Transcript QAV 507

QAV 507 Club

Cameron  00:07

Welcome back to QAV the podcast, as opposed to the film which will be hitting cinemas later this year. I’m kidding. The Tony Kynaston-QAV, the Tony Kynaston Story. How are you TK?

Tony  00:23

Straight to YouTube. Ah, good. Yeah, just still down at Cape Schanck, enjoying life. It’s been really good. Golf’s been great.

Cameron  00:33

That’s good. Heading back next week, is that right?

Tony  00:36

Correct. I’ll do one more recording down here next Tuesday and then I’ll push off and go via Wagga. Catch up with Ruddy for a while and then get to Sydney on the weekend.

Cameron  00:44

Cases in your apartment building in Sydney under control?

Tony  00:50

Well, they’ve dropped but they’re still there. Still a couple last time I heard. They’re down from seven to two apartments. But yeah, I can’t stay here forever, unfortunately.

Tony  00:58

Unfortunately.

Tony  01:01

I’m really enjoying it.

Cameron  01:03

Yeah. How long have you been down there now? A couple of months.

Tony  01:06

Yeah, since just before Christmas. Although it is starting to chill down a bit. It’s still pretty good during the day, getting a bit cooler at night. Autumn’s coming.

Cameron  01:15

And you’ve got no one to cuddle up with.

Tony  01:17

Yeah. Luckily enough, Jen’s coming down on the weekend. Her father’s having his 90th birthday, so we’ll catch up then which will be nice.

Cameron  01:25

All right. I wanted to start this week, Tony, talking about our portfolio, the QAV portfolio, and the analysis that you’ve done on Navexa and the big problem that you found?

Tony  01:36

Yeah, so I guess it’s a problem. I think Navexa just sent us an email saying they’re going to release a new version of Navexa which will address it, but I think our portfolio has been underreporting its performance. Because, Navexa, when it gets dividends or any sort of return of capital, or even if we sell something and then don’t reinvest all that cash, Navexa isn’t accounting for that cash anywhere. So, it kind of got me a bit worried when I was looking at the – not worried, but scratching my head – when I was looking at our weekly performance figures. And I’m thinking, we’ve dropped a lot since the probably the high point in the market around October last year, and I couldn’t reconcile how the numbers could add up. So, I downloaded all the transactions from Navexa and ran it through Excel, and what’s happening is all of that cash that’s coming in for whatever reason, it’s just sitting nowhere in Navexa. It is being added to our performance, but it’s not being added to the dollar value of the portfolio. And it’s also not being reinvested, so the cash balance is big enough to have bought a couple of more stocks along the way. So, we actually have too few stocks in the portfolio and they haven’t been compounding, so the cash has been sitting there earning nothing for the last whatever it is, two- and a-bit years. So yeah, so I think Navexa is going to address that, so we’ll see what comes out of that. But, I think what I might have to do for a while anyway is to drop the transactions into a spreadsheet again and just do our portfolio performance from that. The other thing which is still bothering me is the way that Navexa calculates our performance, and I’m not saying it’s wrong, the way that they do it, they claim it’s the way that fund managers do it, but it doesn’t kind of suit our fund, which is a closed amount of money without money coming in and money going out regularly. So again, I dropped that into Excel, and since the portfolio was fully invested in September 2019 which is just a little under two and a half years, we’re achieving 20.3% compound growth. That’s using the simple CAGR formula in Excel, which is RRI, is the name of the formula. And in fact, as I said that’s probably underperforming what should have been happening because there’s a large cash component sitting in that that we didn’t reinvest. So yeah, a couple of issues there with the Navexa portfolio. We’ll rectify them and going forward will reinvest the cash and report our performance using a CAGR formula.

Cameron  04:07

So, you know, we’ve talked on and off over the last year or so about the different portfolio tools – Share Sight, Navexa, Stock Doctor – that we’ve played around with and I mean, we’ve been happy with the way that any of them report but just a heads up for anyone else out there that’s using those tools, that you might want to not really take their reporting numbers as being gospel. Might have to try doing your own CAGR.

Tony  04:36

Absolutely. I’m just, I might actually reach out to Brett. I know that he put together an Excel spreadsheet to track performance for some of his work, so if we can get a copy of that, download our Navexa transactions and use that going forward that might help. And if he’s amenable to it, make it available to other people so they can do the same; download from whatever portfolio service they’re using and just double check things as a bit of a sanity check.

Cameron  05:00

Yeah, good thinking. Alright, moving right along, then. There was this article I think Stephen Mabb sent you to, Chris Lightner’s article, “You’re probably overconfident and what can you do about it?”-“Why you’re probably overly confident and what you can do about it.” Really good article, I thought.

Tony  05:17

Yeah, I did too. So, I think Steve pointed me towards Chris Lightner in the past, but this article came up recently and yeah, it’s everything we’ve been talking about, that people, particularly if they’re – well, the article points out if they’re male, but also too if they’ve had a bit of success in the share market, that they might become very overconfident and that might be their downfall longer term. Especially if they’re buying into, you know, the dotcom stocks or the buy now, pay later space, or Bitcoin or whatever. Yeah, great article. It’s on Live Wire if people want to read it. I did post it in the group, so chances are people have, but there’s a lot of good quotes from it, too.

Cameron  05:59

Yeah, that was in our QAV club group, so people who aren’t members of QAV club wouldn’t have seen that. But yeah, you can look it up: “Why you’re probably overconfident and what you can do about it.” A couple of really good quotes. I liked this thing he said about IPOs “that, even if they know it – which most apparently don’t – it doesn’t matter to the overconfident that for example, the average initial public offering is at best a mediocre and often a losing proposition. They believe that they can distinguish the small number of eventual winners from a large number of losers. According to the Australian on the 27th of January, more people lost on new stock market listings last year than made money. The losses during such a strong year for equity markets should be a wakeup call. Quite the contrary, such results should surprise nobody because they’re the norm. According to NASDAQ, ‘What happens to IPOs over the long run’ 15th of April 2021, since 1981, three years after they floated almost two thirds of IPOs significantly underperformed the overall market. It’s true that a few soar spectacularly. Equally, however, many more sink abysmally,” then he’s got a quote from this report; “‘such misapprehensions leave the overconfident to transact too frequently, invest in areas that are much more risky than they realise, and time the market. The overconfident substitute their mistaken recollections and unrealistic expectations for base rates and plausible estimates of risk, and where such assessments aren’t available, they assert blind faith in their ability to steer a successful course through uncertainty.’ Which I know we’ve talked about a lot when we’re talking about tech stocks like Afterpay over the last few years or Bitcoin when they’ve gone through these massive runs, which look fantastic and it looks like a lot of people would have made a lot of money out of it. But I’m always stuck with this question for myself personally, if I invest in anything like that, and it’s not based on fundamentals like you teach us with QAV, but it’s just based on FOMO – Fear Of Missing Out – how will I know when to sell? And yet my instinctive reaction is always well, I’ll just, you know, when it starts to drop, I’ll just sell. But, I know that in practical sense it’s not that easy. Drop by how much? 5%, 10%, 20%, 50%? When do I sell and how do I know it’s not gonna turn around and… like I was having some fun with our old friend Torsten Hoffman the other day, the producer of our film and also a couple of films on Bitcoin. He’s a big Bitcoin advocate. And he was bugging me, he was again plugging Bitcoin “oh, its the greatest thing ever. It’s gonna be huge.” And I go, “well, you know, what about the people who bought it when it was $90,000 a few months ago? Now it’s down to 50,000.” And he said something like, “oh, that’s such a, that’s such a lame response that there are memes around it all over the internet. Like you got to double down, you buy the dip.” And I go, “really?” Not easy to say to somebody who invested everything they had in it when it was at $90,000 and it’s now down to 50, you know?

Tony  09:12

Yeah, I remember reading an article last year in the Fin Review about someone who sold their house and invested in Bitcoin. So, I hope they did okay, but probably not. I mean, Bitcoin in particular, but it’s just like the dot-com boom and some of the dot-com stocks now. They’ll be great behavioural investing psychology case studies one day for someone like Daniel Kahneman, because it’s fear of missing out, it’s anchoring. There’re all sorts of behavioural psychological reasons why people do this – and the Dunning-Kruger effect, which is the overconfidence angle that people think they’re better at investing than what they really are. That’s, as I said in my post on the Facebook group, there was a test in the article and I scored pretty high on the overconfidence scale and it made me realise that without a QAV system, you know, I’d be making a lot of mistakes and I did make a lot of mistakes when I first started investing, because of all these psychological things. You know, you think you’re successful because you’re doing well with your career, but that’s got nothing to do with investing.

Cameron  10:10

Or, you can even be successful as an investor for six months or a year or two years, right? And think, “oh, I’m pretty shit hot at this. Look at me. I’m a legend.” But, you know then it all goes pear shaped and you back to where you started.

