TONY KYNASTON | From QAV Investing Podcast
TONY KYNASTON | From QAV Investing Podcast
We spoke about the part of my portfolio that is using QAV Light and how it is down 15% inception. Investing is not a pursuit for the faint-hearted. Tony underscores the importance of the QAV system's ability to eliminate emotion from investment decisions. While a 15% downturn can be disheartening, succumbing to the impulse of abandoning ship can prove detrimental. Tony's counsel is clear – maintain composure and stay committed to the chosen course.
Tony offers great advice about avoiding the problem of avoiding portfolio destruction:
"The first thing is to hold 15 or to 20 stocks in a portfolio and therefore if one has a problem, it's not gonna blow the whole portfolio up. The second thing is to buy quality companies with lots of cash flow. And the third thing is to buy them cheaply. Because generally what happens is if something's trading on a high PE, for example, and then there's any sort of ripple in their future earnings, down goes the stock."
According to Tony, "It's not a straight line from the lower left to the upper right." The market is inherently unpredictable, marked by undulating trends. However, over an extended timeline, it exhibits an upward trajectory. The fundamental dilemma lies in the choice between time in the market and attempts at timing the market. Investing in the share market demands a strategic, long-term approach, resisting the allure of short-sighted decisions.
If the recent market conditions have left you feeling like a punch drunk boxer, know that you are not alone. Focus on the enduring objectives of our investments and uphold a steadfast commitment to our chosen strategies.
TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE
Shares For Beginners, Phil Muscatello and Finpods are authorized reps of Money Sherpa. The information in this podcast is general in nature and doesn't take into account your personal situation.
Diversification, I'm not a necessarily a big fan of that, but I mean it's accepted wisdom is to hold 15 or to 20 stocks in the portfolio and therefore if one has a problem, it's not gonna blow the whole portfolio up. So that's the first thing. The second thing is to buy quality companies with lots of cash flow. And the third thing is to buy them cheaply. Because generally what happens is if something's trading on a high PE, for example, and then there's any sort of ripple in their future earnings, the discounted cash flow kicks in and down comes a stock.
G'day. And, welcome back to Shares for Beginners. I'm, I'm Phil Muscatello. Have markets left you feeling punch drunk this year? And what's an asset write down and how can it affect a share price? Joining me in the studio today is Tony Kynaston from QAV G'day, Tony
Hi Phil. Thanks for having me back again.
Oh, thanks for coming over. It's actually great, but I'll do so many remote interviews these days. It's actually great to do a face-to-face interview, which yeah, good. They're becoming rarer and rarer.
Tony (1m 2s):
Phil (1m 3s):
Tony Kynaston is a professional value investor. He developed the QAV investing checklist system that has produced impressive outperformance over the last 30 years. When he is not investing, he's obsessed with playing golf, breeding horses, reading and spending time with friends and family. So let's go. Full disclosure here. The past 12 months or so has not been a great one for investing. The all ordinary index is barely above the level it was in 2007. Are you feeling punch drunk? I know I'm a little bit,
Tony (1m 32s):
Phil (1m 32s):
No, I Are we gonna get onto that?
Tony (1m 34s):
I am too. I feel like, is it Rocky two where they go? Rocky goes for 15 rounds and ends up in a draw. That's how kind of the, the market feels at the moment. We're just going up and down and at best treading water. So yeah, it has been a very volatile time compared to I guess the last 20 or 30 years of my history.
Phil (1m 52s):
Now I just wanted to have full disclosure here because I've been using the QAV light portfolio system and we're also, we're selling it on the podcast as well and offering a discount code. And I started in February and now my portfolio's down 15%. And I just wanted to be upfront with listeners that it's, it's not an easy ride, is it?
Tony (2m 13s):
No. And thanks for being transparent and we try to be as well, and I'm in a similar boat to what you are, but that's the market that's investing in the share market. And one of the reasons why QAV over the long term works for me is because it takes the emotion out of investing. And so I would think the worst thing you could do is being down 15% or whatever the number is and going it's all too hard and throwing in a towel and then you don't get the upside. Because the thing about share investing is it's not a straight line from the lower left to the upper right. It doesn't always go up, but in the long term it goes up So, it's the old outage of time in the market versus timing the market. That's important.
