TONY KYNASTON | Quality at Value

Are you unsure about when to buy, hold or sell shares? Do you have a system or a checklist? Do you just take a wild punt and lose money?

If this is your story, you're not alone.

Every day, people lose money buying and selling shares because they don't have a plan.

According to Tony Kynaston from Quality at Value, you must systematize your approach, so that you have reasons for buying and selling ready. You develop rules that guide how and when you buy and sell shares. It's important for taking the emotion out of your investing.

Tony has distilled 20 odd questions and put them in a checklist to develop a methodology for identifying companies that he may be interested in buying.

Tony also loves the community that's developed around QAV. They are people thinking about whether they're getting a good deal from their financial advisors or their super funds, and they're starting to dip their toe in the water. The community is full of smart people who ask great, really thought-provoking questions, and they help each other.

I also enjoyed hearing about how Tony used the idea of a checklist in developing his investment philosophy:

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

Phil (36s):

G'day, and welcome back to Shares for Beginners. I'm Phil Muscatello. How disciplined are you when you buy shares in a company? What are your reasons for buying, holding, and eventually selling? Do you even have a plan? My guest today is the hard taskmaster of share investment and the Zen master behind the QAV investing podcast and an old friend of this podcast. Tony Kynaston. Hi Tony.

Tony (59s):

Hi Phil, I don't know that, being a hard taskmaster.

Phil (1m 1s):

Oh, you are. This is the way you made me feel because I just wanted to start with a story. But before that, I just wanted to say QAV stands for quality and value and sums up the philosophy of your investing methodology. That'd be correct to say.

Tony (1m 15s):

It's correct yeah. Yeah, but I'm really an old softie. I'm not a hard taskmaster.

Phil (1m 19s):

No. I was just, I called you that because I remember we're having a discussion one day and I just said to you, you know, because you know, it's like people talk about companies and shares and what they want to buy. And I said, oh, you know, when CSL hits 280. When it drops to 280, I'm going to buy it. And you said why? And that was the most devastating 'why' I ever felt because I could feel behind that there was so much to do with your way of thinking about buying companies.

Tony (1m 45s):

Yeah, exactly right. Maybe it's the pertinent question. That's why! Why 280 and not 290 or not 270? Why CSL and not something else? And I think what I've learned over the years is you've got to answer these questions. You've got to systematize it. So, next time you get asked the same question. You've got the answer already. You don't have to work from scratch and you develop rules. And the rules are really important because we're all human beings with our own biases and our own psychologies and points of view and opinions. But you want to put that aside when the market throws you a question like, oh, CSL has dropped to $280. Should I buy or not? You should have the answer already worked out because it's part of your system.

Tony (2m 27s):

It's either a yes or no. You shouldn't have to think about it because if you think about it, it will be, oh, it's 280. Maybe if I wait another day, it'll be 275 and I'll get that cheaper. And then, it goes to 290 and you miss out. So you need to have a predetermined framework to answer those questions when they get tossed to you.

Phil (2m 45s):

And that framework also. Like I said, in the introduction, it's about holding as well and then selling. Whether it's because there's a loss and you need to get out, or what is a significant enough gain to justify the selling?

Tony (2m 58s):

Yeah. I think the selling rules are equally as valid as the buying rules and holding. And oftentimes, people neglect the selling side. They're all focused on buying CSL at 280 bucks. The flip side of that coin is at what price do you sell it? Or under what conditions do you sell it? You probably can't nominate a price. And so yeah, part of the investment philosophy I have, is I have a set of rules that I apply to selling. And it's got to do with what's happening with a sentiment. Is the share price dropping too much? I've already said it. I call it a stop-loss. I've already said a sell price for what I think the time is for me to get out. I will sell something if I buy it and it drops more than 10%, what I paid for. I'll just clear out and, you know, look for the next bus, clear out of Dodge and wait for the next and train to come along.

Tony (3m 44s):

And, you know, either get back into CSL or buy something different. There are other rules around, you know, what happens if the CFO unexpectedly resigns? What happens if an independent director unexpectedly resigned? So, oftentimes, there's some red flags around those kinds of things. So, there's probably four or five rules that I've got in my toolbox that I can just try as they happen without having to think about it. Oh, why did the CFO unexpectedly resign what's going on there? Cause you'll never find out. But the experience has told me that's a red flag to look for and a reason to sell a stock.

