Episode Name: QAV S03E64 – 2020 Highlights

File Length: 49:53

Cameron Reil­ly [00:08]: Wel­come to QAV. This is Cameron. I’m record­ing this on Mon­day the fourth of Jan­u­ary 2021. We made it. We made it through if you’re lis­ten­ing to this I guess. Any­way, you made it through 2020. Con­grat­u­la­tions. Now this isn’t the first episode of our sea­son. We were going to do that today but then Tony asked me if he could have anoth­er week off. Now I did think about fir­ing him or dock­ing his pay until I real­ized, a; I don’t pay him and b; there is no show with­out Tony because hon­est­ly, no one cares what I think. For good rea­son, I don’t know any­thing.

So, I grant­ed Tony, benev­o­lent­ly grant­ed Tony anoth­er week off and in the mean­time, what I thought I’d do is go through the episodes from 2020 and just pick what I think some of the high­lights were over the course of the year. And we’ll go right back before Covid was on the radar and then sort of pick out bits and pieces through­out the year. So I hope you’ll enjoy this; a bit of a recap for folks that are new, you may not have heard all of these episodes yet so I’ll give you a sneak peak of what you have to look for­ward to when you go back through the archives.

Fox­es just walked into my office and he’s stand­ing behind of me pok­ing me in the back while I’m record­ing this. I don’t know why. But any­way, that’s my life. I guess we’ve all had a taste of what work­ing from home is like with kids this year. Thank you, bye. So, I’m going to start off with going right back to the begin­ning of 2020, first episode sea­son two, episode one; first episode of 2020. Tony was then as he is now down at his Cape shank prop­er­ty. You can tell that from the par­tic­u­lar echoic nature of his voice. I start­ed off that episode by ask­ing him for his pre­dic­tions for 2020.

I want to just ask you about- and I kind of know what your answers going to be but let’s talk about it any­way. Begin­ning of the New Year, everyone’s doing their pre­dic­tions for 2020. Trump is busy assas­si­nat­ing peo­ple; that is going to have some impact on the mar­ket I assume. Tony, do you have pre­dic­tions for 2020 or you just stay out of it.

Tony Kynas­ton [2:37]: Yea. Just stay out of it. If any­one ever push­es me for what I think the shared price of the shared mar­ket will doth­is year, I always say it will go up ten per­cent which is the long-term aver­age. Over time, that’s what it does so that’s what you can real­ly pre­dict but it might go down 5% or it might go up 15% this year, who knows.

Cameron Reil­ly [02:56]: It’ll either go up or it’ll go down. One of those two this year.

Tony Kynas­ton [03:00]: Exact­ly. [Laugh­ter] Yeah and that’s like– it’s a trite sort of line but it’s a real­ly impor­tant one and it high­lights the fact that you’re bet­ter off being in the mar­ket all the time rather than try­ing to pick the ups and downs and try­ing to pre­dict that. It’s time in the mar­ket not tim­ing the mar­ket that’s impor­tant. And look, it’s a ques­tion I’ve been mulling over in my mind too and its human nature, but you just read out the QAV check­list port­fo­lio per­for­mance and I ruled off on my own port­fo­lio for the six months for the finan­cial half. Rather than do it quar­ter­ly, I do it every six months. And, my port­fo­lio is up 19.1%, some­thing like that. And all odds accu­mu­la­tion was up; I think 3.2 or some­thing like that for the six months. Giv­en I’m try­ing to aver­age 19.5, the ques­tion is do I sell every­thing and go away and come back next year? Because I just about met the tar­get already. And of course, the answer is no because you just don’t. This could be– the next six months could add anoth­er 10 or 20% to the port­fo­lio and then you’ve missed out on a big increase. And if you go back in in the sec­ond half of the year and the mar­ket goes down well, you’ve stuffed it all up. So even though human nature is to pro­tect the lead, you don’t do it. You stay in the mar­ket.

Cameron Reil­ly [04:19]: Well, the all odds did­n’t go up by 10% obvi­ous­ly; things that none of us could have fore­seen back then. But, I did put out our end of year num­bers, begin­ning of the year, a cou­ple of days ago. For the cal­en­dar year, the QAV port­fo­lio was up 14.83% and the all odds total accu­mu­la­tion index, the XAOA for those of you that are new, that’s the all ordi­nar­ies plus the div­i­dends that those stocks attract­ed over the course of the year was up 3.64%. So QAV was up 14.83; all odds up 3.64. So we out­per­formed the all odds total accu­mu­la­tion index by about 3.8 times, rough­ly four times. Not bad, all things con­sid­ered. And as Tony point­ed out, the key thing was that we stayed in the mar­ket all year long. I don’t know if he would have done bet­ter if he’d got­ten out when he said, and just sat there. I’m not sure what his final year results were, but obvi­ous­ly, the mar­ket had huge gains after the COVID cough in March and April. And, yeah, I’m sure any­one who was active in the mar­ket and made good deci­sions had a real­ly good last six months of the year. Made up for the cou­ple of months at the begin­ning of the year when every­thing tanked. 

This next clip is from the same episode where a few peo­ple have been ask­ing what Tony thought about Fortes­cue Met­als Group. For those of you that fol­lowed along dur­ing the year, you’ll know that FMG was by far the best per­former in our port­fo­lio in the end; still a per­former. I think the first trench that we bought of it is up 220% rough­ly since we acquired it late in 2019. We bought a sec­ond trench of it I think– I don’t know, ear­ly in 2020 that also did very well. But peo­ple had some ques­tions because the INR price was going down at the begin­ning of the year and Tony had a few things to say about that.

Tony Kynas­ton [06:25]: Peo­ple had asked us ques­tions in the past about whether I still felt com­fort­able being invest­ed in Fortes­cue Met­als Group, which is an iron ore min­er, giv­en that the iron ore price was start­ing to decline a lit­tle bit. And like­wise, we’ve had sim­i­lar ques­tions about coal and oth­er com­modi­ties that we’re invest­ed in. And I just want­ed to share one thing that peo­ple can do that might give them some com­fort about being invest­ed in com­modi­ties com­pa­nies and that is to go to a web­site that tracks the price of com­modi­ties and one that springs to mind is called Index Mon­day. So; indexmundi.com; and just go to the– as we always do a five-year month­ly graph and look at the three-point trend lines for a par­tic­u­lar com­mod­i­ty. So you can do coal, you can do gold, you can do wine or all those kinds of things. 

