw­ing your buy lines from there.

So, in this case, to fudge for Vir­gin UK, I use Sep­tem­ber 2018 at 5.95 and then went down to Decem­ber 2019 at 3.49. And that gives us a buy line, which is at the start of the upturn, which is more prefer­able any­way. So that’s how I did the fudge there. So yeah, some­one’s ask­ing a ques­tion a bit lat­er about TRS and it is the same sort of thing in reverse. I guess my log­ic is if you look at this VUK graph, those two high points which are sim­i­lar, is kind of say­ing that to me that’s kind of say­ing that’s like a U‑shaped high point or high peri­od, and they’re only usu­al­ly a cou­ple of months apart when it does this sort of thing. And how’s that dif­fer­ent to  hav­ing a V‑shaped high point, it’s a sim­i­lar sort of thing real­ly. Just that there was a cou­ple of months where bumped around before it drops.

So, I’m com­ing over to the point of view that we should use the right­most peak when there’s a cou­ple which are near the high point, and they’re close togeth­er, they’re almost like a flat line, in some cas­es, they are a flat line, right, because oth­er­wise, if you had those two peaks and they were the same price, you’d be wait­ing till VUK gets to six bucks before you buy. And I think that’s wait­ing too long, and it’s also, if you flip it over, a lot of peo­ple have point­ed out, well, and the VUK is a good exam­ple of this too, look at the low points you’ve got a low point in March 2020.

Cameron Reil­ly: [32:09] If I drew a line through the high points, if I draw a line through the two high points that are close togeth­er, my buy line comes out just north of 4 bucks, 4.20, not six bucks.

Tony Kynas­ton: [32:24]  I’m just using a hypo­thet­i­cal. If you had a case where they were both at around $6

Cameron Reil­ly: [32:33] I see what you mean, right

Tony Kynas­ton: [32:33] Which we often do. You get this sort of dou­ble bump­ing on the high point, as things try and break­through and they don’t, and they drop. And the reverse is true for the low point, and if you look at the low points on Vir­gin UK it’s a sim­i­lar sort of sto­ry. So, March 2020 the low point’s $1.24. And then Sep­tem­ber 2020 it’s $1.30. And if you draw the sell line there it’s real­ly quite low.

Cameron Reil­ly: [33:00] So you would be fudg­ing that as well, you’ll be start­ing with the sec­ond one?

Tony Kynas­ton: [33:03] I’m think­ing of it yeah, I think that’s prob­a­bly the way to go, so it’s actu­al­ly going to sail pret­ty close to its sell line at the moment.

Cameron Reil­ly: [33:09] Well, let’s see if you sell and if it goes below that.

Tony Kynas­ton: [33:14] Yeah, that’s right, I think you said, and I think that is that,

Cameron Reil­ly: [33:18] is there an inverse fudge rule? If you find one side of it you need to fudge the oth­er side?

Tony Kynas­ton: [33:25] You kind of get hooked on the fudge, don’t you?

Cameron Reil­ly: [33:26] Tom Cruise did.

Tony Kynas­ton: [33:31] Any­way, so we’re still look­ing at exam­ples of this to try and work out whether it’s a hard and fast rule but it’s kind of mak­ing sense to me. That rather tak­ing these kinds of lines across the bot­tom and across the top, because we’re look­ing for trends, right, up, and down, not lines across the top and the bot­tom. And so, it’s mak­ing more sense to me that once you have some­thing clear­ly going up or clear­ly going down to use that as the high point or low point.

Cameron Reil­ly: [33:55] I said that to Ed yes­ter­day in our work­shop, like, what I come to under­stand about the three-point trend­lines is you’re try­ing to get a sense of, he said it sounds pret­ty sub­jec­tive and I said, well, it is sub­jec­tive, that’s the thing. There are some basic guide­lines but we’re try­ing to deter­mine the con­fi­dence, the mar­ket has in the stock, and what the bands are of that con­fi­dence, try to make some edu­cat­ed guess­es about where those con­fi­dence bands lie and umm.

Tony Kynas­ton: [34:26] Right, so yeah, the whole thing sort of is a sim­pli­fi­ca­tion of what hap­pens with these kinds of price move­ments is that they tend to go in sort of a chan­nel. So, if you look at VUK. It goes down in a chan­nel, both at the top and the bot­tom so you know you’ve got the top of the chan­nel from Sep­tem­ber 2018. Then goes down through Jan­u­ary 2020. And then con­tin­ues on where the share price cross­es in about Octo­ber — Novem­ber 2018, but equal­ly if you look at the bot­tom of that, if you drew that line, if you also drew a line across the bot­tom, you’ve got those, I call them troughs, so some­thing around Decem­ber 2018 and Sep­tem­ber 2019. So, the shares tend to move in ranges, they might go sort of, oscil­late up and down in a wave pat­tern, but they go upwards or down­wards usu­al­ly. So, I’m look­ing at the VUK graph, there is kind of three ranges as the ini­tial one up until late 2018 Sep­tem­ber 2018 which is slight­ly going upwards. Then there is the down­turn comes through until about mid­way through 2020. And then now there’s the upturn, so, we’re kind of just try­ing to use those ranges, or those direc­tions to decide whether we buy or sell, and it’s clear­ly an upturn now so, wait­ing until it gets to $4 is miss­ing out on quite a bit of the upturn.