Phil (4m 16s):

Yep. Give us the 30,000-foot overview of quality at value

Tony (4m 19s):

Yeah. So I'm a value investor, but what I've found over the years is that quality is also important because some things are cheap for a reason, and you don't necessarily want to get stuck into those, into buying a portfolio of cheap stocks, which is just going to stay cheap. So you do need to check the quality of the company as well that you're buying. But I mean, there are enough stocks on our share market that there is always going to be a value end to the market. And you know, my entry into investing seriously was through people like Benjamin Graham, Warren Buffet, Peter Lynch, all those famous value investors who just have written loads on value investing. And it just, maybe it just suited my personality to have a framework, to do things with, to have a system of rules to apply.

Tony (4m 60s):

And I kind of cherry-picked points from each of those people and added the whole lot more because, you know, I think share market evolves since those guys were first talking and even someone like Warren Buffet comes out now and says, I'm basically a quality investor rather than the value investor. So he's evolved. But I was able to distill things down into 20 odd questions, put them in a checklist. I think the real benefit for people who've been investing during our time period is the amount of data that's now available to a retail investor has just grown and grown and grown. I mean, when I first started investing back in the nineties, I used to buy a, like a telephone book of one-page summaries of the annual reports of all the companies.

Tony (5m 41s):

And I'd have to leave through that, read them all, you know, do some manual calculations, working out what was cheap, do some more deep-dive research in paper, but now, you know, I can scan the stock market and drop it into a spreadsheet in a matter of seconds, if not minutes, and have Excel crunch through the numbers and come up with list of stocks to have a look at. And that process is helped by having a checklist. So that's the other. I guess part of my evolution that was really important was I used to have all these ideas in my head. You know, this is a situation which looks like it's worth investigating, but I read the book, the checklist manifesto, which talked about pilots before they take off checking all their controls, running through a checklist and that's reduced the error rate, the crash rate, and in airlines dramatically over the years.

Tony (6m 26s):

And it was picked up by surgeons who said, how come we're killing people on the operating table through basic mistakes. And so now they use checklists before they operate and that's reduced deaths in the hospitals. And I took that and applied it to the rules I already had, and just doing that, coupling it with being able to download data quickly and then run that through Excel has made the process really, really quick to scan for those kinds of situations that, that meet my window for investing.

Phil (6m 53s):

I think people don't really understand this when they first approach the share market. They think that there must be some easy steps to start making money. But it is really a lot of hard work, isn't it? And QAV, it's not something that you just sort of go and get the spreadsheet and plug it in and you start using it. It's actually quite a long process to learn and to work into your own investing philosophy.

Tony (7m 18s):

Correct! we are teaching a process which you can't just pick up. You have to know. And to be fair to people who might be listening to this, who haven't heard of QAV, it also requires not just an investment in time, but there's a bit of money involved. Like we suggest people subscribed to stock doctor if there's a subscription to our service in QAV but yeah, you get that money back and in multiples from the benefits of applying the process. But yeah, it involves a commitment in both time and money. It's a professionalization, I guess, of what's been a hobby, but it's, you know, involving real money and you playing for big stakes. So it's worth it.

Phil (7m 53s):

Hmm, So it's kind of grown into quite a community now, hasn't it. It's a great community. You go onto the Facebook group and not only is it a very pleasant community without too much argy-bargy, but people are asking very intelligent questions and providing a lot of intelligent input into people's investing styles.

Tony (8m 12s):

Yeah. I love that community. That's been probably the real fine of QAV for me, from my point of view. Generally, the people that gravitate towards a sort of mid-career professionals who are starting to think about their long-term future have maybe bought their house already started to pay it down. They're starting to have more time to focus on their investments. They're thinking about whether they're getting a good deal from their financial advisors or their super funds, and they're starting to dip their toe in the water. And just like it's because of that kind of filtering process, we get smart people into the community and they ask great questions, really thought-provoking questions, and they help each other. Some people who subscribed didn't want to join Facebook. they'd deliberately gotten off social media because of all the negatives that come with it.