Phil (2m 49s):
It's the difficult thing though, isn't it? The psychology and the emotions that you feel. Absolutely. It's, it's, it's these times when you do feel like throwing in the towel.
Tony (2m 57s):
Yeah, no, absolutely. And I'm not saying it's not gonna get worse before it gets better too. Who knows? I mean, if we had a crystal ball, we wouldn't need podcasts like this to talk about investing, but we don't. And what we can do is to have a framework for investing So. it can take the emotions out of investing. And when we get to these situations where A, we don't what's gonna happen, B it looks like it's all too hard, we can have a way of investing, which we just follow and it can get us through these kind of tough times. Mm.
Phil (3m 27s):
Because that's what I found was great. I didn't really have to think about emotions as I've been going through it. It's like you just sort of follow the system and it is actually a nice way of doing it. But anyway, hard. I know it is,
Tony (3m 39s):
But that's the market.
Phil (3m 40s):
Yeah. And as we were saying about just before we started that I had one stock that I bought one day And, then like two days later it was down 10% or more. But you mentioned that in ordinary times, well whatever ordinary times are that a report like that that it came out with wouldn't have had such an impact on the share price.
Tony (3m 58s):
No, I don't think so. That's right. I think why is that? I think investors are trigger happy at the moment. Any sort of bad news which, and there's been a couple of cases of that in the latest reports. It just triggers a, an oversized sell off. I guess there is a little bit of money that's leaving the share market overall because you can get 5% in cash in corporate bonds or the even putting your money in the bank, you're getting 4.5% as well. So I think there are people who are saying it's all too hard on getting out and they're also, you know, the pros who are saying, well, I don't have to stay in this company if it delivers a bad report, I'm gonna go somewhere else. And they, and the herd moves on. Mm. Which is a bit different to if the market was bullishing and going up
Phil (4m 37s):
And in the QAV methodology, you are basically basing the numbers on whatever the latest report is.
Tony (4m 44s):
Correct. The latest either half yearly or annual.
Phil (4m 46s):
And we've just come through the annual season. We really haven't. We pretty
Tony (4m 49s):
Much, yeah. So yeah, so we, we look at, again, trying to take the emotions out of things. We look at the figures that were reported. Does the company have lots of cash? Are there certain quality metrics that it meets? And then can we put buy the reasonable price?
Phil (5m 3s):
You just mentioned interest rates. Do you believe that interest rates are what's been driving market pricing at the, at this stage,
Tony (5m 10s):
Interest rates always do drive market pricing because a company that rents or leases space, your costs have gone up because interest rates have risen. I mean, there's inflation going on. So that's part of, you know, why interest rates are rising. So that hurts other companies. So yeah, it's, it's a big thing. It's does it affect how I invest it indirectly it does. 'cause it affects the economy. But directly, no. We can still find good quality companies probably even more so in a, in a downturn like this that have lots of cash and you can invest in for the future with them.
Phil (5m 42s):
What's the importance of having lots of cash? Well
Tony (5m 45s):
I think the, the most important thing is that, well if you've got a lot of cash, you're not really being affected by interest rates are you? Because cash is separate to, to borrowing. You're
Phil (5m 53s):
Not paying interest to
Tony (5m 54s):
Yeah, we're looking for low for low debt and those kinds of companies as well. It's one of of the metrics we go through and look at. So yeah, cash is always King Bo Warren Buffet said it more succinctly. He said he looks for companies that can raise their prices at any type of environment in the market. So that's the kind of quality company he looks for. And and those kind of companies have lots of cash on their books
Phil (6m 12s):
And it also means that they can survive through any kind of downturn. Correct. Like I, I think, I believe during the covid situation, there were a lot of companies, if they had a strong balance sheet, they were able to sail through.
Tony (6m 23s):
Oh absolutely. Yeah. And I'm not saying that those companies still, their share prices still won't go down, but they will recover. And of course the time to buy them is when the share prices are down too. So that's another important metric. But getting back to the theme of interest rates, I think as you say, the share market now or the all ordinaries is pretty much what it was in 2007 before we went into the GFC, we went into the GFC interest rates were cut almost back to zero at some stages. And then the market went from being in the depths of despair to taking off again. And then we had covid and there's lots of cash splashed around probably correctly to support the economy. And that's just sort of flying through now. And interest rates are being risen. Their steepest amount that I can think of, probably their steepest amount in history in terms of how quickly they've risen.
