Transcript QAV S03E64 – 2020 Highlights

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.

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