Tony (8m 55s):

But I think the group that we've gotten there is just the reverse. It's supportive, It's positive. It's really good.

Phil (8m 60s):

What if you found that it's common to these people that makes them interested in the DIY approach?

Tony (9m 5s):

Yeah, I think, like I said, they're smart. They're generally coming from a professional, if not professional, then a small business background. The really other interesting thing is, there's such a market out there for more information on how to do this yourself. The whole industry is geared towards getting you to sign up with a financial advisor or getting you to sign up with a rap platform or a super fund or whatever. And, you haven't done parts of the AFSL cost to obtain a license, that's not necessarily the best way to invest because you know, there's a whole lot of other moving parts of the going on there. Most of which are around keeping a lid on risk. But as we all know, risk and reward are a trade-off. And if you keep a lid on risk, you're probably not going to get much more than the index in terms of the Share-market investing.

Tony (9m 50s):

And therefore, you might as well buy an ETF or an index fund, or an LIC and save the fees. But if you really want to do better than that, then you've got to dig around and come up with your own system. It's not hard to do better than that. people sort of intuitively know that they can do better than that. It's just finding the right system and approach to doing it.

Phil (10m 9s):

Yeah, finding the path or the way, or, yeah, I so hate that term journey, investment journey here over the way. I'm going to Institute El Camino the investing way. So, it really is important to have a systematic approach and it's not going to resonate. Q A V is not going to resonate with everybody. No. And there are plenty of other approaches as well. And some of them are more technical and some of them have more value like your own, but it's really about having a system and sticking to that system. Isn't it?

Tony (10m 38s):

Yeah. Look, I don't really care if people are out there buying high-growth stocks, if they're buying Bitcoin. I mean, it's up to them. It's a broad church. There are plenty of ways to make money, but just work out what you're doing first. As you encounter issues and problems, think about how you respond to it, write it down as part of your system. So the next time it happens, you know what to do. You don't have to reinvent the wheel every time. And as I said before, get the basics, right? Get the framework right on when you're going to buy, when you're going to sell; how long you hold for. All those kinds of things. And part of that is evaluation. So you're not just buying a story, you're buying something when the price is right and not overcooked. So all those kinds of things need to be distilled down into your formula and your system, but you've got to have one.

Phil (11m 22s):

Yep. And it's something that helps you to deal with the emotions that inevitably arise with when your money's on the line.

Tony (11m 30s):

Correct? yeah. I mean, that's a really big part of investing in taking the emotion out of it's another benefit of having a system because yeah, after a while, I don't think about the money in terms of dollars and cents. I think about it as a piece or a token, I guess. You know, I've got a portfolio of 15 to 20 tokens and this is what they're all doing. And I tend not to focus on the dollar value. that's something that comes after a while of moving around. But that's an important part of the El Camino as well of the journey. But yeah, I mean our brains have been wired by evolution to run from lions and to hunt mammoths and all those kinds of things. They haven't been wired to necessarily invest in the stock market.

Tony (12m 12s):

And of course, there are people out there who know how we're wired and they play on that wiring to try and get us to do things that they want, which aren't in their own best interests. So the only real way around that is to understand that Mr. Market is going to be optimistic one day and pessimistic another day, is going to be bipolar, and just having a framework to deal with that.

Phil (12m 35s):

And I remember a previous episode we called situation normal. This was just when everything was going down in 2020-- March 2020, when we had the first COVID situation. And it was just great to say 'situation normal. Don't worry about it, don't think about it.'

Tony (12m 50s):

Yeah, correct. That's exactly right. This is a market, just like if you go to the gold market in Abu Dhabi in Dubai and haggle with the people selling you different types of gold, you're going to have good days, bad days come back next week. And everything's going to be twice the price.All the kinds of things happen in markets and they go up and down. And again, if you don't have the framework for dealing with that, the first time he goes through a crash, it's like, what the hell just happened? How come I've lost all this money? You'll be the roadkill. You won't be on the journey. You'll be the roadkill. So you've got to have a way of approaching that systematically and it helps you mentally deal with it as well.

Phil (13m 26s):

Hmm, Are there any common questions and comments that come from listeners and subscribers to QAV that you have noticed recur?