And last time I checked, they’re all in a three-point trend upturn so they’re all trend­ing upwards using our nor­mal three-point trend line analy­sis. And that’s– I’m not say­ing that I would­n’t buy some­thing if it was­n’t. I’m not say­ing I would­n’t buy say Fortes­cue Met­als Group if the iron ore price was trend­ing down in terms of a three-point trend line. But chances are Fortes­cue Met­als Group would be as well and there­fore I would­n’t be buy­ing it if that makes sense. So often­times when there are com­pa­nies and those com­modi­ties areas are going up, it’s because the under­ly­ing com­modi­ties are. And even though there’s lots of noise in the mar­ket, and one of these can bounce around a lot, if peo­ple seek com­fort from the fact that they’re doing the right thing, then go and have a look at the long-term com­modi­ties trend graphs for the under­ly­ing com­modi­ties. And gen­er­al­ly, they were also going up too.

Cameron Reil­ly [08:09]: And those of you that were lis­ten­ing towards the end of 2020 may remem­ber that Tony was look­ing at Index Mun­di again and noticed that the cop­per and alu­minum prices were start­ing to rise up and he made a deci­sion that we should add a cou­ple of those sorts of stocks to our port­fo­lio on the basis of the suc­cess of FMG. And we added a CAA, Capral which is an alu­minum stock, and cop­per moun­tain, C6C. They both did very well. We bought them at the end of Octo­ber. Capral, CAA is cur­rent­ly up 22% and C6C is up 60% or 59.13% since we bought them. So, yeah, again, good deci­sions and good insights from Tony there.

Well, this next clip is from episode 205 record­ed in ear­ly Feb­ru­ary, about a month after the last one that we heard. The mar­ket had start­ed to feel the impact of coro­n­avirus in Chi­na; had­n’t yet spread to the rest of the world and Tony and I had a chat about how he han­dles mar­ket cor­rec­tions. What’s your mind­set? Where are you at? Are you pan­ick­ing? Are you get­ting ready to– once the Brazil­ian ladies are fin­ished clean­ing your win­dows this morn­ing, you’re get­ting ready to jump, Tony?

Tony Kynas­ton [09:37]: Not at all. No, you know, it’s the old say­ing about being alert, not alarmed. It’s a– yeah, you focus on the mar­ket in these times of uncer­tain­ty, but you don’t get alarmed because if it does drop, if there’s a huge cor­rec­tion, that’s a chance to buy. And look­ing at them, there are stocks now– par­tic­u­lar­ly stocks like Qan­tas, which are the most exposed. If they do hap­pen to drop below their three-point trend lines then I’ll sell them and look to buy them lat­er. But at this stage where last time I looked– I haven’t looked today, but last time I looked Qan­tas was still above the three-point trend line. So that’s what I use to guide myself in this kind of cor­rec­tion. Just use the sen­ti­ment graph as a test to see whether peo­ple are sell­ing out whole [inaudi­ble 10:24] or whether there’s some sell­ing, but it’s not strong. 

Cameron Reil­ly [10:28]: Right.

Tony Kynas­ton [10:30]: There is a cor­rec­tion like– it’s that old say­ing it’s fresh meat. Rub your hands and get a hold of all the cash you can and buy-in. 

Cameron Reil­ly [10:41]: Right. And, you know, you men­tioned the three-point trend line there, that’s your pol­i­cy with all of these stocks, even though Qan­tas has obvi­ous­ly, I guess it’s not real­ly con­fes­sion sea­son, but they are obvi­ous­ly say­ing, well, this is going to have a dra­mat­ic impact on our rev­enues for the year when we–

Tony Kynas­ton [11:02]: I don’t think Qan­tas has said that. 

Cameron Reil­ly [11:04]: Oh real­ly?

Tony Kynas­ton [11:05]: Sor­ry to inter­rupt. Yeah. 

Cameron Reil­ly [11:06]: Some­body said that–

Tony Kynas­ton [11:08]: I knowthey came out towards the end of last week and said it would have an impact but at this stage it was man­age­able. 

Cameron Reil­ly [11:17]: Right. But it’s still going to have an impact on their finan­cials, their pro­jec­tions for the year sure­ly.

Tony Kynas­ton [11:24]: It will. But, no, I don’t have the release in front of me, but it was­n’t– they weren’t over­ly con­cerned. I don’t think Qan­tas has a big busi­ness in Chi­na real­ly. They’d have some flights in there, but com­pared to every­thing else going on around the world, it would be a small per­cent­age, and don’t for­get the inter­na­tion­al car­ri­er busi­ness for Qan­tas is about one-third of the rev­enue and it’s an even small­er per­cent­age of sales so, yeah. I was­n’t at all alarmed when I read the Qan­tas press release. I can’t recall the details. And they’re obvi­ous­ly say­ing there’ll be some kind of impact, but it was­n’t going to be huge.

Cameron Reil­ly [12:02]: So the share price has come back 10%, but based on noth­ing real­ly that Qan­tas has said, this is just the mar­ket pan­ick­ing.

Tony Kynas­ton [12:10]: Cor­rect. It’s just spec­u­la­tion. And look, you know the mar­ket and it could drop a lot more if sud­den­ly the whole world goes into lock­down and inter­na­tion­al trav­els put on hold indef­i­nite­ly, for sure, Qan­tas will have it here but we’re not at that stage yet.

Cameron Reil­ly [12:26]: So your pol­i­cy with the port­fo­lio in times like this is all based around just keep­ing an eye on the three-point trend line?

Tony Kynas­ton [12:27]: Yeah. I’m still read­ing the fin­ger view every day and see­ing if there are any par­tic­u­lar announce­ments that you might be con­cerned with. But yeah, look­ing at the three-point trend line and eager­ly wait­ing for the results to come out as well. And I would expect that Qan­tas– some com­pa­nies as big as Qan­tas would give us good guid­ance as to what they expect will hap­pen because of the impact of coro­n­avirus and poten­tial­ly the Bush fires. I’m not sure how much that would impact their busi­ness, but it might if peo­ple aren’t trav­el­ing as much in Aus­tralia as well, that will have an impact. But at this stage, they haven’t come out as a con­fes­sion and say, look, we’re going to take a big hit.