Tony (7m 3s):
And that's having a hand break effect on the economy as well. So yeah, the interest rates are very much driving the share market and the economy, but as I said, it's the underlying and individual companies that we look at, not necessarily what the market or the or interest rates are doing.
Phil (7m 18s):
So we're basing this interview on a couple of your recent podcasts because, well, let's give a plug to the podcast, the QAV investing podcast, which you do with Cameron Reilly as well, correct? Yeah, yeah, yeah. And you were talking about Macquarie Bank and their annual report that came out recently where there's been quite a few downgrades in various areas and one of them has been about asset write downs. Yeah. Tell us about that.
Tony (7m 40s):
Okay, sure. If I did say that I might be incorrect, I don't think there was a, an impairment charge taken from Macquarie Bank in its latest results. What has happened with them is that they, a part of their business is to be an early stage investor on infrastructure type investments and then to watch those grow and then sell them down the track when they're worth more. And what they said was they're delaying all of those sales at the moment. 'cause as we said, the market is not stepping up to buy those kinds of assets that the price Macquarie thinks they're worth. If that continues there, there would be an impairment write down. So what that means is that I try and think of a simple example. We use an analogy called the coffee shop analogy. So, if you think about a local coffee shop, and there's one up the road here.
Tony (8m 21s):
If they sell coffee at $5 a a cup and they sell a certain number per year and they make a net profit of 10% on that, you can work out what that place is worth. if you wanted to go along and make an offer to buy, there'll be a certain number of years into the future, you'll project that kind of cashflow for, and you do what's called a discounted cashflow back to what you want. Pay for that stream of income and you'll pay a certain price for that coffee shop. Now if McDonald's opens across the road and has a McCafe in it and it's selling coffee at $3 a a cup, then the coffee shop that we bought when things were good will be worth less because they're gonna have to try and match the competition across the road. So no more $5 cups of coffee and they're also gonna sell less.
Tony (9m 3s):
'cause there's now a competitor in the market. So you know what may have been, I dunno, I'll just pick numbers here. A million dollar investment is now worth 800,000 or 700,000 or whatever the number is simply by discounting fewer cups of coffees and a lower price per coffee going out into the foreseeable future. If we were a listed company that did that, so say we're a chain of coffee shop owners, then we would have to go to the market and say, we paid a million dollars for this coffee shop, it's now worth $800,000. And we have to take what's called an impairment of our assets. The accounting rules say if we have an asset on our balance sheet, it has to be valued correctly. And that's important for transparency in the market.
Tony (9m 44s):
So if you're an investor willing to buy Shares in that company, you're not over or underpaying for the assets. So they're on the books, they're not trying to cheat you by saying, Hey, we have lots of assets. So they're valued at this when they're not. If you're a bank that's sending money to that company, you've gotta have a fair idea of what the assets are worth before you invest. So they have to take what's called an impairment in the coffee shop case we just talked about. And that would be a couple of hundred thousand dollars because of the way bookkeeping works. That would be a cost on the profit and loss, which would
Phil (10m 11s):
Reduce So. it, it's not on the balance sheet.
Tony (10m 14s):
The assets on the balance sheet. Yeah.
Phil (10m 15s):
But then, then the impairment goes onto the profit and loss. Correct. Yeah,
Tony (10m 18s):
Phil (10m 19s):
Okay. I was wondering how that works. Yeah,
Tony (10m 20s):
It's double entry bookkeeping I guess, but, But yeah, you've gotta do that. That's a what, what's often called an abnormal. So you might see in some company reports every year, here's our underlying profit and then there are all these abnormals and some of those are impairment charges and sometimes the impairment gets written back and it becomes a boost to profit because of that. And Macquarie actually had a couple of those this year where they took impairments on what they call credit impairments and they wrote them back because they didn't need to use them coming forward. So anyway, the companies are always adjusting the asset value because of that. And then taking a, a write down or a write up to their profit and loss. But more importantly, I think that's a once off cost. So if you're doing a discounted cash flow straight away, one of the years in that cash flow is not gonna have the income you thought it was, but then you say to yourself, okay, well this coffee shop going forward is worth less, so therefore I'm gonna take that off my discounted cashflow.