Tony  10:24

Yeah, and like with your Bitcoin example, like, the question is now it’s come back do you byy more or or do you enter the market? Well, without a system, without fundamentals, how do you ever answer that question?

Cameron  10:35

So, that’s the point of this is, you know, the great thing with QAV is that it gives us the rules. It tells us what to do, when to do it, what not to do. And you don’t have to, like, even if you are overconfident, if you’re following the rules QAV will get you out when things are going pear-shaped. And it’s not just, you know, average punters like me doing this too. Lightner writes “overconfidence is rife in financial markets. It’s not just retail investors; financial advisors, central bankers, fund managers, journalists and senior executives also succumb to it. In this context it’s worth mentioning that men and women tend to make different kinds of financial mistakes. On average, women are less predisposed than men do overconfidence. Indeed, they often lack financial self-confidence. They thereby commit fewer investment errors of commission than men but their reticence to invest is an error of omission.” Good point. Then he says, “egged by ‘bullish experts'” in inverted commas, “people’s views about present and future economic conditions, overall markets and particular companies’ prospects, etc., when compared to subsequent reality are unrealistically confident and optimistic. If its consequences weren’t so costly the situation would be comical. Analysts, central bankers, journalists and strategists who routinely, and sometimes grossly, overestimate their ability to prophesy, issue overly optimistic prognostications based partly upon CEOs and economists overly sanguine biases about companies and the economy as a whole. Moreover, investors who are overconfident about their skills and excessively cheerful about the future gravitate towards companies run by arrogant-about-their-skills and overly-buoyant-about-the-future executives.” Like I said, so true.

Tony  12:29

Yeah, it is true. And that’s not withstanding all of the conflictions, the incentives for people to pump stocks or to say how good their future is going to be for their own company. That’s all in there as well, not just overconfidence, but the fact they have a vested interest.

Cameron  12:45

Or journalists plugging companies based on how many times they’ve been taken out to dinner or the races.

Tony  12:51

Yeah, potentially, or even, I mean, journalists are interesting too in that they’re looking for the story, whether it’s, you know, necessarily right or not or good investment. They’re one of the reasons why CEO’s spin story so they can get publicity for their stock, and stories aren’t a great way to invest.

Cameron  13:09

Yeah, and journalists don’t get held to account for saying something positive about something that went pear shaped a year or two later.

Tony  13:17

No one gets held to account, Cam, except for the poor investor. The buck stops with them. I mean, like how many times have I seen the CEO spectacularly explode and then pop up a couple of years later as CEO of something else? Or, how many times have I seen investment bankers change banks and go back to work again after they blew up the company they just left. It’s just ridiculous.

Cameron  13:42

Get to wash your hands of it and just move on. No one remembers, there’s no institutional memory for stuff like this. You just move on.

Tony  13:49

It’s like the old classic, that quote of yours just then from Lightner’s like the classic one from Buffett that Wall Street’s the only place that people who take Rolls Royce’s to work take advice from people who take the subway.

Cameron  14:01

Alright. Good article. Anyway, moving right along. Murph resigned from the Berkshire board. People that have been listening to you for a long time will know the name of Tom Murphy, “Murph”. He had an influence in when at least one of the numbers in QAV, right?

Tony  14:17

One of the important ones, yeah, the price to operating cash flow limit. Yes, when he built up a network of TV stations which eventually became one of the big networks, ABC I think from memory, in the States. And so, he must be getting pretty old now, Cam, I imagine that’s why he’s retiring from the board. And the book was The Outsiders, which I recommend to anyone, not just because of the Murph story but there’s, I think, about seven or eight different stories in there about almost unsung heroes of investing and what they did. You know, there’s a guy who ran a company called Teledyne and used strict financial investment measures to grow his business into a huge aerospace organisation and technology organisation. There’s the Tom Murphy story. I think Buffett’s even in there. And you know, and Buffett’s always made the case that there’s only one job a CEO should be good at, and that’s deciding where the capital goes, where to invest. You know, but as we just said before, these days most CEOs seem to look sharp, dress sharp and talk sharp rather than invest their capital wisely.

Cameron  15:21

Yeah, Murph is 96 and retiring from the board of Berkshire. Like, he’s just a slacker. What’s his problem?

Tony  15:33

Well, it also tells you how sticky Buffett is, how people want to spend their lives with him they stay on the board until they’re pretty much over. ‘Till they fall off their perch, usually.

Cameron  15:43

Or vice versa. Like, he’s sticking to them. I have a quote from Warren about Murphy, he says “most of what I learned about management, I learned from Murph. Tom Murphy. I just kicked myself because I should have applied it much earlier.” So, that’s a pretty good endorsement.

Tony  16:00

Yeah, so definitely, if you haven’t read The Outsiders, it’s a great book. I recommend it.

Cameron  16:05

Continuing with Berkshire, got a lot of Berkshire stuff in my notes this week. There’s a story in Fortune I read about Berkshire taking a position in a crypto fund, which I think shocked everyone. “Years after calling Bitcoin rat poison,” I think that’s actually Charlie’s term, but still, “Warren Buffett”… in his Q&A this week, Munger’s gone from calling it rat poison to a venereal disease, which I love.

Tony  16:35

I think he called it “rat poison squared.”

Cameron  16:37

Yes, that’s right.

Tony  16:39

And then he also said, “none of my daughter’s better turn up married to someone who’s a crypto investor.”

Cameron  16:48

His daughters have all got to be in their 70s now, so…

Tony  16:51

Yeah, probably.

Cameron  16:53

Anyway, “years after calling Bitcoin rat poison, Warren Buffett just invested a billion dollars in a crypto friendly bank. His company has bought a billion dollars’ worth of stock in a digital bank that focuses on crypto, a company called Nubank,” NU, “a digital bank based in Brazil, the largest of its kind in Latin America, a so-called Neo bank, a type of bank that operates differently from the traditional banking system by not relying exclusively on physical locations, and instead focuses primarily on digital services.” Are you gonna start investing in crypto now, Tony? Are you capitulating?

Tony  17:32

No, I’m not, and I don’t think Buffett is either. I haven’t researched this very much, but two things spring to mind. First of all is that this could be a Tod or Ted investment. So, these are the two chaps that now run a large part of the Berkshire Hathaway portfolio as a backup to Warren but also as a replacement for Warren when he does shuffle off. And they’ve been the ones who’ve kind of spearheaded the investment in Apple, and aren’t as constrained around tech as Buffett has been in the past. And that’s, that’s because Buffett cheerfully admits that it’s outside his circle of competence, he doesn’t know how to value it. So, the first thing is that could have been done by somebody else besides Warren, but not sure. And secondly, Brazil was the thing that flagged my attention, because for a long time Berkshire Hathaway and Warren Buffett have been partnering with a group called 3RCapital, which are based in Brazil and this could be one of theirs. So, often in the past Berkshire Hathaway have either funded 3RCapital into investments, or they’ve actually taken a position side by side or a blend of both. So, it’s entirely possible that this is a funding deal with 3RCapital. 3RCapital are really interesting. If we’re talking about books, you can get a hand on their story, too. I’m just trying to look it up. It’s really interesting. So, it’s an investment bank from Brazil founded by an ex-professional tennis player who decided he wasn’t good enough to be world number one so he moved away from his life in tennis and got a job in an investment bank. And its just a, it’s an interesting management philosophy, it’s very much incentive based and it’s a very controversial company. So, for example, when Berkshire Hathaway tried to buy, I’m gonna say Kraft, a big company like Kraft anyway, they were rebuffed because 3R were also in the deal and 3R are known for your classic, sort of, private equity takeover of a company and ripping all the costs out; either slashing and burning with the staff or closing the stationery cupboards and not letting people have pens or paper clips. So, it’s a controversial partnership, and even when I went to the Berkshire Hathaway AGM they were being asked questions about, you know, did they condone the ruthless behaviour of 3R? But that aside, I think this is probably one of the reasons why it’s in Brazil, and bear in mind that the Brazilian banking system won’t be as developed as Western banking systems. So, Nubank may well be a good investment. And you’re often seeing this in the emerging countries, that they sort of leapfrog in industry. So, they go, I remember the classic example was laptops aren’t selling well in the third world because they’ve all jumped to phones, and use apps on their phones. So, this could be the case as well, if banking hasn’t been that great in Brazil or in South America, they may have jumped to online banking which Nubank would be part of.

Cameron  20:34

Might it be called 3G Capital? I found a book called Dream Big: How the Brazilian Trio behind 3G Capital…

Tony  20:42

Thank you, 3G Capital. I got that wrong, sorry. acquired and

Cameron  20:45

… Acquired Anheuser Busch, Burger King and Heinz, and there’s a quote here from Buffett in Amazon: “my friend and now partner Jorge Paulo and his team are among the best businessman in the world. He’s a fantastic person, and his story should be an inspiration to everybody as it is for me.”

Tony  20:54

Yeah, so it’s a good story to read I guess within the framework that they are pretty ruthless when they take over a company, and Heinz was a classic one that they did rip out a lot of costs from and made a lot of people unhappy.