Cameron Reil­ly [13:15]: Well, of course, Qan­tas did come out, not too long after that, and say that we’re going to take a big hit as the full extent of the pan­dem­ic start­ed to become clear. And we haven’t bought back into Qan­tas yet. I guess it’s still a lit­tle bit uncer­tain what’s going to hap­pen in 2021. We’ll see how it plays out. But we replaced Qan­tas. We sold when they breached their three-point trend line cell line, and we bought oth­er things which per­formed well, most of them over that last half of the year. But I think it’s inter­est­ing just to go back and hear how Tony was approach­ing the cor­rec­tion at the begin­ning of it. As you would have seen through­out the course of the year, there are sim­ple rules with QAV about when to buy and when to sell. And for me, it was a ter­rif­ic oppor­tu­ni­ty this year to see that in prac­tice dur­ing a cor­rec­tion that Tony did­n’t flinch, just fol­lowed the rules and stayed calm and trad­ed through­out it and got a great result at the end of the year, by just fol­low­ing a set of sim­ple rules. Towards the end of Feb­ru­ary and episode 208, again, we talked about how Tony deals with cor­rec­tions. 

But when it goes, when things like coro­n­avirus hits or trade Wars or what­ev­er, you know, you’re not lying awake at night, wor­ry­ing about it?

Tony Kynas­ton [14:38]: No. Oh God, no; not at all. I’m out on the golf course play­ing golf. I’m more wor­ried about my golf swing than I am about my share port­fo­lio.

Cameron Reil­ly [14:50]: Again, because you’ve seen these things hap­pen every year for decades and you know that if you’re buy­ing the prin­ci­ples of QAV, the fun­da­men­tals, you’re buy­ing good qual­i­ty com­pa­nies that long-term, they will come good.

Tony Kynas­ton [15:04]: Yeah. And also too, I mean, don’t look at the noise, look at the mar­ket. But it’s one of those strange things I think about share mar­kets around the world, in this low-inter­est-rate envi­ron­ment, as they keep on going up. Even though there’s lots of noise about virus­es and trade wars and all sorts of things, you know the ASX is still going up. I kind of scratch my head and won­der why, but it’s clear­ly being fueled by low-inter­est rates and easy access to the mon­ey. So that will come home to roost at some stage but until it does you just ride it out.

Cameron Reil­ly [15:37]: Yeah.

Tony Kynas­ton [15:40]: Again, you can’t do much about it. There’s a lot of peo­ple who are try­ing to make their rep­u­ta­tions by say­ing, oh, there’s a crash com­ing because of the low-inter­est-rate envi­ron­ment that they can cry wolf for a long time before that hap­pens. And the city on cash and miss­ing out last year on a 20% rise and just the index alone, you know, what a bit of smart invest­ment can get you. 

Cameron Reil­ly [16:05]: Yeah.

Tony Kynas­ton [16:06]: And that may well hap­pen for the next three, four, five years. Who knows where it might go– it may be all over in six months but the three-point trend lines will tell us about that. We don’t need to lis­ten to the noise to work that out.

Cameron Reil­ly [16:17]: Well, a week lat­er when we were record­ing episode 209, ear­ly March, the mar­ket had already start­ed to go straight into COVID cough mode and we start­ed talk­ing about what you do when all of the stocks that you’re look­ing at buy­ing fail on sen­ti­ment. 

I did a fil­ter then I stack rank them by price to cash, export­ed the ones that were less than sev­en, start­ed going through the check­list and I did about four or five and they all imme­di­ate­ly fell on sen­ti­ment because every­thing’s crash­ing. 

Tony Kynas­ton [16:50]: Yeah.

Cameron Reil­ly [16:51]: So the first ques­tion I had for you, we’ve got a lot of ques­tions from peo­ple last week obvi­ous­ly about three-point trend lines but are you like when there’s a mas­sive down­turn like this when the vast major­i­ty of stocks I’m assum­ing are in free fall and they’re going to– their charts are going to look like shit, do you still obey the go-no-go rule on sen­ti­ment in a mas­sive sell-off like this?

Tony Kynas­ton [17:18]: Absolute­ly. So, I mean, I like to stay ful­ly invest­ed so this is how I cash up to buy lat­er. When the shares fall past their sen­ti­ment lines that gives me the cash to rein­vest because I think the mar­ket’s going to fall even fur­ther. 

Cameron Reil­ly [17:34]: Right. 

Tony Kynas­ton [17:35]: Yeah. And even if it does­n’t fall fur­ther, we’ve now got a watch list­ed– on my watch list now has 40 or 50 stocks on it that failed sen­ti­ment so even if the mar­ket turns around this week, we can just jump straight back in with the cash we’ve got sit­ting there on the side­lines and ride it back up. So that’s kind of an– it’s an inter­est­ing point you raised and it was some­thing I thought of after we had the inter­view with Roger Mont­gomery, when he was quite cor­rect­ly point­ing out that we’re prob­a­bly going to have a cor­rec­tion at some stage in the next 12 months, because the mar­ket’s get­ting a bit over­val­ued and the econ­o­my’s look­ing frag­ile, et cetera and he was quite press­ing it with that. 

And there­fore he likes to sit on; I think you said some­thing like 25% cash, 20 to 30% cash, which you’ll now start deploy­ing on. I lis­tened to an inter­view he did at the end of last week where he was talk­ing about being cashed up and start­ing to look for bar­gains. I don’t do that in such a dis­ci­plined fash­ion along the way because that 25% of cash is going to reduce my returns but along the way. So, instead of get­ting 19 and a half per­cent, you’re get­ting three-quar­ters of that if you’re sit­ting on 25% cash because only 75% of your port­fo­lio is invest­ed and the rest is earn­ing sort of 1%, if that if you’re lucky. 