Tony (11m 10s):
And then if you're an investor, you might say, hang on, this listed coffee shop chain has 50 coffee shops. How many more might be affected by McDonald's opening up in the next five years? Let's reduce the valuation on the company based on that. And suddenly, if the share price was $10, it's now $8 because all those discounted cash flows have been reduced based on the one impairment on that, on that one asset.
Phil (11m 32s):
And Macquarie Bank being an investment bank has a lot of assets on its books, doesn't it? Yeah. So, so I guess part of the bookkeeping firm, Macquarie Bank is that they're constantly adjusting the values of what's on their books.
Tony (11m 46s):
Yeah, so Macquarie Bank in particular has a division called Macquarie Asset Management, which is the one I outlined where they try and get an early on infrastructure developments, provide the funding for it or put together syndicates to fund in it, and then let that grow up until it's a more mature asset and then sell it. So it's kind of a, sometimes it's called asset recycling. So they, that that's their business model so that yes, they do have to make sure those assets on their books are, are correctly valued. Probably a better example is what they call real estate investment trusts, REITs, which listeners will have encountered at some stage. That's how listed companies which own real estate trading on the ASX, but they have the same issue because all of their, their business is basically around property and land.
Tony (12m 27s):
They've gotta keep those correctly valued. So there's a big debate going on in the investment community about the REITs that hold lots of office block accommodation or office block leases in their offerings, in their funds because there hasn't been a complete return to work in the CBDs as people will know, and therefore are the office buildings they have on their books corrkkectly valued or not. And a lot of those office REITs at the moment are trading at a discount to what's called their NTA, their net tangible assets. So they're assets because a lot of investors are saying, look, you haven't written down those office buildings to what they're really worth now. And then of course the, the managers of the REITs saying, yes, we have, but, but they tend to trade below their NTAs and they could be some write downs coming in the future to those assets.
Tony (13m 10s):
And that's all about, it's, it's about interest rates, but also about leasing. So if I own an office building rather than a coffee shop, I've gotta rent out all the floors at a certain amount per square meter and I've gotta then deduct what it costs me to borrow to buy the building and that gives me my profit. And that's getting skinnier and skinnier for those kinds of operations going forward.
Phil (13m 28s):
And often these assets can turn out to be very, very good investments. Yes. I mean, thinking back to Macquarie Bank, when they first bought Sydney Airport, and I think their bid for Sydney airport was like, I can't remember the exact figures, but it was 30 or 40% higher than the the next bidder. And it ended up being a bargain for them that Right. But at the time they were going, what's Macquarie thinking? Well,
Tony (13m 50s):
Yeah. And that, that was that same debate that was going on in the investment community back then have Macquarie overpaid and therefore is there an impairment coming in the future? Even though, like, it was funny, you see on the front page of the fin review, Macquarie trumpeting the fact they paid, I dunno what it was, $500 million for Sydney Airport,
Phil (14m 7s):
It was a long time ago. And on the back, and you could buy an airport for under a billion.
Tony (14m 10s):
Yeah, I dunno what the number was or something on the back page. There was an analysis going, Hmm, Macquarie Bank may have overpaid for this by a couple hundred million dollars. So interesting dynamic that goes on with these assets. Yeah.
Phil (14m 21s):
So if they were writing up the value of those assets, that then goes onto the profit and loss Correct. Rather than the balance sheet as
Tony (14m 28s):
Well. Correct. And that's a whole other issue because if you are a super fund or if you are a property fund or if you are a reit, when times are good every half, you'll see their profits are going up. And that's a, a large driver of that is the fact that they're revaluing their properties up and that gives them a positive charge to their, their profit and loss as well.
Phil (14m 47s):
And they'd be paying tax on that profit then, I assume? Yeah,
Tony (14m 50s):
They would. Yeah.
Phil (14m 51s):
Wow. Okay. Interesting.
Tony (14m 53s):
I ha to add, I'm an expert on this, this call.
Phil (14m 55s):
No, no. you know more about it than me.
Tony (14m 58s):
Do I come across these things? I'm sure there's other accounting treatments you have to take into account with that.