Cameron Reil­ly: [35:54] So how do we process this? Gen­er­al­ly speak­ing,  we’re buy­ing some­thing that has­n’t tru­ly breached its by line. Because you’ve fudged the buy line.

Tony Kynas­ton: [36:10] Yeah, well, if you look at the top scor­ers list, I record where I fudged them and there’s, you know, four or five, I can’t remem­ber how many, four, on the buy list, and they all have this pat­tern where there’s kind of like a plateau rather than a def­i­nite peak that we can use for our buy­ing, and if we use the plateau, We’re always kind of what we’re going to be a long term, a long time before we can reach that plateau again to buy safe­ly. Where­as I think if there’s a clear­ly estab­lished trend, use the right-hand side of that plateau as the start­ing point. So, we’re just look­ing at that at the moment, you know, Dylan and I are work­ing on the algo­rithm for three-point trends, and it looks promis­ing, so we might want to make a change to the rules on this one, and which also to, I’m quite, you know, cog­nizant of always try­ing to solve the FMG ques­tion which is, we know it’s a com­mod­i­ty, we know that iron ore is going to kind of cycle.

We know also know the graph is going up and has been going up for a while and if we draw the sell line based on the cur­rent graph, we get that kind of flat­ten­ing out effect, we have, you know, a kind of almost like, not quite a straight line but a bit of a straight line, around sort of around $5 when the share price is now $22. So, I’m think­ing that when you have that kind of flat­line. We need to take the right­most trough and use that as a start­ing point, which will give us, in FMG’s case, it’ll give us a sell price more around sort of 16 or 17 bucks, rather than five.

Cameron Reil­ly: [37:44] Okay. Well, the peo­ple in a fun­ny wag­on are going to come to pick you up because they’re hear­ing all of this and they’re like, he’s lost it, I can hear the sirens, they’re going, he’s lost it. He’s chang­ing the rules again we bet­ter pick him up.

Tony Kynas­ton: [38:02] Some­one just had a COVID jab, I guess.

Cameron Reil­ly: [38:05] I think it’s your COVID Jab, it’s mak­ing you fudge stuff as what it is.

Tony Kynas­ton: [38:11] Yeah Bill Gates is whis­per­ing in my ear. Maybe it’s Tom Cruise. Tom Cruise and Bill Gates are in cahoots.

Cameron Reil­ly: [38:21] Good­ness me. Well, you got a stock of the week for us, Tony? Before we get into Q&A.

Tony Kynas­ton: [38:25] I spoke about it I was kind of using it, I was going to use Ing­hams as stock of the week, but we’ve cov­ered that already. Okay. Yeah, so iI think it’s well it’s not way up on the top scor­er’s list,

Cameron Reil­ly: [38:37] No point one six I think it’s score was,

Tony Kynas­ton: [38:39] Yeah, yeah, but it just came back on to it and it’s a rea­son­ably sized com­pa­ny and it’s a rea­son­able busi­ness so that’s why I called it out there for peo­ple to have a look at.

Cameron Reil­ly: [38:48] Okay, all right Q&A time. Stew­art wants to know your thoughts on ANZ, I noticed that you had it in the watch list but not on the score­card last time I checked.

Tony Kynas­ton: [39:03] I think it’s on the score­card. First of all, I own it. So, it would be on the score­card at some stage I just look at me

Cameron Reil­ly: [39:09] Oh it is now.

Tony Kynas­ton: [39:14] Yeah, I get its what point one six or some­thing it was point one six I have it as.

Cameron Reil­ly: [39:18] It’s also on the watch list but it’s prob­a­bly because you just haven’t moved it off, moved it over. Yeah. Why, what are your thoughts on ANZ?