And I’d rather take that extra 25% of returns along the way and then use my sen­ti­ment– go-no-go as a way of rais­ing cash when the mar­ket starts to turn down. So it’s almost like a pre-step process. They ful­ly invest­ed. If the mar­ket turns down sig­nif­i­cant­ly, then we sell out, raise some cash and we wait for it to go fur­ther and then we rein­vest when the com­pa­ny starts to retrace or start to estab­lish three-point up trends. And that could hap­pen this week, or it may keep going down fur­ther on. 

I think any­body who tries to fore­cast what’s going to hap­pen now is going to wind up with egg on their face. They’re most­ly going to be wrong because it’s just a run-on in unchart­ed ter­ri­to­ry. I mean, the reserve bank is meant to meet tomor­row. We’re record­ing this on Mon­day the 2nd of March, 3rd of March they’re meant to meet, I think the chances of them low­er­ing inter­est rates to a new rate of some­thing like 85 or 90% by the mar­ket, but I’m not sure that’s going to help.

That might give us a short term uptick in the mar­ket but if coro­n­avirus has the effect that peo­ple seem to think it will, then Chi­na’s going to come off the boil and that’s going to affect our econ­o­my hard because when you name one of their biggest cus­tomers, we export to them. So that’s going to hurt us regard­less of where inter­est rates are. If we can’t export, that’s going to be bad. So, inter­est rates may go down; that may not help the mar­ket go up. It might, I don’t know; we’ll see what hap­pens dur­ing the week.

Cameron Reil­ly [20:29]: Kind of fun­ny lis­ten­ing to Tony talk about our exports to Chi­na being an impor­tant com­po­nent of our econ­o­my. Some­body should have told Scott Mor­ri­son that. He may have han­dled things a lit­tle bit dif­fer­ent­ly in the lat­ter part of the year. Any­way, good to go back I think and just hear Tony talk through his strat­e­gy for cash­ing up and get­ting ready to buy back in as we in fact did. And a week lat­er, episode 210, I start­ed the episode like this.

[Music] Good morn­ing, Viet­nam. 

Tony Kynas­ton [21:24]: How are you? 

Cameron Reil­ly [21:25]: Feels a lit­tle bit like Viet­nam at the moment, Tony. I’m good.

Tony Kynas­ton [21:29]: Is it hot and sweaty up there is it?

Cameron Reil­ly [21:32]: Which is nice if you with a lady, but not good when you’re in the jun­gle or some­thing like that as the line goes.

Tony Kynas­ton [21:39]: Yeah. Well, it’s nice down here in Syd­ney. Good to be back.

Cameron Reil­ly [21:45]: Yeah, that’s good. I just got back from Mel­bourne.

Tony Kynas­ton [21:49]: Yeah. How’d it go? 

Cameron Reil­ly [21:51]: Went great. Thanks, Tony. Yeah. First screen­ing of the film and yeah, it was, yeah. Every­one seemed to love it. Let’s get into more impor­tant mat­ters. The stock mar­ket, Tony. I don’t know if you’ve seen but it’s been in the news a bit late­ly.

Tony Kynas­ton [22:09]:  It has a bit, has­n’t it? 

Cameron Reil­ly [22:18]: Like, I’m just– I tell you what, this is my first, I mean, I’m near­ly 50, so it’s not my first mar­ket cor­rec­tion that I’ve lived through or my first bear mar­ket, or soon to be, not my first reces­sion, but it’s the first one where I’ve actu­al­ly been, you know, active­ly involved in pay­ing atten­tion real­ly to at this sort of lev­el. And the thing that amazes me is it only seems like a month ago that every– it was boom times; every­one was telling us it was going to go on for­ev­er because inter­est rates were low. And you know, this was a times of glo­ry time. 

Tony Kynas­ton [22:56]: This time it’s dif­fer­ent.

Cameron Reil­ly [22:57]: This time it’s dif­fer­ent. Inter­est rates are low, Tony. You don’t under­stand this is going to con­tin­ue.

Tony Kynas­ton [23:04]: Every­thing’s being dis­rupt­ed. 

Cameron Reil­ly [23:06]: Yeah, sure is. And–

Tony Kynas­ton [23:11]: Moth­er Nature has shown us she’s the great dis­rup­tor.

Cameron Reil­ly [23:14]: Yeah. Remem­ber Moth­er Nature said, hold my beer, watch this.

Tony Kynas­ton [23:18]: Hold my Coro­na.

Cameron Reil­ly [23:22]: Oh, very good. 

So then Tony talked about how he thought we were going into a reces­sion and I asked him– 

I mean, how does a reces­sion affect your invest­ing strat­e­gy, Tony?

Tony Kynas­ton [23:25]: Well, it does­n’t change. I mean–

Cameron Reil­ly [23:38]: You’re so bor­ing, Tony. 

Tony Kynas­ton [23:39]: I know. I’m glad to be a bor­ing investor. I real­ly am because it’s times like these when it’s, you know, as Buf­fett says, invest­ing is, you know, 90% sit­ting on your hands and that’s what we’re doing at the moment. We’re not nec­es­sar­i­ly buy­ing yet although I think there’s a cou­ple of false starts that I’ve had over the last week in a very small way and I’ll declare that when I did the analy­sis, which I think we shared on last week’s episode about the most under­val­ued top 10 stock, I did buy some Rio Tin­to, but that was short-lived because it start­ed to go down again and breach its three-point trend line so I sold it. So there’d prob­a­bly be events like that hap­pen­ing in the short while, but large­ly like in our QAV port­fo­lio, I’m rais­ing cash as shares cross their three-point trend lines. And I’ll wait for clear evi­dence that they’re in the three-point upstream before I buy back into them.

Cameron Reil­ly [24:36]: I’ve had a lot of emails from sub­scribers, new and old say­ing, you know, what’s Tony going to do now. And, you know, my stan­dard reply is, well, I think he just does what he always does. Like no change. 

Tony Kynas­ton [24:52]: Exact­ly.

Cameron Reil­ly [24:53]: The rules are the rules.

Tony Kynas­ton [24:56]: Yeah, no, exact­ly. And the rules are based on expe­ri­ence. So, hav­ing been through these things before, hav­ing been through false starts of these things before you need to stay evi­dence-based, you can’t jump at shad­ows. We’re human beings and not very good fore­cast­ing engines so, you know, some of the ques­tions we’ve got are odd, but I think the Coro­n­avirus will be short-lived and there­fore, can I buy now? It’s like, if you want, but I’m going to wait for the evi­dence to unroll before I start mak­ing fore­casts.