Phil (15m 1s):
Yeah, yeah. Oh, well, if you're a reit, don't take any tax advice from us. We'll get back to the show right after this brief message. Why am I buying, holding, or selling a share? if you can't answer that basic question, then you don't have a plan. The best investors are ruthless in executing their plans. I've been fortunate to meet many great investors on the podcast. Tony Kynaston is one of the best. He has a clear and systematic approach to investing that is honest, sensible, and methodical. It's called QAV Quality at value. QAV now offer an excellent light plan for only $29 per month. You can follow their buy and sell recommendations and learn the ropes. And the first month is free using the promo code SFB light.
Phil (15m 45s):
Go to qav podcast.com au to sign up. That's qav podcast.com au. Using the promo code SFB light past performance is not a guarantee of future returns, please read the Q AAV FSG and consult a financial professional before investing. I receive a small commission for services I recommend, and I only recommend services. I said I came across this quote on Twitter from Rudy Filapek VanDyke. Has he been on the QAV podcast? He has. He has. Yeah. Yeah. Hi, Rudy must probably not listening, but in case he's a fun guy and he said bad things happen to great companies and vice versa.
Phil (16m 26s):
It doesn't mean you are wrong or the company is bad. Not everything can be predicted or anticipated. How can you guard against these outcomes in your own portfolio? Because these are the unknowables you're not sure about what's gonna happen in the future? Oh,
Tony (16m 39s):
And definitely that's part of the game really, isn't it? A couple of ways. One is by holding more than one stock in your portfolio. So
Phil (16m 45s):
Tony (16m 46s):
Diversification, I'm not a necessarily a big fan of that, but I mean it's accepted wisdom is to hold 15 or to 20 stocks in the portfolio and therefore if one has a problem, it's not gonna blow the whole portfolio up. So that's the first thing. The second thing is to buy quality companies with lots of cash flow. And the third thing is to buy them cheaply. Because generally what happens is if something's trading on a high PE, for example, and then there's any sort of ripple in their future earnings, the discounted cash flow kicks in and down comes a stock. Mm. And it trades on a lower PEs. But if a company's trading on a low pe, it can still go up and down, but there's not that kind of whipsaw volatility because it's not being bought and priced to perfection.
Tony (17m 30s):
So I think that's why I like value investing. It is a bit of a safeguard on these kinds of downgrades that can happen, doesn't prevent them. But you're not sort of getting a halving in the valuation because you know the outlook dropped off for a particular high flying company.
Phil (17m 45s):
So when you're constructing a portfolio, you're not worried about correlation in any way, are you?
Tony (17m 50s):
I'm not, no. I mean, some people do,
Phil (17m 51s):
But I don't. Some people do.
Tony (17m 52s):
Yeah. What I've found over the years is that I often get concentration in my portfolio because oftentimes industry sectors go through their day in the sun and then their day in the shade. So for example, in the past I've, and I don't construct a portfolio this way, I just buy according to my metrics of looking for high quality companies with lots of cash flow that are reasonably valued.
Phil (18m 13s):
And then you might end up with coal,
Tony (18m 14s):
Then I end up with coal with
Phil (18m 15s):
Tony (18m 16s):
Or I might end up with airlines or I might end up with banks or something like that and you'd sort of look back after six months and go, I didn't set out to buy all those gold mine companies, but actually they'd been good. It was a good time to be in gold mining. Yeah,
Phil (18m 29s):
There was a time too recently where there were a lot of coal stocks in the portfolio. Correct. And there's a lot of people who are concerned about ESG these days. You don't take that as a concern to take into account when you're constructing the portfolio or feel any qualms about investing in fossil fuel stocks.