Cameron  21:17

Alright, moving right along. What have I got here? Oh, yes, highlights from Charlie Munger’s daily journal Q&A. Now, the reason I said that Murph is a bit of a lazy piko for retiring at 96 is Charlie just turned 98 on January 1, and just did this lengthy Q&A for the other business that he’s on the board of, the Daily Journal, his newspaper/tech company. Did you catch that? Did you watch any of that?

Tony  21:50

I didn’t, no.

Cameron  21:52

Oh, somebody posted it on our QAV Club Facebook group. I watched most of it. Fantastic. I mean, 98 and he’s as sharp as a tack, direct, straight to the point. And you know, he really shines when he doesn’t have Warren there. Like, you know, when he and Warren are together, Warren fields most of the questions in a sort of folksy manner and then Charlie just comes out with a little barbed comment every now and again about venereal disease. This one, you know, when it’s the Daily Journal, unless its like a day to day business topic where his partner takes it, he takes all the questions and yeah, there’s so many great quotes. The one that I just wanted to mention, though, is he said- somebody asked him about value investing, “is it going out of style?” or something, and he said “the idea of getting more value than you pay for is never going to be obsolete.” You know, pretty much sums it up.

Tony  22:44

True, exactly. It’s amazing, though, isn’t it? I mean, we’re lucky to have these people in our lives, because they provided the link to value investing for us. But, I mean that, the person who asked that question is like probably 98% of people who are investing, they just don’t get value investing. And you can count the number of people on one hand who preached value investing, like your Graham and Dodds, your Warren Buffetts, Charlie Mungers, and I start to run out of names there. And it’s been around for a long time, it’s been proven to be the most successful way to invest, why don’t people get it?

Cameron  23:19

Yeah, look, I think it was Ben Graham or might have been Buffett, somebody I read a while ago talking about it’s a personality type, maybe a certain disposition that it takes. Do you think there’s any truth to that?

Tony  23:37

I think it could be that. It does require patience, as Buffett has said, it does require taking the emotion out of things, ignoring the market, ignoring – or not ignoring the market, well yeah, probably ignoring the market – ignoring the noise. Buffett was in Omaha, Nebraska to get away from Wall Street – well, I mean, I think he wanted to live there – but the benefit from being away from Wall Street and not having his phone ring every five minutes with another offer. But yeah, there’s some truth in that. And look, there’s plenty of people out there who don’t get spreadsheets, who don’t like numbers, so I get that too. But you’d think after the Intelligent Investor was written in 1930/1920, something like that, it’s a hundred years old, you’d think that almost everyone by now would be a value investor. I just find it strange that Charlie still gets asked this question.

Cameron  24:28

Yeah, like, I think Taylor has said to me in a couple of cases “what are you going to do when QAV is so big that everyone’s doing it?”

Tony  24:41

Celebrate?

Cameron  24:44

Yeah, buy a yacht. Buy an island off of Richard Branson. I say “yeah, it’s just not gonna happen, man. People have been trying to teach people value investing for a hundred years and, you know, it’s still not something you really hear talked about a lot in the media.” It’s sort of the redheaded bastard stepchild, every couple of years they go “oh”…

Tony  25:09

I hate that analogy.

Cameron  25:10

Yeah, I know. I said stepchild, not orphan child, stepchild. It’s different. People go, “oh, yeah, values coming back.” Looks like, yeah, when everything else crashes they go “oh, values back again.” And then that lasts, what, six months? And then they’re like “oh, tech stocks are back, growth stocks are back.” They don’t like value, you just don’t hear many positive stories about it in the investing press. I don’t anyway.

Tony  25:37

No, you’re right. And that’s the problem. It’s not, it’s not sexy. It just does its thing year in year out.

Cameron  25:42

It’s not a problem, it’s good. I mean, it’s good for those of us that are value investors, right?

Tony  25:46

Exactly.

Cameron  25:47

That no one else is doing it.

Tony  25:50

You don’t want the roller coaster ride, you don’t want something blowing up and making the front page all the time. You don’t want your CEO smoking crack on video and being sacked. All those kinds of things are what happens to all the other companies, not to the value investing companies.

Cameron  26:05

Yeah, it’s boring and predictable and that’s why we like it.

Tony  26:12

Yeah, I mean, the Fin Review would be half a page long if it reported on value investing. There’s no story.

Cameron  26:21

Alright. BFG, Tony, you’ve got a BFG? A Big Effing Gun?

Tony  26:27

Big Friendly Giant. Yeah, so I think it’s gonna be a question later on, too, when we get to it so I don’t want to pre-empt it too much. But we did sell it from our dummy portfolio last week on a bad news story, which was around anti money laundering. But we can get to that in a while. Plus, their results weren’t received very well, they were down a little bit, and the stock was down I think 7% after the results announcement and the AML investigation announcement. So, it was clearly some bad news that we had to sell the stock for.

Cameron  26:57

One of the very few instances where we’ve sold something due to bad news that I can recall.

Tony  27:02

Yeah, that’s right actually. Good point. Oh, so the Fin Review gets a half page story today from value investing.

Cameron  27:11

Because we sold something? Yeah, right.

Tony  27:13

No, because one of our stocks is being investigated for anti-money laundering.

Cameron  27:18

Okay, well, we’ll talk more about BFG later. HUM, Humm is dumb I used to say, and then I invested in it, then I had to sell it. It’s been taken out by LFS, Latitude. New IPO.

Tony  27:30

Yes, that’s right. So, and LFS actually on the numbers appeared on the buy list, although it’s a Josephine. But they’ve bought out HUM. Again, there’s a few of these cases cropping around in the market at the moment where stocks that we find attractive are being found attractive by other companies or other players, and they’re starting to either take stakes or buy them out. Something I see all the time, so it’s not surprising, but it does reinforce the fact that, you know, we’re sort of playing with the pros in terms of how we invest. The other one that came to mind was GMA, Genworth, which was the mortgage insurance company that hit our buy list last year. A company called Ares, one of the private equity firms from overseas has taken a 15% stake in GMA last week. So, again, they’re seeing some value. And I remember doing the pulled pork on GMA towards the end of last year, and one of the issues at the time was they were having to go through a request or proposal, or a tender, a contract tender, to continue with Commonwealth Bank which was a large part of their mortgage insurance business. And just recently they received the go ahead and that contract has been renewed and extended, and straightaway a big private equity firm takes a 15% stake in the company. So again, somebody else can spot value out there, not just us.

Cameron  28:53

Yeah, and I think the share price for GMA’s done very nicely too. It went from $2.18 on the 25th of January, it’s now $2.86. So, it’s like a 70-80% bump in under a month. Not bad if you own that.

Tony  29:12

Yeah, and as you’d expect because of the fact that they got the contract with CBA, that was the big risk in the market.

Cameron  29:18

HUM has also not done well actually. HUM was trading at 71 cents in the middle of December, went up to 94 cents on the 10th of January then dropped back. It’s down around 86 cents. Still okay if you happen to buy it, sort of, in the month of December by the looks of it, but if you bought it at any other time in the last six months you’ve broken even or hasn’t nudged much. I don’t know why their price hasn’t skyrocketed as a result of this takeover.

Tony  29:50

Yeah, I agree. And also, I was always surprised they hadn’t skyrocketed on the back of the BNPL wave because they were a solid money-making buy-now, pay-later company.

Cameron  30:00

Yeah, it’s ’cause they had a dumb brand as I said last year, Humm is dumb. What a dumb brand, Humm.

Tony  30:07

Yeah, I agree.

Cameron  30:09

I think somebody on Facebook just earlier today – I think it was Brent – asked about the GMA thing and asked if it’s common that you find that stocks that turn up on the QAV buy list end up being acquisition targets. And I said, I think you have said in the past that that does happen quite a lot.

Tony  30:28

Yeah, it does happen quite a lot. Well, it’s not overly common, but yeah, two or three, maybe up to half a dozen a year that will happen too, for sure.

Cameron  30:36

Because, you know, we’re looking for undervalued companies and if we think they’re undervalued, then other people out there probably also think they’re undervalued and have the wherewithal to take a big chunk of them.

Tony  30:47

Yeah, exactly. And I find that quite reassuring, that these big PE firms and fund managers etc…. In this case it’s Latitude Financial Services, a company with Humm, but they’ve just listed it, got their hands on some money and now they’re investing it. And they see things the same way we do, which is reassuring in a way.

Cameron  31:04

CGF back on the buy list, Tony.