Cameron Reil­ly [25:25]: And as I’ve said, many times on the show before, that’s one of the things I appre­ci­ate most about QAV as an invest­ing method­ol­o­gy is it’s root­ed firm­ly in evi­dence. Tony does­n’t care about fore­casts, he does­n’t lis­ten to what CEOs say, does­n’t lis­ten to what prime min­is­ters say, or econ­o­mists or jour­nal­ists or com­men­ta­tors or peo­ple in inter­net forums, he just looks at the num­bers, lis­tens to the num­bers, watch­es how they play out, looks at the evi­dence for how com­pa­nies are per­form­ing and makes deci­sions, invest­ing deci­sions based on that. It just takes all of the emo­tion out of it. A sim­ple set of rules that you can fol­low in boom times, in mar­ket cor­rec­tions and in-between times. 

But speak­ing of emo­tion, Tony, in episode 304, that we record­ed at the begin­ning of April, Tony talked about Elis­a­beth Kubler Ross and her five stages of grief and how that applies to mar­ket psy­chol­o­gy.

Tony Kynas­ton [26:27]: Let me talk a lit­tle bit about mar­ket psy­chol­o­gy as well. So peo­ple may be famil­iar with Kubler-Ross who put togeth­er the five stages of grief and that has been used in the past to look at how mar­kets work as well, because they, of course, made up of humans. And the five stages of grief are denial, anger, depres­sion, bar­gain­ing, and accep­tance. And if, well, let me ask you, where do you think we are in that cycle in terms of how the mar­ket’s oper­at­ing at the moment?

Cameron Reil­ly [27:02]: Denial.

Tony Kynas­ton [27:05]: Denial, anger, depres­sion, bar­gain­ing, and accep­tance.

Cameron Reil­ly [27:12]: Well, I would say, bar­gain­ing.

Tony Kynas­ton [27:18]: Oh, okay. I don’t think we’re that far. I think we’re at anger still.

Cameron Reil­ly [27:21]: Anger?

Tony Kynas­ton [27:22]: Yeah. I think we had a lot of denial and Don­ald Trump was prob­a­bly the Paragon of denial before things real­ly broke out in the US. Now we’re hav­ing anger. You know, who the hell let that ship dock in Syd­ney last week, and why has­n’t Don­ald Trump done enough for us and blah, blah, blah. And after we’d been in lock­down for three or four weeks, we’re going to have depres­sion. And then I think we go the bar­gain­ing after that. You know, gee, if I just stay in lock­down for anoth­er three or four week, this thing will pass and then we’ll have accep­tance. After every­thing is beat­en out of us, any sort of resis­tance or opti­mism is beat­en out of us, we’ll have accep­tance. That’s prob­a­bly about the time when you buy.

Cameron Reil­ly [28:00]: You’re not buy­ing Don­ald Trump’s every­one’s going back to work in two weeks plan then?

Tony Kynas­ton [28:04]: Oh God, no. I don’t think any­one’s buy­ing it.

Cameron Reil­ly [28:11]: Well, Tony is noth­ing if not hum­ble and will­ing to always learns. And by the end of April, despite his feel­ings that we had­n’t yet real­ly seen the bot­tom of the mar­ket, we start­ed buy­ing again. And we had a lot of ques­tions from lis­ten­ers at the time about why you’re doing that if the mar­ket’s going to go low­er and here’s what Tony had to say.

Tony Kynas­ton [28:35]: So we added, I don’t know five or six stocks to the port­fo­lio in the last cou­ple of weeks. Now, a lot of peo­ple are going well, hold on a sec­ond on one hand, you’re say­ing this is a dead cat bounce, it’s not a true recov­ery so why are you adding stocks? Explain your­self, Kynas­ton. I don’t know what’s worse, the gov­ern­ment track­ing me or your for­eign ques­tions? No. Well, I think I’ve come to the real­iza­tion that my sys­tem for invest­ing is a lot bet­ter than my fore­cast­ing abil­i­ties. I still do believe that we’re going to see a low­er point in the mar­ket going for­ward because we haven’t got all the– we haven’t got almost any com­pa­ny announce­ments about how COVID is affect­ing them. So come Sep­tem­ber, come August, Sep­tem­ber when we start ana­lyz­ing com­pa­ny data, we’re going to prob­a­bly– well, again, my fore­cast is we’re going to see some bad num­bers, but I think when we see the gov­ern­men­t’s bud­get, which has been pushed back until the– towards the end of the year, they’re going to have some pret­ty hor­ren­dous num­bers.

I think when we come out of COVID-19, when­ev­er that is, and com­pa­nies start to ramp up again and busi­ness prac­tices changes and they might decide not to hire on all the same staff mem­bers they had but things like employ­ment will kick up. So I still think there’s– my gut feel is there’s still plen­ty of neg­a­tive waves, neg­a­tive infor­ma­tion to flow through before we’ve seen the bot­tom of this. But we have seen a bounce in the mar­ket and the mar­ket is a for­ward-look­ing pre­dic­tor of things and cer­tain­ly, stocks are cheap at the moment so we start­ed buy­ing again. So, you know, like I said, I think if I look back over the life of this pod­cast and even some of the pre­dic­tions I’ve made have been just rub­bish, you know, that we talked about the yield curve inver­sion halfway through last year and I say, well, you know, econ­o­mists always fore­cast nine out of the last sev­en reces­sions. But this one came to pass when I did­n’t think it would so there you go. 

I remem­ber you and I dri­ving around Syd­ney going to meet­ings and we’re talk­ing about how many COVID cas­es we thought there’d be in Aus­tralia and, you know, we were talk­ing about a hun­dred thou­sand deaths and there’s been 80 odd deaths. So yeah, I think my fore­cast­ing abil­i­ties are pret­ty bad, but I know from my track record that fol­low­ing the sys­tem is a lot bet­ter.

Cameron Reil­ly [31:09]: So the the­o­ry then if I under­stand it is we don’t want to fore­cast. We want to play by the rules. So–

Tony Kynas­ton [31:22]: Yes.