Tony (18m 47s):
Personally, I don't. I think one of the great things about managing your own portfolio is if you do take those things into account, you can screen them out. And I'll tell you why I don't, in full disclosure, I used, I started off my career working for Shell, the oil company. So I, I do have a history of being involved in that industry way before it was
Phil (19m 5s):
Tony (19m 6s):
ESG concerns. I think it's always been evil with some people, really big oils. But anyway, my point of view is, there's a couple of different arguments there. One is that I think it's a transition to fossil fuels. And if we if,
Phil (19m 18s):
Or transition away from fossil fuels, sorry, transition away from fossil fuel, oh, sorry. Fossil fuels,
Tony (19m 23s):
You're right. Transition towards ESG away from fossil fuels. And in the interim, we still need to keep the lights on. So I think that's the thing. Interestingly enough, I think for a value Investor that sets up a, an industry nicely to be under price because people who don't want to invest in them free SG reasons aren't there. And so it's like going to a house option and you, and you're the only bidder, right? You'll get it for a better price than if you went there and there was 10 people bidding against you. So there's a bit of that going on. But also too, I don't like cutting off my nose despite my face. So I, if you are an ESG investor who's selling Shares in Santos or Whitehaven Coal or whatever, I'm buying them from you. I'm not putting more money into coal mining.
Tony (20m 3s):
We're trading Shares between each other. So I think that's another argument for it. But, but really I think what it comes down to is I invest, first of all to increase my wealth for me and my family. And secondarily then if I have other concerns, then I'll look at those and everyone has their own line in the sand. For me it would probably be tobacco companies. But there's no list of tobacco companies in Australia.
Phil (20m 25s):
And again, this is a way of avoiding stories in investing, isn't it? Because so many people love the stories, don't they?
Tony (20m 32s):
They do stories and thematics. Yeah, yeah. My saying is, if you want a story, go to a bookshop because it's a better place to buy them. Yeah. I mean if you're a good CEO, you've worked out the elevator pitch for your company, it's been honed and honed and honed and it's a good story. It's designed to hook investors into it. You won't survive as a CEO if you go to an investment briefing and say, yeah, I'm not sure about the future. You've gotta have a positive upbeat speed. I mean, you're a leader of the company. You've gotta be motivating the staff as well. So all those things come into play if you're a CEO. And so generally the stories are always good and that's not a criticism of them, that's their job. But you've gotta understand that when you're investing,
Phil (21m 10s):
What sort of steps can people take to check on whether the story matches the performance?
Tony (21m 16s):
Well, I think,
Phil (21m 16s):
Or is it coming back to value investing? Look at the figures, look at the
Tony (21m 19s):
Biggers for one. But generally the stories are always about the forward outlooks. you know, we're, I'm just picking examples here. Lithium's gonna be the next big boom or blockchain's gonna be the next big boom or buy now, pay later is gonna be the next big boom. And they are for a while, but they don't always last. And so you've gotta look at the underlying company and work out for yourself is, is this gonna be around for a while? Does it have the cash flow to continue to service its obligations? All those kinds of things. And am I buying it at a reasonable price, like a, a price to, I prefer prop calf price to operate in cashflow rather than price to earnings ratio as a way of valuing company.
Phil (21m 56s):
Why is that? I
Tony (21m 57s):
Think because, and PE is the sort of industry standard for saying whether something's cheap or dear. But if you look at the financial statements for a company, they start with the cash flow and then they drop down to the p and l, then they go to the balance sheet. And along that journey, the further off, the further away from the top that you go, there's more chance for management to influence what the bottom line number is. We talked about one of those before. Are my assets truly valued and how do I value them? Well, sometimes that's a how long's a piece of string type argument. And sometimes a company has to call in separate independent valuer to look at what the value of the assets are. Because I could make a case for this house being worth $10 million and you could make a house case for the house being worth $20 million and it's maybe it's worth something in between.
Tony (22m 39s):
So, but if we're taking
Phil (22m 41s):
It, Sydney property hasn't gone outta control
Tony (22m 44s):
Yet, but if we're taking impairment charges and which affect the balance sheet, it becomes material. So, and that's just one example of how the p and l can be affected by a management decision. There's amortization, there's depreciation, there's other impairments for bad and doubtful debts. All those kinds of things are there. And so I like cashflow, which is at the very top. And, and the operating cashflow is simply sales. That's the cost of those of, of getting those sales. And that's a, a less easy number to have, or I'm gonna say manipulate, but I don't think necessarily C
Phil (23m 19s):
Tony (23m 19s):
Uncolored. It's uncolored. Yeah. Yeah. There's less, there's less gray area on what valuations are or what kind of impairments are needed. It's just simply, I sold as many coffee, you know, cups of coffee this year and it costs me this much in beans and here's what my operating cash flow is. So that's what I look at. Cash is king in in terms of valuations.