Tony Kynas­ton: [39:27] Oh yeah it’s good, good busi­ness. Same, I mean it’s part of this whole bank­ing thing that we’re see­ing where the pro­vi­sion­ing that was tak­en last year to account for peo­ple who may be affect­ed by the COVID shut­down or not be able to ser­vice their mort­gages, all that pro­vi­sion­ing seems almost unnec­es­sary now that we’re through, I hes­i­tate to say we’re out the oth­er side, but we cer­tain­ly, cer­tain­ly peo­ple have come off their hol­i­days, they were giv­en  mort­gage repay­ment hol­i­days by the banks at the insis­tence of the fed­er­al gov­ern­ment. And no-one knew how that was going to work out, whether peo­ple would have mon­ey to pay their mort­gages if they weren’t work­ing, all that kind of stuff, so that’s all panned out quite well for the banks and I think there’s some­thing like 90+, 95% plus repay­ment, you know, peo­ple com­ing back on to their nor­mal repay­ment loan sched­ules now. So, it has­n’t affect­ed the banks at all.

So, they’re writ­ing back those pro­vi­sions which is a boost to prof­it. So, there’s that is a tail­wind for the banks, but also to their, you know if the econ­o­my is going well, and we saw some fig­ures out just recent­ly to sug­gest that, large­ly I guess because of the way we han­dled COVID and the gov­ern­ment stim­u­lus that was involved. And the banks always do well dur­ing a strong econ­o­my, dur­ing good eco­nom­ic times. I don’t like being the­mat­ic when I invest but it’s cer­tain­ly the case that in the last six months, all or most of the major banks have come on to the top scor­er’s list. That start­ed way back with Mac­quar­ie group and I count them as a major bank even though they’re an invest­ment bank, but they were first out of the blocks and joined our top scor­er’s list and they’ve done well for us and then Vir­gin UK came along, a Scot­tish bank, and they’re doing well, and then CBA I think was the next one to come on, and now ANZ.

And I also think West­pac and NAB if they’re not on the top scor­ers are still pret­ty close. So yeah, it’s a good time to be a banker. They’re hav­ing their day in the sun so to speak. I think as well  they’re always being good div­i­dend pay­ers. And so, you know, they’ve been in a down­ward trend for a long time they’ve been beat­en up by the Hayne Roy­al Com­mis­sion. I think peo­ple will start to come back to them, like retirees in par­tic­u­lar, and see them as being investable once they steady their ships, and because of the good div­i­dends they pay, they’ll become attrac­tive again to retirees, so I think the banks will do well going for­ward. And ANZ is a major one.

Cameron Reil­ly: [42:14] Thank you for that, Stu­art. Dar­ren, says he lis­tened to episode 303 again, and was inter­est­ed in your thoughts on oper­at­ing cash flow because you said you use oper­at­ing cash flow because you don’t know where machines at the mine were going to need replac­ing, says My ques­tion is there will be times when OPC healthy, but unex­pect­ed sce­nar­ios arise that require cash to be spent. So, is there any­thing in the QAV check­list that accounts for that, or do we rely on things like the three-point trend line for these sorts of sce­nar­ios?

Tony Kynas­ton: [42:48] Yeah. So, I just want­ed to be clear, the rea­son why I’m using oper­at­ing cash flow as a way of com­par­ing com­pa­nies using a rel­a­tive met­ric. So, you know, tra­di­tion­al­ly, peo­ple have invest­ed based on the P/E price, Price to Earn­ings Per Share ratio, but I found that earn­ings per share were so becom­ing so mud­dled and sub­jec­tive that it was­n’t as use­ful as it could be. And so oper­at­ing cash flow which is high­er up the P&L and bal­ance sheet and cash flow tri­umvi­rate of com­pa­ny report­ing and it was hard­er to manip­u­late. And so, there­fore, is a pure way of com­par­ing com­pa­nies, one to the oth­er, and rank­ing them. That’s the main rea­son I use oper­at­ing cash flow. It was­n’t because I don’t know when the mine’s going to need replac­ing. I guess my point there was there to be able to tell whether a com­pa­ny has the right depre­ci­a­tion on its books or Amor­ti­za­tion on its books requires a fair bit of detailed under­stand­ing of the indus­try and the com­pa­ny. And I don’t get down in those kinds of weeds because I try to invest across all indus­tries. And don’t have the detailed knowl­edge to know if a mine is being depre­ci­at­ed prop­er­ly for.

So that was the rea­son for my com­ment around that. But we don’t look at depre­ci­a­tion and cash flow in any of our met­rics, specif­i­cal­ly, we rely on a qual­i­ty of man­age­ment, we rely on the fact that they are depre­ci­at­ing these assets prop­er­ly. So, Dar­ren’s right to a cer­tain extent, the ana­lysts will pick up, the peo­ple who do have detailed knowl­edge of the indus­try in a com­pa­ny will pick up if they think the com­pa­ny is not pro­vid­ing enough depre­ci­a­tion to replace mines or equip­ment, and we will see that in the sen­ti­ment for that stock. So that’s kind of, I guess where I kind of do it, but it’s also, you know, pro­vid­ing the right depre­ci­a­tion amount is also bound up in the oth­er met­rics about finan­cial health and about equi­ty, increas­ing those kinds of things. Although you could increase your equi­ty by under-depre­ci­at­ing so maybe not in equi­ty increas­ing. But cer­tain­ly, in the oth­er health met­rics, we look at you would find out, I think that if there was a com­pa­ny which was short­chang­ing itself that it would come a crop­per, and, and be found out, either by the ana­lysts or by oper­at­ing but, you know, sud­den­ly equip­ment break­ing down they’ve got no mon­ey to pay for.