Tony  31:07

Yep. So, they’ve had some good results. I was gonna make them my pulled pork this week, but I’m not because as of this morning the new results haven’t hit Stock Doctor yet. I didn’t want to do a pull pork on the old results, because we did that last year. But yeah, so their dividend, well both dividend and profit are up 21%, which is good. This has kind of been a bit of a surprise, really, because Challenger was sold out of the portfolio a little while ago as its stock was dropping, and it was sold down even heavier last month which is usually a sign that the results are going to be bad, that people are starting to put numbers together which suggests they’re gonna be bad, but it’s surprised the market and it’s jumped. Increasing funds under management, increasing sales, and a couple of interesting events. So, they, they bought a company which offers term deposits and they’re going to start rolling that out as part of the Challenger brand. And if you remember when I did the pulled pork, Challenger is a company that provides annuities to retirees, so guaranteed income. So, the fact they can start selling term deposits would be, you know, right in their market space of providing steady income to retirees. And they’ve also done a deal with a company called Apollo Global Management. Again, another big, I think private equity firm probably, but certainly a big fund from the States. And they’re going to start offering lending services as well. So, couple of deals there which I think might also be driving the share price appreciation in CGF.

Cameron  32:37

I just got a shiver down my spine when you said Apollo.

Tony  32:42

Completely different company.

Cameron  32:44

Mm-hm.

Tony  32:45

Like, if you take a generic name like Apollo you’re always gonna come up against other people with the same name. It’s like wearing a dress from Myer to a party, right? My wife would never do that because she’s afraid she’ll meet someone else in the same dress. But, when you have a name like QAV, we’re never gonna worry about that problem.

Cameron  33:03

I got to parties dressed in a white t-shirt and pair of blue jeans. Chances are no one’s gonna have that on. South 32 is going to be your pulled pork today, Tony.

Tony  33:15

It is, yep, that’s my pulled pork. So, first things first, I own shares in South32. So, this is not a recommendation to buy it, but do your own research. The reason why I picked it though, I was looking for a large cap stock and the ADT on this one is $61 million, so it’s huge. And I wanted to get a large ADT stock that had reported recently and the numbers are now in Stock Doctor. So, that’s why I went down that list so far to South32. There’s been plenty of companies reporting in the last few days, they haven’t hit Stock Doctor yet, but they will. So, people just might want to keep alerts or to monitor Stock Doctor on the recent update section if they have a particular stock that they’re interested in. Interesting stock and it’s done well for me in the last, sort of, twelve months that I’ve owned it. It was spun out of BHP back in about 2015, from memory. At the time, the market sort of dubbed South32 “bad BHP”, and it was spun out because of, well, it was basically the non-iron ore section of BHP. BHP was going through a cleanse, both of management and assets, and so all the things that were seen as a distraction or too small and not the way of the future was spun off into South32. And as often happens with these kinds of spin offs, South32s performed a lot better than BHP since it was spun off. So, Stock Doctor is telling me that since 2015, South is up 108% versus BHP which is up 56%. So, there you go. But that’s not a criticism of the board because oftentimes these spin offs happen because the board knows that if all the small parts of the company are kept in the company, they often are undervalued compared to what they be valued as a standalone business. Because the big driver of valuation for a company like BHP is the iron ore price. So South32 was spun off it. It includes coal, bauxite, aluminium, nickel, silver, lead, zinc, and manganese. And you know, people who’ve listened to us for the last year or so will know all those things are commodities, which are in their, in their three-point trend line buy space at the moment. So, it’s really having its kind of day in the sun, with pretty much everything it mines and sells improving in terms of its commodity price. So, that’s a bit of a pocket history of South. In terms of the numbers, the latest results are in Stock Doctor, they’ve been well received. Sales are up 32% and profit is up 638%. But that’s a bit of an exaggeration, because last time they had a coal mine which they wrote down a large impairment on. So, profit was held down last time. But still, profits increasing and sales are increasing. The price I’m going to base these numbers on is $4.57, which was the price on Sunday when downloads were done. Going through the scoring, the current price, 457, is slightly less than the consensus target so it does score for that. It’s a borderline star stock so it scores half a point for that. It does have a decent yield of 3.7% which is slightly above the mortgage rate, and I should highlight to people now that they should be watching for ex-dividend dates too when they’re making buying and selling decisions. So, they’ll be coming up soon. Generally, they occur after reporting season but sometimes they can occur quickly, and you just need to factor the dividends into your calculations both for buys and sells. Financial Health for this company is strong and steady, so it scores well for that. Interestingly enough, the price to operating cash flow is 7.56, and that’s above our cut-off of 7. So, it doesn’t score for price to cash flow but it scores high on the other quality matrix, so it does come in above our QAV hurdle of 0.10. I highlight that because this company may disappear from the buy list fairly soon because of rise in share price and the fact that its price to operating cash flow is already higher than what we normally see. It’s PE is 10 times, so that’s interesting in that the cash flow is 7.5, PE is 10, so the cash is really flowing through straight to its bottom line. And we often find that with commodity-based companies, as they’re highly leveraged to commodity prices. As they increase, it’s basically just straight, you know, jam that goes to the bottom line with increases in the commodity prices. So, that’s something to note about mining companies. Price is up 60% in the last six months and still climbing, so I guess this highlights the fact that a large cap stock can still improve dramatically, certainly been my experience if that’s the case, but this is a good example. The share price is currently above our IV 1 value but it’s less than our IV 2 value, and, in fact, it’s less than half our IV 2 value so it scores an extra point for that. Net equity per share is $2.86, so even with equity plus debt equity plus 30%, book value plus 30, doesn’t score for that. It’s $4.50 is about 371, which is the book value plus 30%. This company has the consensus forecast earnings per share growth of nearly 40%, so its gonna score a 2 for growth over PE which is 3.7 times, which is more than double what we’re looking for at 1.5. Record low PE in the last three years – there’s a couple of halves in there which didn’t have a PE because it was running at a loss, but of the ones where it did score, it’s the lowest in the last three years. But its equity hasn’t been consistently increasing, so it doesn’t score there. So all in all, the quality score is 81% but the QAV score is 0.11. And the last point to make is that it’s been doing a buyback and the buyback’s been expanded by another $110 million. So, that’s also helping to improve numbers like return on equity, but also is supporting the share price as it rises as well.

Cameron  39:24

Right. Thanks for that. S32. 60%, hey? That’s been a good run.

Tony  39:31

Yeah, it’s been great.

Cameron  39:33

All right, well, just following up, last few things. Top three movers of the Navexa portfolio the last week, Tony, what were they?

Tony  39:42

Yeah, well unfortunately two of them were down. So, FEX was down 10% and we sold it, and BFG was down 7%, and like I said earlier on, we sold that. But Capral Aluminium, CAA, was up 9%, so that’s another one that’s been doing well for our dummy portfolio since we bought it.

Cameron  39:59

Very good. We’ve had a couple of stocks that have done very well recently. And FMG is a Josephine following its results you said.

Tony  40:07

Yeah, so FMG results are out and probably driven a lot by dividends, but also by not quite meeting analysts’ forecasts. The stock started to come off since its results came out. So, listeners will recall that the dividend yield in FMG at the end of last year was really good. Was double digit.

Cameron  40:29

And we sold out of it before we could get our hands on it.

Tony  40:32

Yeah, we did. But what’s happened this time round is that the payout ratio has been decreased and the dividends been decreased as well. So, people who were buying into Fortescue Metals Group for the dividend have been disappointed. And there’s, I mean, dividends do drive a lot of investment in Australia because of the franking credits and because superannuation funds like the dividends that helps their performance and helps them and SMSFs like them, because it helps retirees to get steady income. So when, when a dividend is reduced, it’s not seen that well by the market. Plus, the iron ore price has retreated a little bit, so that’s also factoring into people’s calculations. But yeah, all in all, the result wasn’t received as well as it could be.

Cameron  41:18

I bought them a little while ago too, they were 1860 then, 1920 now. So, they’re up but looks like if they keep going I might have to rule 1 them.

Tony  41:28

Yeah, see how it goes. You’ll get a good dividend too, don’t forget to take that into account.

Cameron  41:33

Yeah, good. Well, we got a question about the iron ore price, too, coming up a little bit later on because that’s something that’s on people’s minds. But unless you have anything else, we can get into Q&A?

Tony  41:45

Yep, sure. Let’s go.

Cameron  41:47

Ali asked us to talk about this article on Jeremy Grantham, says a super bubble crash may be underway. Here’s where he’s stashing his cash, according to the ABC. Under his pillow. For those people who don’t know the name, Jeremy Grantham is in this article referred to as one of the world’s most famous fund managers, the co-founder of GMO, claims to have predicted the Japanese crash of 1989, the dot-com bust of 2000, the Global Financial Crisis of 2008, and the next five financial crises in the next ten years, he’s already predicted. He’s got it all mapped out. He’s also predicted where Elvis has been in hiding down in Argentina with Hitler, and Marilyn Monroe and Andy Kaufman. He’s now warning of another similar crash in asset prices with speculative tech stocks first in the firing line. Well, I think it’s already started, the tech stocks. “Oh, I’m predicting that,” yeah, you’re about a month late, man. Yes, he’s, you know, we’ve talked about Graham, you’ve talked about Grantham recently – over the last few weeks.