Cameron Reil­ly [31:23]: When the rules and by the rules, I mean the rules of the check­list, the guide­lines of the check­list say the sen­ti­ment for a par­tic­u­lar stock is pos­i­tive, they’ve come out with recent announce­ments around their finan­cial pro­jec­tions, we’ve ana­lyzed the stock based on the cur­rent best non-finan­cials and their pro­jec­tions and it gets a pos­i­tive QAV score, then we buy it regard­less of whether or not we think this is a dead cat bounce or a gen­uine recov­ery. And then if it turns down again and breach­es the sell three-point line, we sell it as we would in any oth­er time. 

Tony Kynas­ton [32:06]: Cor­rect.

Cameron Reil­ly [32:07]: So we’re not– it does­n’t mat­ter if we’re in a gen­uine recov­ery or not, we’re just buy­ing the rules and the rules will look after us. 

Tony Kynas­ton [32:14]: That’s right. That’s exact­ly right. 

Cameron Reil­ly [32:16]: Because if it is a true recov­ery and went wrong, then we’re in. We’re in the mar­ket and we’re going to get the advan­tage of that. If it’s not and it turns back down again, then we sell and we might lose 10 to 20% but that’s okay because when it does turn back up gen­uine­ly, we will be in because we’ve obeyed the rules that time as well and we will get all of the growth asso­ci­at­ed with the recov­ery.

Tony Kynas­ton [32:41]: Cor­rect. Yep. That’s a neat sum­ma­ry.

Cameron Reil­ly [32:43]: So we just– we play by the rules.

Tony Kynas­ton [32:48]: We play by the rules, but because we’re putting out a pod­cast, we need con­tent so we also make fore­casts, which are crap.

Cameron Reil­ly [32:56]: Well, no big­gy. But you’re human and you’ve been around a long time so you do have an idea based on your expe­ri­ence of what’s going to hap­pen. But as you’ve said over and over again, you’re not a prophet, yet. You’re not a reli­gious icon yet although I am work­ing on that because it is some great tax ben­e­fits, quite frankly. We can turn this into a reli­gion. 

Tony Kynas­ton [33:18]: Can some­one license [inaudi­ble 33:19] that would be ter­rif­ic. 

Cameron Reil­ly [33:22]: Yeah, well, lis­ten, you’re not that kind of a reli­gious– like, you don’t have the heal­ing pow­er yet. But where was I going with that? Oh, yes. Yeah, you’re human so you have your ideas about where it’s going to go, but the great thing about the sys­tem is it does­n’t mat­ter if you’re right or you’re wrong because we play by the rules.

Tony Kynas­ton [33:43]: Cor­rect, yes.

Cameron Reil­ly [33:45]: Well, just tak­ing a break from how to trade dur­ing reces­sions and cor­rec­tions for a few min­utes. One of the real­ly inter­est­ing ideas that Tony and his wife Jen­ny came up with this year was the real cost of send­ing kids to pri­vate school, giv­ing them a pri­vate school edu­ca­tion when you com­pare what you could pro­duce if you invest­ed that same amount of mon­ey wise­ly. Here’s Tony talk­ing about it in episode 318.

You sent me an email the oth­er day say­ing I’ve fig­ured out the real cost of send­ing your kids to pri­vate school or some­thing like that.

Tony Kynas­ton [34:24]: Oh yeah. Yeah so the back­ground of it is, Jen­ny, my wife has been read­ing this Scott Pape book, The Bare­foot Investor, and he had a sequel called Bare­foot Investor for Fam­i­lies, which was about teach­ing your kids the val­ue of mon­ey. And he put a table in that book which I–

Cameron Reil­ly [34:42]: Wait, can I just– can I inter­rupt? It’s Jen­ny read­ing that because she’s a lit­tle bit con­cerned about your finan­cial future and she thinks you guys need to start think­ing a lit­tle bit more seri­ous­ly about, you know, set­ting some­thing up for Alex.

Tony Kynas­ton [34:54]: Well, just between you and I, I’m try­ing to co-opt her into the pod­cast some­how. 

Cameron Reil­ly [35:00]: Right.

Tony Kynas­ton [35:00]: So she’s tak­ing an inter­est. Well, I think I said to you once before we start­ed to write a book on invest­ing for peo­ple who weren’t investors and that’s how the finan­cial lad­der con­cept came about, which we’ve used in our QAV get­ting start­ed book­let.

Cameron Reil­ly [35:17]: Yeah.

Tony Kynas­ton [35:18]: And men­tioned. Yeah. So, now that she’s not work­ing, she’s tak­ing an inter­est in what I’m doing and start­ed to read those because I think she was prompt­ed by either Paul or Cam at the din­ner we had at Sil­ly Tots that night. And one of them said, why don’t we do a record­ing about how to get kids start­ed in invest­ing. So Jen­ny took that one to heart and she read the Bare­foot Investor books.

Any­way, it’s good because I don’t have to read them. She’s been giv­ing me high­light­ed sec­tions of them. And one of them was a table which just got paper used to moti­vate kids to get a part-time job. And in the table, he basi­cal­ly said, if you get a part-time job and you can save $5,000 per year and put that into an index fund and you do that for 10 years. So between the ages of 15 and 25, he used as his exam­ple. He said if you invest that until you’re 60, then– I for­get what the num­ber was. What was it? Mil­lions of dol­lars any­way, $2.8 mil­lion I think the num­ber was, would be in your retire­ment sav­ings account. And he com­pared that to a per­son who did­n’t do that but start­ed by sav­ing $5,000 a year when they start­ed work­ing from the age of 25 every year until they turned 60 and that per­son would have less in their retire­ment sav­ings account than the per­son who start­ed ear­ly and stopped after 10 years; so no more con­tri­bu­tions after 10 years. 

And I thought that was quite a pow­er­ful table. And then I got to think­ing about some­thing I briefly sketched out decades ago when my daugh­ter start­ed going to school. And I thought why don’t I take the pri­vate school fees, because she went to a pri­vate school and invest them in the mar­ket. And I remem­ber at that stage, I worked out that she could retire at 40 if I did that. But I nev­er real­ly act­ed on it. She still went to a pri­vate school. So I took a Scott Papes table and plugged in school fee num­bers and what it would be like if you invest­ed, you know, 10 or prob­a­bly $20,000 a year over the 12 years of school­ing and you know, from the age of six for my child and what they’d be worth at 60 and do you recall what the num­ber was Cam?