So, it’s not specif­i­cal­ly looked at in the check­list. It’s kind of there in the health ratios, but to ful­ly under­stand whether a com­pa­ny is depre­ci­at­ing prop­er­ly you’d have to get right down into the nit­ty-grit­ty of the indus­try, and peo­ple do it, Buf­fett does it. I mean, Buf­fett is a big believ­er  in check­ing out depre­ci­a­tion, and there was a great chap­ter in a book I read once on Buf­fet­t’s invest­ment style I think it might be the War­ren Buf­fett work­book or some­thing like that, I for­get which book it was, but the author of the book went through and looked at the way Buf­fett bought Coca Cola, which is one of his big invest­ments back in the 70s I think, and a key rea­son for that was Buf­fett thought that Coke was over depre­ci­at­ing and that they would write back to prof­it some of that over-depre­ci­a­tion over time and they did. And that was a rock­et under the share price which he ben­e­fit­ed from after he bought the shares. So, there’s cer­tain­ly some val­ue, if not a lot of val­ue, in under­stand­ing depre­ci­a­tion, but it is just some­thing I’m not an expert at or have a met­ric for.

Cameron Reil­ly: [46:31] So the Stock Doc­tor finan­cial health rat­ing is sort of some­thing you rely on to pick up if there are any prob­lems with their finances?

Tony Kynas­ton: [46:41] Yeah, I do rely on that but even that won’t pick up on a com­pa­ny that’s not depre­ci­at­ing prop­er­ly. So, yeah, I ful­ly call out that I don’t have a good met­ric on depre­ci­a­tion. And if Dar­ren can enlight­en us on some­thing about the indus­try like the min­ing indus­try that he knows about that can help, that’d be great. But the health rat­ing is more around the ratios you know the debt to equi­ty, the quick ratios, all those kinds of things so I’d have to ana­lyze it fur­ther. My gut feel is that if a com­pa­ny scor­ing well on the finan­cial ratios, they’re prob­a­bly the kind of com­pa­ny that is also depre­ci­at­ing prop­er­ly for its future. I can’t imag­ine that some­body who’s, you know, is care­ful­ly man­ag­ing its finances would not want to depre­ci­ate for the future.

Cameron Reil­ly: [47:34] The sense that I got from Dar­ren’s ques­tion was real­ly ask­ing how do we know that these com­pa­nies have got enough cash tucked away to han­dle what he says, unex­pect­ed sce­nar­ios. And so, you know, that sort of comes back to just the gen­er­al finan­cial per­for­mance and health of the com­pa­ny, right?

Tony Kynas­ton: [47:56] Yeah, exact­ly right but the com­pa­nies which will ride out storms like unex­pect­ed prob­lems, you know, if a mine wall col­laps­es or some­thing like that, are going to be the ones that throw off lots of cash and the ones that are in a good finan­cial sit­u­a­tion so they can either fund it from a cash or their own equi­ty or bor­row, they’ve got plen­ty of head­room in their bor­row­ing to go and bor­row and fix it.

Cameron Reil­ly: [48:21] Like Fortes­cue Met­als and their whole iron dome, what­ev­er it is, the thing they’ve got, the Iron Bridge Project, which turns out it’s going to cost a cou­ple of bil­lion more than they orig­i­nal­ly planned for.

Tony Kynas­ton: [48:35] Yeah, yeah. And there was a slight impact on the share price when that news came out but did­n’t real­ly affect it that much and would­n’t affect the com­pa­ny that much either. Yeah, def­i­nite­ly.

Cameron Reil­ly: [48:46] Thanks, Dar­ren. Rebec­ca asks, Oh no, she sug­gest­ed we do a show for peo­ple who are new to stocks, step­ping them through how to buy stocks, which bro­kers to use, what to look out for, etc. I think we’ve touched on this a bit, but it might be nice to do that at some point. You know we’ve talked about the fact that you use full-ser­vice bro­ker, Bail­lieu’s, you have done for decades. A lot of the peo­ple, though, that are lis­ten­ing to this, are prob­a­bly using either Comm­sec or some­thing like self-wealth or super­hero now, com­pa­nies that are sort of low ser­vice, low costs, just an app that kind of thing. But there are some things to look out for, like, I remem­ber when I start­ed buy­ing some stocks, hav­ing to fig­ure out, well I want to do it at the mar­ket? Do I want to do it at the lim­it? What are the impli­ca­tions? This day, next day, buy­ing or sell­ing? There are a few things in there that we could maybe pro­vide some tips around,  any­thing that comes to mind for you, Tony?