Phil (23m 38s):
Is management a metric? Is that part of the checklist in Q? The
Tony (23m 41s):
Only q the only thing we include on management is whether the company contains what we call a known a, a founder. And again, an interesting concept, generally not in every case, but generally if it does, it means you've got someone A who's got skin in the game, who's running the company, and b has got experience you probably can't hire outside 'cause they've, they've grown up with the company. So you think of your likes of Scroo Turner at at flight center. Solly Lew and all his retail investments, Kerry Stokes in wa, Twiggy Forest, they, they, you know, have large stakes in their companies. They know the industry really well. They can see over the horizon on what's coming. All of those things work in the favor of those companies. There's a couple which, you know, maybe the founders stayed on too long or something like that.
Tony (24m 25s):
But generally that's a good metric to look for.
Phil (24m 27s):
Something I've heard about recently, someone mentioned to me the idea of lifestyle companies, that there are companies there and all of the balance sheet is basically looking after the lifestyle of management. Now, I'm not sure how, how much, how many companies on the as SX are like this or if this is a valuable critique, but maybe something worthwhile watching out for.
Tony (24m 47s):
Yeah, possibly. I mean I haven't heard, heard of the concept, but snouts and the trough has always, always been around. But generally that gets rooted out by, by the fund managers and you know, someone will call them to account it at some stage anyway. Not always. If if the founder's got a large shareholding and they can give two fingers to the investment community, then yeah they can treat it like it's their own bank account.
Phil (25m 8s):
Can it also be an, an issue when they own such a large amount of the Shares on issue that there's a lack of liquidity Yes. Because of that. Yes.
Tony (25m 16s):
And and you can see that playing out in companies like WiseTech or Atlassian where the founders are selling down. Mm. Because the first question you you'd have to ask the founders is why are you selling out of a company if it's so good and you built it up? And the answer is 'cause there's pressure on them to give a bigger what's called a free float in the company. And that that pressure can come from even just the index construction. Like you, you can't get into a higher level of the ASX if you don't have a certain amount of free float in the company regardless of how big the market cap is because you just can't buy the Shares or the big in installs. Can't buy the Shares they want in it.
Phil (25m 49s):
I didn't include any of the questions, but we've got a bit of time. Did you wanna talk about Qantas?
Tony (25m 53s):
Yeah, sure. Yeah. Qantas has been good to me over my investment history. Mm. But the most recent downturn wasn't so I had to sell it. So again, full disclosure. But yeah, I think it's gonna come back and do well and the prices are even more attractive than they were in the past, but sentiment's moved against it. And that's a part of what I look for. So I'd rather not buy a falling knife. I'd rather buy a climbing stair and get on at the bottom when things have turned around, when things look like a Nike symbol and they're starting to go up rather, and they've been down for a long time, rather than a traditional value investor will say, Hey, this is cheap, I'll buy it now and hold on. 'cause I can probably make money in the 18 months. You have to wait for it to bottom out and, and come back.
Tony (26m 33s):
But yeah, it's been hit by those negative sentiment Alan Joyce leaving, selling his Shares before he left, not a good look and all the problems they're having with allegations of selling tickets to flights that that had been canceled already. There's a whole series of optics that don't look good with QAs in the last sort of little period. They do have a new CEO, albeit she was the old CFO. So is she part of the problem or part of the cure? Tell on that. But yeah, I mean it's a, it's a solid company. It will face headwinds and it does have to replace its fleet. So by that I mean the aircraft will get older and older and eventually have to be replaced. And that's hasn't
Phil (27m 12s):
One of the issues discussed is that they, they they wanna do a share buyback and some managers and analysts are saying, well perhaps that money should be better deployed Yeah. Buying new aircraft. Yeah.
Tony (27m 23s):
Yeah. And that's a, that's a common question when any, you know, someone does a share buyback, is that the best use of capital? So, and, and I, I don't really have an opinion on it. I'm not an expert on aircraft leasing and I assume the ex CFO of, of Qantas has got a good handle on it. So I'd take her her analysis at face value. But yeah, I think QAs will always have a focus on it for a little while until it gets some runs on the boards and then I'll go back to business as normal is my assessment.