Tony  43:04

Yeah, and I think it would be news if Grantham ever predicts the market’s fairly valued and that we should invest.  He’s a perma-bear. Look, I ignore him basically. And he could be right this time, who knows? But, get Ali to look at an article that Richard Coppleson wrote in Livewire which refutes Jeremy Grantham, because Livewire did an interview with Grantham last year where he was saying his dire predictions were there for the share market, it’s overvalued, etc., etc. And Richard Coppleson made out the fact that in ten of the last ten years, Grantham has predicted a share market collapse, so.

Cameron  43:44

It’s a good business model.

Tony  43:45

Yeah, you never would have invested and never would have had the, sort of, tripling in the value of the share market since the GFC. So, yeah, not a great person to follow. He’s a bit like a broken clock, he’s right twice a day. So yeah, he did predict the Japanese housing crisis and the GFC and everything else, because he’s been predicting crashes every year to anyone that listens, you know, for the last fifteen/twenty years. So, I’m not sure it counts so much. And the other thing that’s not taken into account, or that he hasn’t taken into account at least publicly, he may take it into account privately, is that interest rates have been in decline for the last at least ten years, probably even longer. That’s why the share market, particularly in the bubble stocks, has been going up. So, he may be right this time if interest rates start to rise, although I also refer people to the Eureka report on the weekend where our friend – I’ve forgotten his name, the professor who founded modern monetary theory – was interviewed, and he claims that interest rates won’t rise in Australia at least, and that they shouldn’t rise in Australia. So, we may not be seeing rising interest rates or that they won’t rise to the level that people think that they should. And that’s the other point, too, which even Grantham called out in the Livewire article, that he doesn’t think Australia is in as much of a bubble as the US, if it’s in a bubble at all. So, his prognostications are really around the US. And, you know, to give him his due, the NASDAQ has fallen a lot in the last six months, and so he’s completely correct in saying that that was overvalued. But we’ve all said that’s overvalued, none of us have been touching those kinds of stocks for a while. Well, for me forever.

Cameron  45:29

A lot of people have been, but just not us.

Tony  45:31

Just not us, yeah. So yeah, so Ali, I’m not worried by his predictions. And this is always the case even when I have thought the market was overvalued, it always has a great run up to the crash. And if you sort of get out too early, as some people do, and they start to build cash reserves which we’ve spoken about before, it doesn’t really offset the fact that you haven’t had those last couple of good years. And if you have a way of selling like we do, like we did during the COVID cough where you get out after the market’s started to turn down, you get the best of both worlds; you get the run up, plus you get to get out at a reasonable price and stay intact. So, it doesn’t really come into my thinking as a QAV investor.

Cameron  46:13

Yeah, we just keep doing what we’re doing, keep following the rules. They’ll tell us when to sell and then they’ll tell us when to buy back in.

Tony  46:21

Yeah. And look, people like Grantham and who was the other one we’ve spoken about a couple of weeks ago? Howard Marks? They obviously use these attention-grabbing headlines as a way of publicising their funds and getting people interested in to investing in their funds. So, I think there’s a bit of self interest in these prognostications as well.

Cameron  46:40

We should do more of that. Just predicting crazy things, just to get attention.

Tony  46:46

I can make a prediction now which was made on that overconfidence article, that the predictors get things right a little bit worse than a coin toss. That’s my prediction.

Cameron  46:56

Do you think we can get that in the Financial Review? Tony Kynaston says predictors aren’t very good at predicting.

Tony  47:02

Yeah, it’s true.

Cameron  47:04

Chris suggests “in regards to a definition of the Josephine’s, I am wondering if you can use twelve- and six-month trend lines. Could a definition possibly be,” and this is harkening back to last week when we were talking about how do we know when something’s not a Josephine anymore, etc., etc. A Josephine for new listeners is the cutesy name I came up with for a stock that is currently trading at below its month end price – price it was at the end of the last month.

Tony  47:33

Well, it’s more than that. It’s a stock which is a buy on our buy list but we’re not buying at the moment because it’s in a downtrend.

Cameron  47:39

Yes, thank you. That’s great. Chris says, “could a definition possibly be if the six- or twelve-month trend line is in an upward trend, no longer a Josephine when the current share price is above the last month close. However, if the six- or twelve-month line is in a downward trend, it’s no longer a Josephine when the last month close is above the previous month’s close, and the current price is above the last months close. E.g…” and then he’s got it as a formula. Anyway. “Maybe it needs to be three consecutive gains or whatever, food for thought, Chris.” What do you think about all that? It doesn’t-I haven’t got my head around it.

Tony  48:28

Yeah, no, it’s food for thought. Chris’s is just trying to, I guess, put the formula around what a Josephine is and that’s something that I haven’t quite cracked yet. What he’s suggesting is using a more recent graph to run our three-point trend lines over. And I have done that in the past with mixed success. In fact, probably overall negative success in that it makes the portfolio much more volatile and things can look like they’re trending down in the short term and then they whipsaw and go up in the long term and if we had of held that would have been fine for us. So, I don’t disagree with what Chris is saying, and again, as I said last week, if you want to, you know, run some numbers on that, and let us know, that’d be great. What Chris is suggesting is a little bit like SDMAX, which is the Stock Doctor version of three-point trendlines, I guess, or their version of when to buy and sell based on the graph. And that was regression tested by Stock Doctor and they claim, which I would believe, that the results have improved based on using SDMAX. So, that’s a two-year line with a six month, last six month overlay on it. So, Chris might want to have a look at that if it interests him. I still think that when I get around to working out the formula that the concept of a second buy is going to be the one that I use, and I kind of use it now anyway, unofficially. And that in summary is that if a stock is a buy based on “the buy line follows the sell line”, which means it may have been a buy a long time ago, or six months ago, or one year ago or whatever, but it’s been going up and we haven’t got a high point and a second high point based on the highest point on the graph, then we still buy. But if it has got a high point on the graph, and it starts to trend down from there, I’m going to wait until it does have a second high point and the line crosses that new buy line. So, that’s a bit wordy, but it’s a combination of drawing a buy line using the highest point on the graph and second highest point on the graph, and the buy line follows the sell line. So, I think that’s going to be the answer but I just haven’t had, or haven’t done enough research into that yet to see whether it works or not.

Cameron  50:33

Thanks for that, Chris. Ris asks about iron ore: “is it hitting a sell line?” Now, long term listeners will remember that late last year, I think it was sort of November-ish, you decided that we were going to use a fudge sell line for iron ore and use that as a reason to get out of our iron ore stocks like FMG, because it had such a big run up in the previous, whatever it was, eighteen months. The real buy line was quite low and the share price had gone up extraordinarily high; I think it was trading at 20 odd bucks and the sell price was like five bucks or something, and we decided to fudge a sell line. Then we bought back in and so people are wondering – and the share price has gone up again, iron ore price has gone back up again – are we fudging an iron ore share price now Tony, what are we going to do?

Tony  51:30

Well, no. So, the first thing to answer is Riz’s question, and no, the iron ore isn’t hitting a sell line – the iron ore commodity. And I’m using TR#, which is defined as iron ore 62% FE, which is the grade of the iron ore, China, and that’s available in Stock Doctor. You’re right, Cam, I did fudge that particular line, and the reason I did that was because out of all the commodities iron ore seems to be on a two-year cycle and you can see that if you go back and look at the long-term history of iron ore. And so waiting for it to reach its sell line didn’t appeal to me. Iron ore has dropped back from, sort of, 240 odd dollars a tonne, went all the way down to around 100, and is back up to 141. So, it has bounced back. If you look at the more, sort of, the end of that graph on a daily basis or a weekly basis is trending down because iron ore’s price has been – largely because China’s been jawboning the price down and telling it’s smelters not to buy any iron ore for a while, etc., etc., which it often does from time to time. However, if you look at the five-year monthly graph of TR#, iron ore’s definitely in an upturn. So, I think the short answer to Riz’s question is no, it’s still a buy.

Cameron  52:50

So, people who’re trying to find this graph, if you go into Stock Doctor advanced charting, go into the folders tab, look under commodities then under the sub folder futures, and there are three iron ores in futures and we’re using the third one, the last one of those which is TR# as Tony said. Yeah, okay. So, don’t worry about it.

Tony  53:16

Yeah, that’s right.

Cameron  53:17

It’s all good.

Tony  53:18

All good.

Cameron  53:18

It’s all good, for now. Thank you, Riz. Sue: “hi, Cam and Tony. Is there any science or research on stock performance on stocks purchased closer to their sell line than stock purchases which are further away from the sell line? From personal experience, I found my biggest returns were that of stocks bought fairly close to their sell lines versus stocks that were much higher than the sell when I’ve bought in. Is buying close to the sell line an indication of being closer to the bottom? Maybe just a random pattern, but something I’ve noticed. Thanks to you both, take care, Sue.”