Cameron Reil­ly [37:37]: Look, I know it was a cou­ple of bil­lion dol­lars.

Tony Kynas­ton [37:40]: That’s right.  If you used an index fund, it was like $64 mil­lion from mem­o­ry. But if you used the QAV method, it was like 1.5 bil­lion and that was for a Catholic school, which is less than for an inde­pen­dent school, which was more like $3 bil­lion. So, it was a good table too, to show the pow­er of com­pound invest­ing.

Cameron Reil­ly [38:02]: Wow. So instead of send­ing your kid to pri­vate school, you invest the school fees for those 12 years. 

Tony Kynas­ton [38:10]: Yup. 

Cameron Reil­ly [38:11]: Then when they are 60, is what that fund will be worth?

Tony Kynas­ton [38:18]: No, it was just– good ques­tion. Yes. It would be when they are 60. Yeah. 

Cameron Reil­ly [38:23]: Right. So they don’t get all the ben­e­fits of a pri­vate school edu­ca­tion which is, as I under­stand it being sex­u­al­ly molest­ed by the old boys, by the priests, and what are the oth­er advan­tages? I’m not sure; some­thing.

Tony Kynas­ton [38:42]: Net­works, Cam, net­works.

Cameron Reil­ly [38:44]:  Net­works. Yes. Yes. I was sex­u­al­ly molest­ed by the old boys as well net­work group. And then they come out the oth­er– but they have a reg­u­lar life and they come out the oth­er end very wealthy.

Tony Kynas­ton [38:58]: That’s right. Yeah. 

Cameron Reil­ly [39:00]: Just in time to die though, but they have some­thing to leave their kids.

Tony Kynas­ton [39:03]: Or they could always take a bit out, buy a house or retire when they’re 40, keep some invest­ed, live off the oth­er.

Cameron Reil­ly [39:10]: Right. Yeah, right. Yeah, no, I think that’s pow­er­ful. 

Tony Kynas­ton [39:16]: Just shows you the real cost of some­thing like that. 

Cameron Reil­ly [39:21]: And then you can apply that to lots of oth­er things as well, right? I mean, I know the real cost of drink­ing beer, smok­ing cig­a­rettes. 

Tony Kynas­ton [39:30]: All sorts of things. Yeah. No, absolute­ly. 

Cameron Reil­ly [39:33]: We don’t real­ly– well. I mean, I did­n’t, any­way. We don’t get raised think­ing about mon­ey in those terms, like the future val­ue of that mon­ey, if we did some­thing dif­fer­ent with it.

Tony Kynas­ton: No, when we should. That’s prob­a­bly the first thing to teach kids, real­ly.

Cameron Reil­ly [39:47]: Yeah. Yeah. Although I think the prob­lem, like I find this with Hunter and Tay­lor, you know, I think at their age, 19, the idea of invest­ing for 20, 30, 40 years and hav­ing some­thing at the end just seems so remote to them like that just seems like a bil­lion years, like the death of the sun away from them, from where they are right now, right?

Tony Kynas­ton [40:10]: Yeah. It is. And it’s not that they don’t know how to teach that to kids that it’s not the debt of the sun, that they’ll get to it one day or, you know, they tap into it and buy a house or what­ev­er along the way. But, yeah, that’s the trick because I know when I was their age, all the mon­ey just went into hav­ing fun. But was it the George C. Scott quote about what do I do with the loop? Some of it was spent on women, some of it was spent on booze and the rest, I just wast­ed it.

Cameron Reil­ly [40:41]: In episode 344 that we record­ed at the begin­ning of Octo­ber 2020, Tony had some real­ly insight­ful things to say about the dif­fer­ence between volatil­i­ty and risk that real­ly made an impres­sion on me.

Tony Kynas­ton [40:59]: And I want to real­ly just high­light the fact that I don’t fear volatil­i­ty, you know, and to also high­light the fact that volatil­i­ty does­n’t equal risk. And that’s one of the fun­da­men­tal mis­takes that peo­ple have made, par­tic­u­lar­ly aca­d­e­mics, over the years is to say that volatil­i­ty equals risk. And they look at things like– there are some aca­d­e­mics who, you know, use ratios to quote what the risk is on a port­fo­lio. One of them is called the sharp ratio and one of them is called VAR, vol­ume at risk, but they’re real­ly report­ing on volatil­i­ty rather than risk. And just to clar­i­fy that if a stock is high­ly volatile, it means it goes up and down a lot. It could be the safest stock in the world. It just could be, for exam­ple, thin­ly trad­ed. They are very dif­fer­ent things, but tra­di­tion­al­ly, par­tic­u­lar­ly bankers and some fund man­agers and aca­d­e­mics use that volatil­i­ty to try and mea­sure the risk of a port­fo­lio and they’re two very dif­fer­ent things.

And that’s– if peo­ple want to find out more about that, I’d rec­om­mend a book that was writ­ten after a fund called the long-term cap­i­tal, LTCM, Long-term Cap­i­tal Man­age­ment blew up in I think it was 1998 when there was a melt­down in some of the emerg­ing mar­kets. And just try­ing to think what that book was called now. I’ll just do a quick look for it. It was called–

Cameron Reil­ly [42:40]: When Juniors Failed.

Tony Kynas­ton [42:42]: When Juniors Failed by our old friend, Roger Lowen­stein who wrote mak­ing it an Amer­i­can Cap­i­tal­ist, the Buf­fa­lo biog­ra­phy. Yeah, and what those guys do at LTCM is that they aggres­sive­ly said we can take out port­fo­lio insur­ance. And in oth­er words, they used– one of them was I think, Maren skulls who, you know, I think got a Nobel prize in eco­nom­ics for com­ing up with a for­mu­la to val­ue options.