Tony (13m 34s):

Yeah. I think probably the most common one is that they get QAV, they're implementing QAV, and then they take their eye off the ball. Something happens or they didn't apply the rules diligently. And that's a big thing. I mean, I remember going to the first dinner we had in Melbourne with our listeners and you know, one of them said, what's the number one thing I need to do now that I'm getting involved in QAV and I've switched across and I'm investing with it. And I said, understand you to do this every day for the rest of your life. You have to be diligent. And so the common questions that we get are: oh, I missed the sell price for that stock and it's dropped further. What do I do? You know? And that's a common type question and...

Phil (14m 12s):

And what do you say to that?

Tony (14m 15s):

Oh, the rule is there. It's below the sell price. You're still holding it, sell it and move on. It could go further. You've got to have these rules because there was one case I heard of recently, where another QAV stock, about someone who was investing in the smaller end of the market bought into a company. The share price dropped. They thought the correct thing to do was to double down and buy more. The share price dropped again. And then they asked the question, 'oh my God, what do I do?' So again, if they're applying the QAV methodology, there's rules around all those things. You don't double down. If it's below the sell price you sell and you move on. There's plenty of other stocks that are above their sell prices and going up to make that money back with.

Phil (14m 53s):

Phil: Hmm. Phil: Any other stories like that? Any other comments that you'd give?

Tony (14m 57s):

Well, the other one, I think has been common is people will come in and I encourage them to try and improve the process. Like if they've had a background of investing using, I don't know, return on capital as a key metric for it (which we don't use) what sort of insights can they bring to us from that? But what tends to happen is, and so again, the process is if you want to change the QAV checklist, that's fine. Run it on paper first for a while, don't use more than 10% of your portfolio to try out the new thing. And then if it works and we're talking about sort of a 12 -month process there, cause you need to go through a couple of cycles in the market of results announcements and all the rest of it, a couple of seasons, then we can look at putting it into our checklist.

Tony (15m 38s):

But what tends to happen is people go: 'well, someone, so on this other podcast said this. So I decided I was going to do some QAV and some of that. And of course when the cake doesn't rise, when it goes in the oven, they come back and say, what went wrong? And you've ridden two horses and they went different ways. That's what went wrong. Yeah. So I don't mind if people want to try and improve the process, but there is a process for improving the process. Yeah...

Phil (16m 1s):

That's great. A process for improving the process.

Tony (16m 8s):

A process for everything. And I don't have to think about it.

Phil (16m 11s):

So how much time is involved with the QA process where you say people have got to look at it every day? How many hours every day?

Tony (16m 19s):

No, they don't look at it every day. No. It's more, I encourage people to do things like read the financial press every day. So I'd spend an hour a day, every day, reading the AFR back. Sometimes it'll lead me to check a new stock. Like it might be a news story in there about a CFO resigning or something happening, some merger and acquisition activity going on. And that might make me do a bit of research, but generally, it's about an hour a day. in Company reporting season, and because we're focused on using the numbers, we're running our downloads almost every day. It can ramp up to a couple of hours a day, but that's usually for about two weeks, twice a year, but generally you're not doing much more than monitor things.

Phil (16m 59s):

So we're recording today on the 18th of November, and the market seems to have been not really going in any direction in any particular way. What are your thoughts?

Tony (17m 7s):

Yeah, I'm finding it a very choppy market at the moment. Probably since the dividend season happened, the end of the financial year and company started paying dividends. Normally they'd dropped down by 2 or 3%, then buying would come in and they, they go back up. But the sort of downturns has dragged on for a lot longer this time and going a bit deeper. There's people out there worried about inflation, which is usually bad for share investing--not always. And there are companies which help, but as the price of borrowing goes up, it's a cost to companies. So it can affect their profits. There's things like the Chinese property developer Evergrande. Which is looking very shaky and the Chinese property market, which might cause some ructions worldwide, if it starts to go down or collapse. But the...

Phil (17m 52s):

An attack on Taiwan...