Tony Kynas­ton: [49:59] We can go back and lis­ten to the pod­cast inter­view we did with Alex. Alex Hay from Bail­lieu’s, because we went into all that kind of stuff about what to watch out for when you’re doing your own exe­cu­tions. But yeah, I’m prob­a­bly not the best per­son to talk about this because I’ve used a full-ser­vice bro­ker for a long time. I did­n’t have an e‑trade account, way back when e‑trade was a thing and came out first on the mar­ket. So, I have a lit­tle bit of expe­ri­ence then but, as I have, no expe­ri­ence with the new apps or new peo­ple. So, if we need to, we can get some­one on to talk about them and what to watch out for, it’s not a bad idea.

Cameron Reil­ly: [50:34] Okay, but there’s a tip. To start with, look at the inter­view that we did with Alex Hay, Rebec­ca. H A Y, just Hay or Hayes.

Tony Kynas­ton: [50:46] H A Y,

Cameron Reil­ly: [50:47] And have a lis­ten to that one if you haven’t already because we did go through that, Tony’s right.

Tony Kynas­ton: [50:52] Are we going to maybe include some­thing like that in the work­shop that we do?

Cameron Reil­ly: [50:55] Yeah, that’s not a bad idea. All right, Daniel asks IGL has been con­sis­tent­ly buy­ing back shares for the last five months their busi­ness guid­ance came out the oth­er day with a pos­i­tive out­look, and the share price rock­et­ed. I’ve been keep­ing a close eye on it and was half tempt­ed to add to the posi­tion from the con­sis­ten­cy of the dai­ly buy­backs. I know ECX is start­ing on this trend of buy­ing back shares after they report­ed some pos­i­tive results. Does Tony have any rec­ol­lec­tion of com­pa­nies per­form­ing well, where man­age­ment feels the com­pa­ny is under­val­ued and car­ry out such an act, or any thoughts or insights on the mat­ter would be great?

Tony Kynas­ton: [51:32] I think the bet­ter ques­tion is, do I have any thoughts or have any rec­ol­lec­tion of a com­pa­ny doing poor­ly when they start to buy back, and I don’t know gen­er­al­ly a share buy­back is a very good sign. Includ­ing with great man War­ren Buf­fett who will buy back shares in Berk­shire Hath­away when he thinks they’re under­val­ued so, you know, you would think the per­son who can val­ue the stock the best is the CEO or the chair­per­son so if they’re going, if they’re buy­ing into the stock, it’s a good lead, you real­ly should be fol­low­ing. So yeah, I think the two stocks you’ve spo­ken about they’re both good exam­ples of what tends to hap­pen. It’s a bit like when, you know, com­ing out of COVID or the GFC when you can see that there are plen­ty of oppor­tu­ni­ties around us. In the past, I did­n’t do it with COVID, but in the past, I’ve geared up and bought into the mar­ket,. You know I’m in a good posi­tion to know that the mar­ket’s cheap so I’m going to buy more than I nor­mal­ly would. The same thing with a com­pa­ny say­ing, you know my shares are under­val­ued we should get in there and buy.

Or if you want to use anoth­er anal­o­gy, it’s a bit like if you’re a home­own­er, and you’re in there’s been some kind of depres­sion in the home mar­ket, and you can’t believe how cheap prop­er­ty prices are and your next-door neigh­bor says I’m sell­ing. So, you might want to go and take anoth­er mort­gage out and buy their prop­er­ty so it’s got all the hall­marks of a great invest­ment, it’s some­body who knows what they’re doing, some­body who knows their com­pa­ny or the sit­u­a­tion or the indus­try, who’s say­ing look we think this is a good buy. On the flip side, there’s been, there’s often crit­i­cism lev­eled at peo­ple who do that by some ana­lysts who say well if, that’s the best invest­ment you can find us to buy back your own shares, what’s wrong with your indus­try? So, there’s you know there’s some truth in that. And that tends to be done by big­ger  com­pa­nies who have sort of like they grew up a lit­tle bit but not shoot­ing the lights out in terms of growth, so they do find it a way to boost the share price by buy­ing back into the shares rather than, you know, open­ing anoth­er cof­fee shop or anoth­er store or what­ev­er.

Cameron Reil­ly: [53:45] So talk me through the pur­pose of buy­backs, I know we’ve talked about it before but it’s not clear in my head so when a com­pa­ny buys back its own shares are they remov­ing those shares from the over­all pool of shares that are avail­able? They’re not going to buy them and sell them six months lat­er when the price goes up. So, if they buy them back, they’re elim­i­nat­ing them from the num­ber of ordi­nary shares.