But he also came up with a way of valu­ing the risk in a port­fo­lio, which then the fund man­agers of LTCM would use to take out insur­ance against their port­fo­lio. But of course, he was­n’t valu­ing risk; he was valu­ing volatil­i­ty and when things became real­ly volatile, the insur­ance filed and the fund­ing implod­ed. And so I think that’s the long-wind­ed answer Cam, but there’s a lot, lot, lot writ­ten about volatil­i­ty and risk and I think we have to real­ly divorce our think­ing from both of those. We want to avoid risk and we want to embrace volatil­i­ty.

Cameron Reil­ly [43:49]: Wow.

Tony Kynas­ton [43:50]: Yeah, well, if we don’t have volatil­i­ty or if we don’t dis­con­nect from the mar­ket, then we’re nev­er going to regress to the name, we’re nev­er going to buy things cheap­ly, we’re nev­er going to sell them at a prof­it. It would just kind of get mar­ket returns.

Cameron Reil­ly [44:05]: So volatil­i­ty, I think, tends to have a neg­a­tive con­no­ta­tion to it. 

Tony Kynas­ton [44:11]: It does.

Cameron Reil­ly [44:12]: We think volatile means bad. If some­one is volatile, they’re dif­fi­cult to be around. We think if stocks are volatile, they’re risky. But I guess, yeah, what you’re say­ing makes sense. If we’re try­ing to buy stocks that are under­val­ued and we want them to catch up to their real­is­tic val­ue, their intrin­sic val­ue, or sur­pass even their intrin­sic val­ue, what we cal­cu­lat­ed might be their intrin­sic val­ue; they are by def­i­n­i­tion volatile. 

Tony Kynas­ton [44:40]: Cor­rect. 

Cameron Reil­ly [44:41]: We’re look­ing for volatile stocks.

Tony Kynas­ton [44:44]: Cor­rect. Yes. And this goes back to the effi­cient mar­ket the­o­ry. If the mar­ket was com­plete­ly effi­cient, which some aca­d­e­m­ic side is, we would­n’t have a chance to make out­per­form or out­per­form the mar­ket and make out­size prof­its. But you know, I’ve been doing it for decades so; and volatil­i­ty is part of that process. Yeah, so it is part of hav­ing a small­er port­fo­lio. If you think about it, if you held one stock, it’s going to be more; it’s going to be quite volatile. Like some days it could be up a cou­ple of per­cent, some days down a cou­ple of per­cent, some days up 10%.

Cameron Reil­ly [45:19]: Yeah.

Tony Kynas­ton [45:20]: The mar­ket very rarely does that. It nor­mal­ly goes up sort of in the half to 1% range and as we get more stocks, we go from along the spec­trum from hold­ing one stock to hold­ing two and a half thou­sand stocks. When we’re down to two and a half thou­sand stock am I going to have a one-to-one cor­re­la­tion of volatil­i­ty with the mar­ket? So yes, hav­ing a small­er port­fo­lio is inher­ent­ly more volatile but that’s some­thing that we like.

Cameron Reil­ly [45:47]: And where we are specif­i­cal­ly look­ing for volatile stocks, but we want the volatil­i­ty a good way. 

Tony Kynas­ton [45:53]: Cor­rect. Yes.

Cameron Reil­ly [45:54]: We want it to be upward volatil­i­ty. 

Tony Kynas­ton [45:58]: That’s right, exact­ly. 

Cameron Reil­ly [45:59]: Upward­ly mobile and upward volatile; upward­ly volatile. Is that a word?

Tony Kynas­ton [46:07]: Volatile. 

Cameron Reil­ly [46:08]: Volatile. That’s the word I’m look­ing for; upward­ly volatile. That’s the name of this episode; upward­ly volatile.

Tony Kynas­ton [46:17]: And I thought make Tony great again was a good–

Cameron Reil­ly [46:21]: [inaudi­ble [46:21] and make Tony great again.

Tony Kynas­ton [46:27]: Keep Tony great again. Isn’t that how it goes?

Cameron Reil­ly [46:28]: Keep Amer­i­can great, keep Tony great. 

Tony Kynas­ton [46:31]: Yeah. And just one more thing to say about that; there is a caveat around that the whole con­ver­sa­tion we’ve just had, and that is if you have a dead­line in your finan­cial plan and volatil­i­ty isn’t your friend. So what I mean by that is an exam­ple is say you’re invest­ing in the mar­ket now so that you can sell your port­fo­lio next year and use it for a deposit on a house. That’s when volatil­i­ty, isn’t your friend because we don’t know if your port­fo­lio is going to be worth more next year, less next year, half what it was next year and if you need the mon­ey at a cer­tain date, you should­n’t be invest­ing in the stock mar­ket.

Cameron Reil­ly [47:09]: Yeah. 

Tony Kynas­ton [47:10]: And it’s the same thing for peo­ple who are get­ting close to retire­ment. If they plan to stop invest­ing this way, if they real­ly need to have a cer­tain fixed amount and then again, you know, exit the mar­ket and maybe buy a bond to live off the inter­est coupon for the rest of their lives. Again, volatil­i­ty isn’t your friend because your port­fo­lio could be worth much less or much more than what you think it would be at a cer­tain date and time. But oth­er­wise volatil­i­ty is our friend.

Cameron Reil­ly [47:41]: Yeah. Well, there you go, folks. I hope you enjoyed sort of rem­i­nisc­ing about some of those high­lights. I mean, there are so many episodes, so much talk­ing I could have cov­ered, but real­ly I thought the main theme, I guess, of the show in 2020 is how we han­dled the mar­ket cor­rec­tion and the reces­sion and then the QE dri­ven rebound from an invest­ment per­spec­tive; just tak­ing it a day at a time, fol­low­ing the rules. I thought those were the most impor­tant lessons for me any­way to come out of the show this year; plus some of those things at the end about the nature of com­pound­ing and the nature of volatil­i­ty and risk. I hope you enjoyed that. Hope you have a good week. For those of you in Mel­bourne, have a great event with Tony on Sat­ur­day. I’m sor­ry I can’t be there. It’s the sec­ond time I’ve had to pull out of a Mel­bourne event, but for­tu­nate­ly at least at this stage, it’s going ahead so you’ll have a great time with Tony. For every­one else, stay safe, good luck with your invest­ing and Tony and I will be back next week with the first real episode of 2021. Keep send­ing me your ques­tions, drop them into the Face­book group, or shoot me an email and we’ll talk to you soon. Take care.