Tony (17m 54s):

All these things are in thinking. I think in the moment in the market. Probably, inflation is the biggest one. But again, you know, our process is not to have a position on those. It's to keep following the process. And yes, I probably turned over more stocks than I normally would because they are sketchy in terms of getting close to there. So they sell prices for me more than regularly. But again, that's just a situation normal for the market. You go through periods of this happening and then it will resolve itself one way or the other. It'll either crash like it did during COVID, or it will go sideways. Or it will go up and you just can't predict it.

Phil (18m 24s):

Yeah. It's interesting. That's something that I've learned to have the last couple of years of doing this podcast. I used to have this idea that markets would be moved by politics. They are by policy, but politics has nothing to do with it. Really?

Tony (18m 39s):

Yeah. It's interesting.

Phil (18m 40s):

Changes of government don't seem to really affect markets or, you know, changes of leadership like we've had in prime ministers in Australia over the last few years. Politics doesn't really have a lot to do with it, does it? It's a misconception.

Tony (18m 52s):

It is. And there's kind of also the other misconception that the share market does better under a conservative government, both in the states and here, and that's been exposed under research. It doesn't always work that way. In fact, it tends to favor the other side of politics a bit better, but again, that's, you know, potentially just a statistical anomaly, but yeah, your comment was correct. It's the policy that affects the share market. And I can think of a number of examples where governments change policy and it's really affected particular company or a particular sector. I remember when Kevin Rudd was prime minister and they decided to change salary packaging. And there was a company called McMillan Shakespeare, which it's whole bread and butter is to package up cars as part of a salary package and other benefits.

Tony (19m 34s):

And it dropped dramatically the day after that was announced. So policy can have a real impact on the share market. Not so much who's in charge.

Phil (19m 45s):

You spoke about dividends a moment ago. How much do dividends factor into the QAV process, and it's not just about growth, is it? Dividends are part of it as well.

Tony (19m 52s):

Yea. In fact, it's in a couple of parts of the checklist. So we look for companies which pay a dividend above the mortgage rate only because if a company is paying a good, solid dividend, it's a vote of confidence by the board that it will continue to be profitable because the last thing a board of directors ever want to do is to cut their dividend. That's virtually capitulation. They're telling the shareholders book room for a rough patch. We didn't see it coming. And that's not a good look for a board of directors. So they try and hold on to their dividend no matter what. So if they do raise it, they've got to be really certain that the future looks bright for the company. So that's one indicator of health. Another one that I've found over the years as a case-by-case situation is sometimes, you find a company with a very low PE and a dividend that's above that PE.

Tony (20m 37s):

And when you find that situation, it's a really good sweet spot. And that generally is a great value buy for a company. But again, they're just a couple of points on the checklist. Everything else has to be right as well, not just those two things, but that's how a checklist evolves You know, I've seen something which works. I've researched it and it goes in the checklist. And then it becomes part of the process going forward. I think what's going on at the moment is, with interest rates being low, a lot of retirees have been forced out of fixed income investments and into the share market. And particularly I think in the last half, we're seeing well are called dividend harvesting going on. So there are now funds ETFs, LICs, which are basically there to provide a steady dividend income stream for retiring.

Tony (21m 20s):

And it's fine there. I think moving the market a lot more these days than they have in the past when interest rates were higher. So that's definitely having an effect and not always, but what they tend to do or what they can do is there's kind of a cycle to dividends in, in our country. So most companies have a end of June financial year finish date, and then they have a half end of December. So that's when most of the dividends get paid after that. But there are also companies like three of the four major banks plus Macquarie who have financial years ending in September. And so they pay dividends in between all the other companies. And there's a few like the retailers who have a financial year ending in January, cause they

Phil (21m 59s):

Have enormous and a strange cycle as well. They don't want to

Tony (22m 3s):

They have to do their, their accounts over Christmas, which is their busiest time. So there's almost like this sort of harvesting going through the market at different periods, selling stocks, and then buying the ones in advance of the next dividend. You know, they'll sell out of the BHP in August and it pays its dividend buying into one of the banks or all the banks, which then report in September and they get a dividend from them in October, November. they're out of them. Then they're back into something else in December. So it's kind of like this harvesting machine that's going on. And I think I don't have any direct evidence for it, but my gut feel is that's driving the market a bit too. Right.