Tony Kynas­ton: [54:13] Cor­rect.

Cameron Reil­ly: What’s the upside for the com­pa­ny in doing that? I know that, in the­o­ry, the buy back reduces the sup­ply of shares in the mar­ket­place, which means that maybe the val­ue of those shares will go up because the div­i­dend per share will go up in the­o­ry if they’re pay­ing a div­i­dend. What’s, but the com­pa­ny does­n’t real­ly ben­e­fit from the share price going up, they don’t get any­thing out of that. Do they?

Tony Kynas­ton: [54:37] The com­pa­ny itself does­n’t per se but of course the stock­hold­ers do so it’s a way of boost­ing the share price.

Cameron Reil­ly: [54:44] So if a CEO has shares, then the val­ue of his shares goes up but he can’t spend com­pa­ny mon­ey in order to push the val­ue of his own shares up so what’s the actu­al jus­ti­fi­ca­tion, what’s the cor­po­rate jus­ti­fi­ca­tion for spend­ing com­pa­ny mon­ey on buy­ing shares?

Tony Kynas­ton: [55:00] Just that, to improve the share price for all share­hold­ers. That’s it.

Cameron Reil­ly: [55:05] You said, if you know, it’s a good vote in the con­fi­dence of the busi­ness if they can’t see any­thing bet­ter to do with their mon­ey but they’re not improv­ing the busi­ness then they’re just improv­ing the val­ue of the busi­ness for the share­hold­ers. I under­stand they have an oblig­a­tion to do that. They have a direc­tor’s oblig­a­tion to do what’s right for the share­hold­ers, right. So yeah, it comes down to if that’s what they think is the best thing that they can do for the share­hold­ers, then they have an oblig­a­tion to do that.

Tony Kynas­ton: [55:34] Cor­rect, and it’s self-inter­est but, also to they’d have to have a good view of what they think is going to hap­pen to the com­pa­ny or the indus­try going for­ward. So, they’d be fool­ish to buy back their own shares if they thought the indus­try was in a down­turn and the shares are going to be worth less next year so it’s also, I guess, a sig­nal to the mar­ket to say hey we think we’re doing fine, the com­pa­ny’s doing well, the indus­try is doing well. So, we are pre­pared to buy some shares and vote for our­selves and our own indus­try,

Cameron Reil­ly: [56:05] That the com­pa­ny does­n’t actu­al­ly derive any direct ben­e­fit out of buy­ing back its own shares?

Tony Kynas­ton: [56:10] No I mean there’ll be some slight cas­es where it might, like for exam­ple, there have been cas­es in the past where com­pa­nies will do a buy­back just sim­ply to take small­hold­ers off the reg­is­ter. So, like, some­times when some of these com­pa­nies had once been like a mutu­al or a Co-Op or some­thing like that and they float­ed and then you know Farmer Joe has 23 cents of shares because he had, you know, a small stake in the Co-Op before float­ed. That hap­pened a bit with com­pa­nies like Com­mon­wealth Bank when it float­ed, AMP… You know peo­ple there were peo­ple who were enti­tled to some share so only ever had small share­hold­ings. And so, the com­pa­ny will say look we’re going to do a buy­back just on our mar­ketable parcels because peo­ple get stuck, like if they’ve got a dol­lar’s worth of Com­mon­wealth Bank shares, some­times it’s an imped­i­ment to get­ting out because the bro­ker­age is going to kill them like if there’s an if it’s Comm Bank and I for­get now what COMSEC has as a min­i­mum trade, but they might charge say 40 bucks per trade or a per­cent­age of a high trade. So, if you own 30 bucks of Comm Bank shares, you’re nev­er going to sell them right because you’ll lose mon­ey. And so, the com­pa­ny will sweep and do a buy­back of all those small parcels just to help out peo­ple who are stuck like that. It is also a slight cost sav­ing to the com­pa­ny going for­ward if it has a small­er share­hold­er base because it does­n’t have to does­n’t cost as much in comms going for­ward but that that’s prob­a­bly nei­ther here nor there these days when things are done by email, it was much more of an issue when you had the mail out annu­al reports to peo­ple and stuff like that. Right.

Cameron Reil­ly: [57:50] Okay, thanks for explain­ing that. Hope that helps, Daniel. Sam says, bon­jour, a ques­tion on the announce­ment of AVG to restruc­ture the cap­i­tal, how is this dif­fer­ent from buy­ing back shares and how will that impact the QAV score when it becomes real­i­ty. On the one hand, it val­ues the com­pa­ny high­er than the cur­rent share price and means cash is paid back to the share­hold­er. On the oth­er hand, it means the man­age­ment may be run­ning out of oppor­tu­ni­ty to invest at the cur­rent rate of return, which is a con­cern for future oppor­tu­ni­ties. Final­ly, per­haps they had fund­ed a large capex pro­gram over the last few years and take the oppor­tu­ni­ty of a good return in 2020 to reduce their lia­bil­i­ty, that’s a more pos­i­tive sig­nal, the mar­ket has react­ed very pos­i­tive­ly with a 10% surge in the share price, and I was keen to have Tony’s con­sid­er­a­tions on this.