Phil (27m 47s):
I I, I feel a bit sorry for poor Todd Sampson because he's copying so much flack because he's supposed to be the brand guy and I know that there've been questions asked during the AGM about his role and why is the brand so damaged? But then you think, well, it's all been operational issues rather than, you know, nice jingles and les on the side of the planes.
Tony (28m 7s):
Yeah, Qantas is interesting. It's been up until Alan Joyce, it has been generally run by a marketing person. And so it's always had the best campaigns, you know, I call Australia home. Mm. All those kinds of things. It's always been marketing
Phil (28m 20s):
Tugging at the team, tugging at the patriotic heart
Tony (28m 22s):
String, you know? Yeah. The marketing's been really, it's fantastic top topnotch and high level. And then Alan Joyce came in and whatever you think of him, he was a cost cutter. He came out of Jetstar and so he ran things operationally very tight and kept cutting costs. I'm not a fan of that in the CEO, even though I own the Shares because I think you can cut your way to prosperity. So, but it did loss that it did lose that marketing magic. And on top of that, of course you, you can't be on the front page of newspapers for bad reasons. Even if you have the best marketing, you know, it's gonna affect the brand. So you're right, Todd Samson may have been pulling his hair out on the board, but he wasn't able to convince management that they needed to not take those cost reductions.
Tony (29m 3s):
And it was a difficult time. A lot of 'em were taking during covid when airlines were, you know, very uncertain about their future. So I kind of get it that people say, Todd, the, the marketing slip and he can say, well, I was one voice on the board and we had to do desperate things. So yeah,
Phil (29m 17s):
I get it. And Richard Goyder, I mean, it's a terrible way to end his career from all reports. He's a great guy and he has been a great chairman, great chair on many companies.
Tony (29m 25s):
Yeah. I mean, I'm not, not sure I share that view, but, oh, okay.
Phil (29m 29s):
I I'm just talking anecdotally here from the things that I've heard, but you've, you please tell me what you
Tony (29m 33s):
Think. Oh, no, no. I, I, I'm, again, I'm, I'm repeating things that some analysts are saying. if you look, I think he's on Santos, if you look at Santos, it's had had problems. if you look at Qua, it's had problems. The AFL has taken a long time to replace its CEO. So rather than criticize Richard Goer, I think I'll take the ASA line, which is to say if someone's chairing three large organizations, they're gonna be overworked. And that's, that's not ideal for any person or individual or company to have.
Phil (30m 1s):
It is, it's a, it's a lot to take on really, isn't it? It is,
Tony (30m 4s):
Yeah. I think, you know, from my limited experience of watching the chair of companies, it can be a full-time job just doing it for one company.
Phil (30m 12s):
So coming to the end of the interview now, we've got a couple of offers from this podcast to QAV podcast in terms of signing up for, for using Tony's investing methodology. So there's the full club version and you can use the promo code SFB when you're signing up for that one or there's the light version and that's SFB light. Just tell us, give us a little bit of an overview of the two and Sure. Just, just your brief. Yeah,
Tony (30m 36s):
Sure. We started off with QAV, the the full membership, the club
Phil (30m 40s):
Club membership. Yeah.
Tony (30m 41s):
Club Club membership. Yep. And that gives you access to receiving our buy list every week, the full length podcast, whereas we put out an abbreviated version for free. We have events from time to time you can come along to as well and talk about investing with us and with other people. So that's the club membership and that's probably the best way to learn how to invest or understand the methodology. And then the light membership is in response to people who say, I've got a career, I'm just too busy. I can't spend time learning this S way of investing, learning, value investing, but I'd like to know what stocks you recommend. And so we put out on a weekly basis what we're buying and selling in our portfolio or portfolios. And we have some dummy portfolios set up to track. And then people can decide whether they want to take that recommendation or not and follow along with us.
Phil (31m 26s):
Okay. And that's great. And there'll be links in the show notes in the blog post as usual. Yeah. Good. Tony, Kinon, thank you very much. Thank
Tony (31m 32s):
You Phil. Great to see you.
Phil (31m 33s):
And Merry Christmas. Yes,
Tony (31m 35s):
Phil (31m 35s):
Chloe (31m 35s):
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