Phil (22m 39s):

Okay. So you expect dividends to be part of their return on investment for the QA V investor.

Tony (22m 43s):

Yes, we do favor stocks that pay dividends. Not every

0 (3s):

Shares for beginners.

Tony (11s):

Do you know brains have been wired by evolution to run from lions and to hunt mammoths and all those kinds of things? They haven't been wired to necessarily invest in the stock market. And of course, there are people out there who know how we're wired and they play on that wiring to try and get us to do things that they want, which aren't in their own best interest. So, the only real way around that is to understand that Mr. Market is going to be optimistic one day and pessimistic another day. It's going to be bipolar and just having a framework to deal with that.

Phil (36s):

Good day, and welcome back to shares for beginners. I'm Phil Muscatello. How disciplined are you when you buy shares in a company? What are your reasons for buying, holding, and eventually selling? Do you even have a plan? My guest today is the hard taskmaster of share investment and the Zen master behind the QAV investing podcast and an old friend of this podcast. Tony Kynaston. Hi Tony.

Tony (59s):

Hi Phil, I don't know that, being a hard taskmaster.

Phil (1m 1s):

Oh, you are. This is the way you made me feel because I just wanted to start with a story. But before that, I just wanted to say QA V stands for quality and value and sums up the philosophy of your investing methodology. That'd be correct to say.

Tony (1m 15s):

It's correct yeah. Yeah, but I'm really an old softie. I'm not a hard taskmaster.

Phil (1m 19s):

No. I was just, I called you that because I remember we're having a discussion one day and I just said to you, you know, because you know, it's like people talk about companies and shares and what they want to buy. And I said, oh, you know, when CSL hits 280. When it drops to 280, I'm going to buy it. And you said why? And that was the most devastating 'why' I ever felt because I could feel behind that there was so much to do with your way of thinking about buying companies.

Tony (1m 45s):

Yeah, exactly right. Maybe it's the pertinent question. That's why! Why 280 and not 290 or not 270? Why CSL and not something else? And I think what I've learned over the years is you've got to answer these questions. You've got to systematize it. So, next time you get asked the same question. You've got the answer already. You don't have to work from scratch and you develop rules. And the rules are really important because we're all human beings with our own biases and our own psychologies and points of view and opinions. But you want to put that aside when the market throws you a question like, oh, CSL has dropped to $280. Should I buy or not? You should have the answer already worked out because it's part of your system.

Tony (2m 27s):

It's either a yes or no. You shouldn't have to think about it because if you think about it, it will be, oh, it's 280. Maybe if I wait another day, it'll be 275 and I'll get that cheaper. And then, it goes to 290 and you miss out. So you need to have a predetermined framework to answer those questions when they get tossed to you.

Phil (2m 45s):

And that framework also. Like I said, in the introduction, it's about holding as well and then selling. Whether it's because there's a loss and you need to get out, or what is a significant enough gain to justify the selling?

Tony (2m 58s):

Yeah. I think the selling rules are equally as valid as the buying rules and holding. And oftentimes, people neglect the selling side. They're all focused on buying CSL at 280 bucks. The flip side of that coin is at what price do you sell it? Or under what conditions do you sell it? You probably can't nominate a price. And so yeah, part of the investment philosophy I have, is I have a set of rules that I apply to selling. And it's got to do with what's happening with a sentiment. Is the share price dropping too much? I've already said it. I call it a stop-loss. I've already said a sell price for what I think the time is for me to get out. I will sell something if I buy it and it drops more than 10%, well that paid for. I'll just clear out and, you know, look for the next bus, clear out or dodge and wait for the next and train to come along.

Tony (3m 44s):

And, you know, either get back into CSL or buy something different. There are other rules around, you know, what happens if the CFO unexpectedly resigns? What happens if an independent director unexpectedly resigned? So, oftentimes, there's some red flags around those kinds of things. So, there's probably four or five rules that I've got in my toolbox that I can just try as they happen without having to think about it. Oh, why did the CFO unexpectedly resign what's going on there? Cause you'll never find out. But the experience has told me that's a red flag to look for and a reason to sell a stock.