Tony Kynas­ton: [58:51] AVG, Aus­tralian vin­tage wine com­pa­ny. Yeah, sim­i­lar to the last dis­cus­sion around buy­backs I had­n’t seen a buy­back nec­es­sar­i­ly struc­tured this way before. So that’s kind of unique. So, I’m guess­ing there might be some tax ben­e­fits around doing it this way. So, I think in terms of how it will affect the QAV score, Samuel could go into the spread­sheet and just change the met­rics where he thinks that he can pre­dict what’s going to hap­pen and there’ll be less share. So, I think they’re tak­ing out 10% of all shares so you can reduce the shares on the issue by that amount. And you’d have to prob­a­bly reduce equi­ty by that amount because they will buy, you know, 10% times the 85 cents because they’re using equi­ty to buy the shares and you will get to a new QAV score.

But long sto­ry short, I would expect the QAV num­bers will prob­a­bly go up because you’re going to have the same oper­at­ing cash going through less shares, so oper­at­ing cash per share will score bet­ter. And then the oth­er met­rics prob­a­bly will as well. Things like earn­ings per share will go up. And we use that for our future IV cal­cu­la­tion, etc., etc. so I expect that the QAV score would go up for this com­pa­ny. Just haven’t seen this way of doing it before so I can’t real­ly com­ment on that. I think what’s hap­pen­ing with this case though was they’ve come out and said they’re buy­ing back shares at 85 cents or 10% of shares at 85 cents. The share price is sort of mov­ing up towards that price, so peo­ple are see­ing some val­ue in that, and I think last time I had a look.. I’ll just have a look at it now.

I’m guess­ing the share price is going to be 10% below 85 cents… so it’s 78 cents, so it’s pret­ty close. So, the mar­ket’s kind of work­ing out what the share price will be after the buy­back. And it’s moved up to get to that price. Yeah, so that they’re the pros of that, of the buy­back. The cons that you should be aware of. I can’t work out why they did just did­n’t do an on-mar­ket buy­back so I’m guess­ing they could have poten­tial­ly bought the shares cheap­er than what they’re doing this way, but like I said there could be some hid­den tax con­se­quences or some ben­e­fits to doing it this way so Samuel might want to have a look at that. But yeah, I think, again, it’s a form of a buy­back and that’s good for the com­pa­ny. Good for the share price.

Cameron Reil­ly: [1:01:23] Right. Well, I hope that answers your ques­tion, Sam. Dave had a ques­tion about sell­ing JB Hi-Fi which we’ve already gone into. Yeah, I think that’s a full lid,  we’ve got lots of oth­er ques­tions, but they might have to wait until next week, I’ve got just before we go, I’ve got an Navexa open in front of me, our port­fo­lio for the finan­cial year is up 46.25% ver­sus the ASX 200, which is sit­ting at about 27.81%. So, it’s a few more weeks left, any­thing could hap­pen. But, look­ing good, QAV port­fo­lio’s look­ing nice for this finan­cial year.

Tony Kynas­ton: [1:02:10] Yeah, we did­n’t get to talk about the Reject Shop and Gas­coyne resources, I know that peo­ple will be sweat­ing on that, so we can leave it till next week, but I’ll just quick­ly say that it’s a bit like with the oth­er stock, like Ing­hams com­ing out with a prof­it upgrade,  these stocks have come out with prof­it down­grades. Gas­coyne are tak­ing a  pro­vi­sion for increas­ing costs of the mine, and The Reject Shop are point­ing out that they still have stores in areas which are affect­ed by shut­downs and peo­ple not pre­tend­ing to work in the cities, and stuff like that, so both of those shares have dropped I think about 10% in the last cou­ple of days. So just quick­ly with that, we will answer the ques­tions in detail when we go through the next week but, I own shares in the Reject Shop. I’m not going to sell them. I tend to wait and see what the sen­ti­men­t’s like after these kinds of announce­ments, cer­tain­ly it meets the cri­te­ria for a neg­a­tive announce­ment so if you want to sell based on that, go ahead. But then if you look at the share price graphs, they’re still in their buy ter­ri­to­ry so unless they start to drop dra­mat­i­cal­ly clos­er to the sell lines and then I’m not going to per­son­al­ly sell them at this stage.

Cameron Reil­ly: [1:03:27] So, I know Sam asked how you would draw the sell line on GCY,  can we do that one before we go because it’s got a big flat stretch.