Tony  53:59

Yeah, thanks Sue. I haven’t noticed that myself, and I’d have to research it in more detail then I have before I have an answer. But it’d be interesting if you have some data you could share with us, that’d be great. It’s a valid point, we often get questions to the podcast about “do I still buy this stock? It seems to have gone through a run recently. It’s way above its sell line?” And my answer is always yes, that there’s still plenty of upside often in those stocks. But, I can also think anecdotally over the last couple of months, we’ve had a lot of stocks we bought close to their sell lines and they’ve gone below their sell lines and we’ve sold out of. And we spoke about one before, HUM, when it was around $1. I remember buying it and having to sell it again soon after that. So, my gut feel is that it cuts both ways. But yeah, I haven’t done the research sorry, Sue. But good question, I’ll add it to our list.

Cameron  54:51

I think our two stocks of the week this week, TGA and CGF, were both new three-point upturns and both sort of just above their three-point trendline-their sell line.

Tony  55:06

Yeah, actually thanks for reminding me of that. I have noticed in the past that stocks that have a recent upturn tend to go on with it, and they probably are the best buy, and that’s why they score a 2 on the checklist. And there’s still ongoing work to work out, you know, the weightings of things; whether we should be weighting that higher or not, but there might be something in that if Sue’s talking about recent upturns.

Cameron  55:27

Well, there’s, there’s two things there, right? So, the fact that they’ve just breached their buy line doesn’t necessarily mean that they’re close to their sell line. Their sell line could be a lot below. CGF, like, if I look at that it’s currently trading at about 705. I think it’s sell price is about 589, which it was trading at the end of January. So, end of the month, it was at 576. So, it’s popped up quite a lot since then, but you know, could just as easily turn down and breach that sell line. Yeah, TGA’s just hovering barely above its sell line at around about 25 cents. So, you know, I’m always a little bit nervous when I buy something just above the sell line. I’m making sure I put my sell alerts in and it’s a question whether or not I’m going to rule 1 it or it’s going to hit its three-point sell line. Yeah, actually looking at TGA I think it’s right on its sell line. Actually, it’s like slightly above, maybe a couple of cents above. Yeah. And you hope it’ll do well, but you know, as you say, I’ve seen a lot where they’ve just fallen back below it and I’ve had to sell it a week later. But then you’ve got, you’ve got this sort of selective memory. You know, they go up, if they go up you go, “oh, yeah, look at that.”

Tony  56:46

Exactly.

Cameron  56:47

Well, you’ve taught me… you know, I laugh about this a lot on the Facebook group, but if I have to sell something, if I have to rule 1 it, or you know, whatever, I blot it from my memory. It’s-what do they call it?

Tony  56:58

Goldfish memory.

Cameron  57:01

No, I’m trying to remember the ancient Roman term for it, you know, when somebody was a trader in ancient Rome: Damnatio Memoriae. That’s it, damned memory. They were like struck off, then if there was any statues of them, their names would be struck off. If they were a console, their name would be struck off from the register. No one was allowed to mention their name. They’re persona non grata in Rome, you’re not allowed to sing about them, you’re not allowed to talk about them in the place, not allowed to talk about them in the street. “You’re dead to me.” I want that person dead, I want their family dead, I want their dog dead. That’s what, that’s what I do with stocks if I have to sell them. I don’t remember, then six months later, I’m like “ah”; except for Apollo.

Tony  57:47

That’s right. Stocks are a bit different to ancient Rome because if they come back on the buy list, it’s like, “ooh, something to buy. Something new.”

Cameron  57:55

Yeah, you forget. Goldfish memory, as you said? It’s like Eternal Sunshine of the Spotless Mind. Like “oh yeah, look at you. Aren’t you pretty?” Thank you, Sue. Paul, a question about B-oh, this is the BFG. Right. So, Paul’s question was “Bell Financial has been a good performer for me since beginning QAV two years ago with a 50% gain plus some small dividends. However, with their annual report last week they announced they’ve had to appoint an auditor at the demand of Austrac to investigate potential breaches of money laundering laws.” Did you see the report that came out yesterday about Credit Suisse? The leaks that have come out?

Tony  58:35

Yeah, I briefly saw it. Yeah.

Cameron  58:38

Oof, my God. It’s just never ending with these big banks.

Tony  58:42

Panama Papers and all that kind of stuff, yeah.

Cameron  58:45

Yeah. Just the money laundering they do, and they get caught and they get a slap on the wrist and they go straight back to it. No one gives a shit.

Tony  58:55

That’s true.

Cameron  58:57

It’s just so blatant. I go, “oh, what?” There’s drinking and gambling going on in this establishment? Well, I’m shocked, I tell you. Absolutely shocked. Here’s your payment, Commissioner. Thank you very much. Anyway, “after some research, I found that this is the first time that a stockbroker has been targeted by Austrac, and the large banks had to pay large fines and similar audit-after similar audits. The AFR reports that Austrac requires reasonable grounds to suspect breaches for an auditor to be appointed. I’ve taken this to be bad news and sold. Was this premature?” You’ve said earlier in the show no, we’ve sold it out of our portfolio as well.

Tony  59:38

The notice about AML breach or potential AML breach, the notice and their results both dropped on the same day and the share price dropped after that. So, hard to know whether it was because of Austrac or because of the results, because the results weren’t as good as people had forecast. But either way, it’s a sell on bad news. The stock is down 10% also. But to go into a bit more detail on AML. So, Paul is exactly right, the banks have received heavy fines for breaching AML. AML stands for Anti-Money Laundering. It’s a thing in the financial system now where financial institutions are supposed to have a lot of compliance and risk assessment and auditing around people depositing money with them and, you know, above a certain amount which is usually $10,000. And whether it’s kind of money-in money-out, so it’s a wash, so it’s just there to launder the money, or whether it’s going around in circles, or there’s a whole, a whole suite of things that banks in particular have to look for. But, the regulator did say they are now starting to target casinos and stockbrokers and other areas, pokey clubs, other areas that potentially have been even unwittingly caught up in anti-money laundering. So, the fact that it’s hit a stockbroker, I don’t see it as being good news, I see it as being potentially bad news. They may well come out and, as sometimes happens with the banks, and say, “look, you know, this was something we didn’t consider,” or “our systems, you know, didn’t pick it up.” But, that doesn’t get them off the hook with the fine. So, I would think the regulator would have good reason to think that BFG at least didn’t have the right risk systems in place to catch money launderers or to report money launderers, and that in this case where there’s smoke there probably is fire.

Cameron  1:01:36

Good pick up, Paul, thanks for that. Simmo: “does Tony ever use the company market cap figure relative to index funds to determine whether a company’s share price could be at a risk of a near future increase or decrease?” I can already tell that sounds like too much work. “If a company’s market cap is close…” Oh, Tony could be playing golf.

Tony  1:02:01

What’s that? Fore!

Tony  1:02:03

Yeah, another Negroni please, bartender. “If a company’s market cap is close to the cusp of either almost entering an index or almost leaving an index, I would think that when the index is balanced quarterly there could be a lot of buying or selling into or out of these open index funds. For example, when AGL’s share price went below around $14 in 2020 it dropped out of the ASX 50. I assume that this then caused the ASX 50 index funds to sell out of AGL causing the share price to fall even more.” I think that’s about right. “I know Tony has talked about this phenomenon before and the risk of index ETF investing becoming too popular, the quarterly rebalancing can create a kind of reinforced selling or buying of a stock. Has Tony ever looked into how much a stock’s price can be influenced by the quarterly rebalancing of index funds? Has he ever used the market cap figures to determine whether he holds or sell stocks that are on the cusp of entering or exiting the index funds when it is close to rebalancing dates? Hope this makes sense. Cheers, Simo.” I’m tired after just reading that.

Tony  1:03:10

It’s actually a really good question. It is something I have looked at in the past, a long time ago. The short answer is no, I don’t take it into account now and it’s swept up, I guess, in sentiment, you know. If the stock price drops and it breaches our rule 1 or our sell line I sell it, I don’t try and predict that. When I looked at it – this is going back a decade or so ago – I started to look at it, did some work on it, but lost interest. And the reason I lost interest was the rebalancing happens four times a year, so it’s not something you can sort of invest in continuously. It involves a bit of prediction, so sometimes I would get it wrong that stock 1 was going to be promoted or demoted in the list, and that’s because the people who decide what stocks go in or out of lists don’t just take market cap into account, they also take into account the liquidity that’s available in the stock. And there’s a half a dozen other factors they also consider. And so, if you run a report, say, out of Stock Doctor using a stock filter which says “give me the top ten stocks or top twenty stocks by market cap,” sometimes you find a stock isn’t there, or is there, that isn’t part of the ASX top twenty or fifty or whatever you’re doing, and that’s because of these other criteria. So, there’s a bit of prediction involved as to what gets promoted or demoted. But the last point is that usually the moves are sort of at best 10, and sometimes sub that. Now, they might get bigger as there are more index funds, but to do the work only four times a year and to get maybe single digit returns from doing it and not every stock you invested in was going to give that return because it may not have been eventually promoted or demoted, it just meant it wasn’t returning the sort of numbers that I got just through doing it with QAV. Not saying there couldn’t be a blend here, it’s something to watch every quarter, but It’s not something I pay attention to at the moment.

Cameron  1:05:03

Thank you, Simo. Kim: “bought GRR and sold within a week because of rule 1. With the volatility of a stock subject to commodity swings I feel bitten, so I’m now feeling twice shy. I don’t know if there’s a way to limit exposure to multiple losses due to rule number 1 eating into capital. Maybe some experienced QAVers or Cam or Tony,” she posted this on Facebook, “can help with advice, or do you just have to kiss a few frogs and eventually you’ll get a prince and it will all be worth it. As someone developing their portfolio, am I better to avoid stocks with high volatility until the portfolio is a bit more stable? So, if I’ve got a material and a consumer discretionary that is scoring similar and charting looks okay, pick the consumer stock?” What do you think, Tony?

Tony  1:05:48

Not necessarily, no. I mean, we love volatility. So, I don’t do that. Look, again, I have to do the research to looking at whether materials are better than consumer discretionary, but I would think it’s going to be a line ball or a 50/50. So no, I wouldn’t pick one over the other. And I love volatility, so don’t forget if it goes down and get rule 1’d it could easily go up and go up in multiples. So, that’s going to be in our favour. I can tell there’s a bit of pain in Kim’s question, and I feel for her, but just bear with it. I mean, don’t forget, statistically, if we’re getting 60%, right and 40% wrong, you know, the first, out of a twenty-stock portfolio, the first eight stocks you buy could potentially have to be rule 1’d. And even more than that, because that’s on average. So, it could be a lot that you’re buying before you strike gold, so to speak. So, you are playing a statistical game, and Kim’s point is right, we are kissing frogs and we’ll get a prince. But I just, just ask her to stick with it because that’s my experience. It’s a particularly, probably a particularly unusual time to be starting a portfolio with the markets being highly volatile in the last couple of months. We have been getting a lot more rule 1s than we normally do. But yeah, this will pass and things will settle down and you’ll be fine, Kim.

Cameron  1:07:05

There you go. Yeah, like I remember, like in the early stages of building my portfolio it felt like it was one step forward and two steps backwards sometimes, because this was around like the COVID cough and all these sorts of things were going on not long after I started. But, you know, eventually it sort of settles down and you’ve got mostly winners in there. And then as I was saying to Taylor I think the other day, I barely pay attention to my portfolio now. If I don’t get an alert I check-I reset my alerts every month. I might look at it, you know, in the course of doing the show, you know, and having to do our disclosure and that kind of stuff, I’ll look at it once or twice a week, but just if I have to report on something. But generally, everything in my portfolio is looking so good now that I don’t even think about it. I can only imagine how you feel after this many years.

Tony  1:08:03

Yeah same. I mean, its company reporting season now so I do read the Fin Review every day, make sure I’m on top of what’s reporting that’s in my portfolio. It’s a volatile time. I know I do have a couple of stocks in there which are getting close to their sells, so I’ll check those. But again, no more than once or twice a week for those. So yeah, it’s the same for me. It’s more often than not that I’m not checking my portfolio, if that makes sense? Even though there’s a lot going on in the market.

Cameron  1:08:29

Yeah. Look, I’ve got my portfolio open in front of me, and, you know, I’m looking at Stock Doctor’s returns for what they’re worth. I don’t know if it’s accurate or not, but running down the list, like, up 9%, up 26%, up 15%, down 2.82%, up 3.3, up 15, up 10, up 6, up eight. What’s this one? Up six. Sorry, I’ve got a few different pages of portfolios here. This is, I mean, I’m only saying this just as an example of people that are getting started. You know I don’t know shit about what we’re doing here. Like, I’ve just been following Tony’s, following Tony’s rules over the last couple of years. But this is, like, legit, I’m just reading out where these, you know, literally the figures are; okay, up 64%, up 6.5, up 33, up 13, up 7, up 55, up 14, and up 30. So, that’s, you know, where my portfolio’s at after a couple of years of doing it. So, when something’s up 50% or 30% or 65%, like, I’m not even, it’s not even on my radar unless it’s getting my sell alert. So, that doesn’t mean that necessarily they couldn’t also be close to a sell line. Like, Lindsay is up 13% since I bought it and had a big run this week, but then it’s dropped back 5% today by the looks of it. I think it was up like 20% yesterday, Lindsay, did you see that? Lindsay Australia?

Tony  1:10:02

No, I didn’t.

Cameron  1:10:03

I don’t know what happened. I assume their results came out or something, but went up like 20% in a day and then it’s dropped back a little bit. But I don’t know where the sell line is on that from memory, but you know, I’ve got my sell alerts set and if I need to know something Stock Doctor will send me an email and hopefully I won’t miss it. But you just stop thinking about it, really.

Tony  1:10:25

Yeah. And back to Kim’s point, you know, even if the first ten stock she buys – or if any person is starting out in this time at the moment when things are choppy – even if the first ten stocks you buy have to be rule 1’d, your portfolio’s down by 10%. The eleventh stock you buy could easily get that back for you. So, the whole idea of the rule 1 is to stop you from dropping more than 10, 20, 30, 40, 50% unwittingly because the stock was a value trap. So, it can be hard if you just keep doing the same thing and losing money, but it will come good.

Cameron  1:10:57

Yeah, and I guess that’s the hard thing to know in the early days. Like, after you’ve been doing this for a while, in my case a few years, you just trust the system. You just trust that, “yeah, okay, this one I had a rule 1, but the next one or the one after that will make up for it” and you stop even worrying about it. I know after you’ve been doing it for as long as you have it’s probably not even, doesn’t even enter into your consciousness if you have to rule 1 something. It’s like swatting a mosquito.

Tony  1:11:23

Yeah, my mindset is oftentimes, “geez, I really want to buy this stock. This has come on to the buy list. I can’t sell anything. Come on, come on, something! Get to a rule 1!”

Cameron  1:11:38

Okay, nice. Yeah. Good. So yeah, it’s a mindset thing. And yeah, it’s tough in the early days, but look, what I would say to anyone who’s new listening, you know, don’t trust Tony and don’t trust me but talk to the people in the Facebook group about what they’ve found that have been doing it for a couple of years, because they will give you their unbiased view on it. We’ve got quite a few people now that have been doing this for two or three years and on the Facebook group they’ll give you their experience. They have nothing to gain by bullshitting you. Neither do we, by the way, but still.

Tony  1:12:14

No.

Cameron  1:12:14

More obvious that they don’t. Last question. Mark: “CGF has long been a possible takeover target by Apollo,” the private equity firm, not the RV rental crowd whose name we shall not speak of. “Does Tony ever think of holding on just for the takeover premium?” Okay, then there’s another question. Do you ever think of holding on just for the takeover premium, Tony?

Tony  1:12:39

Well not just because of that, I just hold on until it’s a sell or the takeover comes to pass. I mean, at the moment, I spoke about Challenger before, Apollo’s taken a stake in it, that doesn’t necessarily mean there’s going to be a quick takeover of it or there’s going to be a second bid. There’s been no bid announced yet, they’ve just taken a stake. So, we could be a long way from any sort of takeover activity with this company. And oftentimes, the fact that a company like Apollo has taken a stake in the company will mean it’s more, it’s harder for someone else to come in new and take it over. So, it can have the reverse effect. So, I’ve spoken about takeovers in the past; when they are afoot, good gains can be had. I tend to try and wait until the last bid is out. The one thing I don’t do, though, is once a takeover has been declared, has been acceptable by the directors and no further bids look like they’re going to come, I’ll sell on market rather than wait for the acquisition or for the takeover fund to actually send me a check. Because that can take a while, and generally the market trades stock at about the value of the takeover offer. So, I’ll take that and move on to something else.

Cameron  1:13:48

His other question is “considering FEX’s very low sell line does Tony ever consider using a more aggressive sell line, say, to follow a more recent trend?” We’ve talked about this many, many times.

Tony  1:14:03

We have, yes. Very, very occasionally I’ll fudge things as we spoke about before with the iron ore price, where I had a pretty good thought that iron ore was in a two-year cycle and that we had to get out when we did. Looking at FEX, I know we sold it from our dummy portfolio which I think was a rule 1 sell, it is trading a long way above its sell line. It’s currently probably a Josephine, so I wouldn’t be buying it, and it’s probably going to be a rule 1 for someone who bought it recently. But yeah, it’s a long way above its sell line. We did take iron ore stocks off the buy list towards the end of last year, so FEX would have come off around that time. In terms of hug lines, look, people are free to do that if they want if they get nervous and they want to sleep at night, for sure, use a more aggressive sell line. But generally, I don’t – in fact, in the vast majority of cases, probably only 1% of cases, I’ll fudge. I’ll let the sell line ride otherwise.