Tony Kynas­ton: [1:03:41] It’s a tough one, isn’t it? It’s a strange one, and again this is like anoth­er exam­ple of why I think the rule might have to be you take the right hand, sort of, right, first of all, I’ll  start with the sell line, there’s a big flat line across the bot­tom when it was sus­pend­ed from list­ing for a while. And then when it came back on it shot up. So, rather than say it’s a sell at 2.77 cents which is what that line is there. And the cur­rent share price is like 40. Yeah so a long way above that. I think it makes more sense to take the right-hand part of that line, so Sep­tem­ber 2020. This is what I’ve been say­ing about fudg­ing it, and then go up from there and then it prob­a­bly is in sell ter­ri­to­ry at the moment if you do that because the next low­est trough to the right would be, When is that, Decem­ber 2020 at 43 cents? So that would make it a sort of breach then around about Feb­ru­ary 2021 at 52 and a half cents. That’s when it would have gone below that sell line using the right-hand side of the bot­tom of the flat line, and it has­n’t become a buy since then so Gas­coyne, to me, and I don’t own it, and this is just how I look at it, is in a sell at the moment. But I under­stand that con­fu­sion because if you’ve got that huge flat­line at the bot­tom there, which says it’s a sell at three cents, rather than 52 and a half.

Cameron Reil­ly: [1:05:21] And while we’re doing chart­ing then and talk­ing about JB Hi-Fi, Paul want­ed to know what the sell line was for JB Hi-Fi, how you draw that …  TRS sor­ry, sell line for TRS I mean,

Tony Kynas­ton: [1:05:35] Yeah, sure. And again, from mem­o­ry, and I own shares in TRS so I was look­ing at it just recent­ly, when I got the announce­ment, so I’m just call­ing it up now, and yeah so again it’s got one of those kinds of, you know, bumpy troughs at the bot­tom so the low point is June 2019 $1.78 And then the next point to the right that was low, is I’m going to call it, Novem­ber 2019 at $1.97. So again, it’s kind of like this umm… There are two or three points that go along that line. But if you use that line, you’re draw­ing a sell it at slight­ly above $2, Maybe $2.50, Which is, again, way below, Where the sell price is now. So, I’m inclined again to use the right­most of those

Cameron Reil­ly: [1:06:26] Way below where the price is now?

Tony Kynas­ton: [1:06:28] Sor­ry, where the price is now sor­ry. Yeah, so again I’m inclined to use Novem­ber 2019, which is the trough, which is the right­most of those three that go along that bot­tom line. And then the next trough to the right of that would be March 2020 at 2.67, in which case my sell line is com­ing in, Just look­ing at this, you know, sort of 520 ish, I’ll have to go and use my three-point trend cal­cu­la­tor to have a look at it. Clear­ly, the Reject Shop is com­ing down, it’s going to meet that line, I think, unless some­thing hap­pens, and it goes up. So yes, I’m going to hang fire even though it was bad news, and just see what hap­pens but I’m going to use that as my sell line. Yeah, actu­al­ly I think I’ve worked it out on the week­end just let me have a quick look at the

Cameron Reil­ly: [1:07:22] If I was TRS I’d be hop­ing that every­one finds out the vac­cines don’t work, and we have major break­outs again because they had their best lit­tle run there dur­ing the first lock­down didn’t they? When I bought it.

Tony Kynas­ton: [1:07:36] Yeah, yeah, and that’s good. Yeah. So, I’ve got $5.16 as the fudge sell line. At the moment.

Cameron Reil­ly: [1:07:45] Okay well I hope that helps every­body.

Tony Kynas­ton: [1:07:48] Yeah, so that’s what I’ll be doing I’ll be just see­ing if it drops down towards that. Again, if it sort of keeps going down and down and gets close, I might sell out a bit before it, but I think I’ll wait until around 520 Before I make a call.

Cameron Reil­ly: [1:07:59] fudg­ing sell lines, there we go. Nev­er a dull moment in QAV. Thank you, Tony. Hope you have a good week.

Tony Kynas­ton: [1:08:10] Th ank you.

Cameron Reil­ly: [1:08:10] No more shots? When you get your sec­ond shot?

Tony Kynas­ton: [1:08:13] Not for three months, chat­ted it to the doc­tor about that and it’s like, am I going to go through that again. And he did­n’t think so. So hope­ful­ly not. It’s quite scary.

Cameron Reil­ly: [1:08:25] Yeah, I bet. It sounds hor­ri­fy­ing. Well, I’m glad you’re well, and we’ll be back next week every­body.

Tony Kynas­ton: [1:08:39] Alrighty, looks like Fox need you as well now.

Cameron Reil­ly: [1:08:47] Send­ing light sig­nals in the back­ground.