Cameron  1:15:00

All right, well, that’s a full lid. We’ve been going for nearly an hour and a half, I think we can skip after hours.  I know you’ve got guests coming over.

Tony  1:15:08

Oh, come on. That’s the highlight of the week for me, after hours.

Cameron  1:15:12

I know, but it’s not for Alex when she’s doing the transcript. She goes, I have to, I have to sit here and listen to you and dad talk for twenty minutes about TV and music. I’m like, it’s the only time we get to talk each week, now, and catch up on stuff. All right. What do you got?

Tony  1:15:26

I just quickly wanted to say that if people hear this before Saturday, we have a horse running – Princess Raffles – which is one of our horses in Adelaide. So, it runs in Morphettville, so might be worth a look for people. And then the only other thing I can talk about is a movie called Those Who Wish to be Dead, which was really good. It’s a, what’s his name now? Taylor Sheridan, I think?

Cameron  1:15:49

He’s the guy behind the Yellowstone TV series, isn’t he?

Tony  1:15:52

Yeah, so he directed this one. It’s, look, it’s a movie full of clichés, but he just seems to have the knack for, for making that classy. And Angelina Jolie stars in it and gives a good performance, so I quite liked it. And Taylor Sheridan, the reason for I guess also mentioning it made one of my favourite movies Hell or High Water, which is worth checking out too if people want to watch a good, a good movie starring The Dude. Jeff Bridges.

Cameron  1:16:19

I gave-I tried watching the first episode of Yellowstone just in the last week after having some friends recommend it, and I just can’t do Kevin Costner man.

Tony  1:16:28

Yeah, I’m the same. I watched the first episode because it was Taylor Sheridan and then went “meh”. Reminded me of Dallas.

Cameron  1:16:35

Kind of a modern Dallas, yeah. It’s a bit Succession, but nowhere near as good. Well for me this week, I’m reading a really good sci fi book called Pushing Ice by Alastair Reynolds that somebody recommended to me, nearly finished it. He’s like an astrophysicist to became a sci fi writer, so it’s really good, hard sciency. Really interesting premise, basically one of the moons of Saturn, Janus, just starts flying away from out of the solar system. This is like set in 2060 or something, and humans realise that it was actually, like, a space station, alien space station, disguised as an ice moon all along. And so they send a ship off to try and catch up to it to find out what’s going on. And la di da di da, you know, the ship sort of ends up going with it to an alien planet, and yeah. Yeah, it’s kind of interesting, really different take on first contact. Chrissy and I watched the French Dispatch on the weekend. Loved it. Didn’t think it was as good, maybe-or, not as good but yeah, didn’t grab me as much as many of his other films. Tenenbaums or… so I loved it too, I mean, like, beautifully done but I think it was just like there were so many stories and so much overlap and there was a, it was a lot more going on than his normal cast of characters that we get a little bit more invested in them maybe. But just in terms of set design and production value and performances and dialogue and all that kind of stuff, just, yeah, fantastic.

Tony  1:18:14

Artistically, visually very beautiful, isn’t it? Yeah.

Cameron  1:18:16

Beautiful. Yeah. Yeah. To die for his stuff, really fantastic. The other thing that I’ve sort of been plugging on our Facebook group too this week, I watched this hour-long interview with a guy called Shep Gordon which I highly recommend to anyone that’s interested in anything, really. Life. Shep, I’ve been a fan of Shep’s for many years. I gotta tell you quickly his origin story; he’s a Jew from New York, is living in LA, late 60s, selling weed, decided to get out of the weed business for some reason, it was getting a bit dicey. But he’s living at this this hotel called the Landmark Hotel somewhere in LA. It’s like a flophouse where a lot of itinerant artists are living. And he hears this woman screaming outside of his window one night. He looks down and around the pool there’s this couple fighting, it was a white woman and a black guy, and he runs down and separates them. And the woman punches him in the mouth and tells him to eff off because they were making out, this couple. He goes back to his room and he’s like, I’m such a loser. Why did I do that? Next day, he’s downstairs, he sees this woman sitting around the pool with a bunch of people and she calls out to him. She says “are you the guy I had to punch in the mouth last night?” And they have a laugh. So, the woman was Janis Joplin, the guy she was making out with was Jimi Hendrix. Sitting around the pool is also Jim Morrison, and bunch of other rock stars, because this was like a Rockstar flophouse where they would sort of stay long term if they had a residency somewhere in LA. So anyway, he gets to know them all, and, sort of, a few weeks go by and Jimi Hendrix says to him, “so what do you do for a living?” He goes “I don’t do anything, really, at the moment.” And Hendrix said, “got a car?” He says “yeah,” he said “you’re a Jew, you should be a manager.” And he says to another guy “Hey, Bobby, you still got that bunch of weirdos living in your basement?” He goes, “yeah.” He goes, “you guys need a manager?” He goes, “yeah,” he guess, “introduce them to Shep.” So, this bunch of weirdos turns out to be Alice Cooper and his band, they were called the NAS at the time they were going nowhere. So, he goes and he signs Alice Cooper, and he knows nothing about music, doesn’t care about music, and he’s still Alice Cooper’s manager today fifty odd years later. And he just tells this story about how he built Alice and made him famous, and then he did it to Anne Murray. And then he tells just these constant stories about how he’s just, he’s just a genius at making people famous, this guy. Two things I really loved most about it; one was he said he and Alice had worked together well for fifty odd years because of three rules that they agreed on very early on. One is we always do the right thing by everybody, no questions asked. And he had some anecdotes going right back, but they always look after everybody. He said “everything’s always a wi-win. It’s never win-lose. We just, we’ve always made sure every deal is a win-win. Secondly, we’ve got an incredibly hard work ethic, we both do what we say we’re going to do, you know, we never slack off.” And the third thing was they never compromise the character, Alice, that they realised that they’d struck gold by building this character and they would never compromise it. So, they’re the three rules they’ve lived by for fifty odd years. And then the other great story was, he said he had been doing this in like the early 80s or something, very successful. He’s rich, but he kind of just didn’t feel like he was doing really what he wanted with his life. Anyway, he produced a film, it was at the Cannes Film Festival, he went out to dinner and he met the chef of this restaurant in France called Roger Verge. And he said, “this guy just had this sense of inner peace about him. And I decided, I want what this guy has. So, I just made myself his go to guy. Anything you want, Roger, I will do it for you.” And he kept his day job managing Alice, but just decided to look after-he just wanted to shadow this chef guy to see why this sense of inner peace was that he had. Anyway, ends up realising that this guy works really hard, doesn’t make a lot of money running a restaurant, and he realised that all chefs back then were the same. No chefs owned their own restaurant, usually, they worked for other people and they were working massive hours not making a lot of money. So, he invented the celebrity chef idea, basically, Roger Verge spoke to Wolfgang Puck, Wolfgang Puck put seventy-five chefs in a banquet room at a hotel and Shep got up and explained to them how he was going to turn make them all famous, turn them into brands with books. And he said, “I had a friend of mine, who was, he had left CNN, and he was starting a new cable network and he didn’t know what to do with it. And I said to him, ‘well, I can get all these chefs to appear on your network for free.'” And so, they created the Food Network, this guy created the Food Network off the basis of that. So, he got all of his chefs to appear for free but they were promoting their books and their sauces and their spices and all of that kind of stuff on the network. So, it’s just a great story, like he’s just this, just a legendary manager and promoter and seems like a nice guy. So yeah, really good. Really good little documentary on YouTube.

Tony  1:23:33

Okay, cool. Thank you.

Cameron  1:23:34

Made by Gibson, the guitar company.

Tony  1:23:37

Okay. Right.

Cameron  1:23:39

That’s it.

Tony  1:23:40

Well we can probably tell Alex not to worry about typing up the after-hours.

Cameron  1:23:44

I did. I told her. I said, you don’t have to transcribe the after-hours stuff. She said, “Oh, well.”

Tony  1:23:51

Yeah, one of the good things about being down here is I catch up with her once a week, which is fantastic.

Cameron  1:23:56

Yeah, that’s good.

Tony  1:23:57

We had dinner last Friday night and she said, we were talking about after hours, and she said, “I’m typing this transcript along and Cameron said ‘what about this thing about John C. Reilly?’ And you said ‘who’s that?’ And I’m like, ‘Dad, come on! You know who John C. Reilly is.'”

Cameron  1:24:13

I don’t remember that?

Tony  1:24:14

I don’t remember that either, but anyway, she did.

Cameron  1:24:17

Alright mate, well enjoy your last week down there and I’ll talk to you next week.

Tony  1:24:21

Thanks Cam, that’s great.

Cameron  1:24:23

Take care everyone. QAV Podcast is a production of Space Craft Publishing Proprietary Limited, authorised representative of AFS sale 520442 AFS representative number 001292718. Please don’t make any investment decisions based solely on listening to this podcast. This is presented as general advice only not personal financial advice. We don’t know your personal financial circumstances. Please see a financial planner before making any investment decisions.

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