Phil (4m 16s):

Yep. Give us the 30,000-foot overview of the quality and value

Tony (4m 19s):

Yeah. So I'm a value investor, but what I've found over the years is that quality is also important because some things are cheap for a reason, and you don't necessarily want to get stuck into those, into buying a portfolio of cheap stocks, which is just going to stay cheap. So you do need to check the quality of the company as well that you're buying. But I mean, there are enough stocks on our share market that there is always going to be a value end to the market. And you know, my entry into investing seriously was through people like Benjamin Graham, Warren Buffet, Peter Lynch, all those famous value investors who just have written loads on value investing. And it just, maybe it just suited my personality to have a framework, to do things with, to have a system of rules to apply.

Tony (4m 60s):

And I kind of cherry-picked points from each of those people and added the whole lot more because, you know, I think share market evolves since those guys were first talking and even someone like Warren buffet comes out now and says, I'm basically a quality investor rather than the value investor. So he's evolved. But I was able to distill things down into 20 odd questions, put them in a checklist. I think the real benefit for people who've been investing during our time period is the amount of data that's now available to a retail investor has just grown and grown and grown. I mean, when I first started investing back in the nineties, I used to buy a, like a telephone book of one-page summaries of the annual reports of all the companies.

Tony (5m 41s):

And I'd have to leave through that, read them all, you know, do some manual calculations, working out what was cheap, do some more deep-dive research in paper, but now, you know, I can scream the stock market and drop it into a spreadsheet in a matter of seconds, if not minutes, and have Excel crunch through the numbers and come up with list of stocks to have a look at. And that process is helped by having a checklist. So that's the other. I guess part of my evolution that was really important was I used to have all these ideas in my head. You know, this is a situation which looks like it's worth investigating, but I read the book, the checklist manifesto, which talked about pilots before they take off checking all their controls, running through a checklist and that's reduced the error rate, the crash rate, and in airlines dramatically over the years.

Tony (6m 26s):

And it was picked up by surgeons who said, how come we're killing people on the operating table through basic mistakes. And so now they use checklists before they operate and that's reduced deaths in the hospitals. And I took that and applied it to the rules I already had, and just doing that, coupling it with being able to download data quickly and then run that through Excel has made the process really, really quick to scan for those kinds of situations that, that meet my window for investing.

Phil (6m 53s):

I think people don't really understand this when they first approach the share market. They think that there must be some easy steps to start making money. But it is really a lot of hard work, isn't it? And QAV, it's not something that you just sort of go and get the spreadsheet and plug it in and you start using it. It's actually quite a long process to learn and to work into your own investing philosophy.

Tony (7m 18s):

Correct! we are teaching a process which you can't just pick up. You have to know. And to be fair to people who might be listening to this, who haven't heard of QAV, it also requires not just an investment in time, but there's a bit of money involved. Like we suggest people subscribed to stock doctor if there's a subscription to our service in QAV but yeah, you get that money back and in multiples from the benefits of applying the process. But yeah, it involves a commitment in both time and money. It's a professionalization, I guess, of what's been a hobby, but it's, you know, involving real money and you playing for big stakes. So it's worth it.

Phil (7m 53s):

Hmm, So it's kind of grown into quite a community now, hasn't it. It's a great community. You go onto the Facebook group and not only is it a very pleasant community without too much argy-bargy, but people are asking very intelligent questions and providing a lot of intelligent input into people's investing styles.

Tony (8m 12s):

Yeah. I love that community. That's been probably the real fine of QAV for me, from my point of view. Generally, the people that gravitate towards a sort of mid-career professionals who are starting to think about their long-term future have maybe bought their house already started to pay it down. They're starting to have more time to focus on their investments. They're thinking about whether they're getting a good deal from their financial advisors or their super funds, and they're starting to dip their toe in the water. And just like it's because of that kind of filtering process, we get smart people into the community and they ask great questions, really thought-provoking questions, and they help each other. Some people who subscribed didn't want to join Facebook. they'd deliberately gotten off social media because of all the negatives that come with it.

Tony (8m 55s):

But I think the group that we've gotten there is just the reverse. It's supportive, It's positive. It's really good.

Phil (8m 60s):

What if you found that it's common to these people that makes them interested in the DIY approach?

Tony (9m 5s):

Yeah, I think, like I said, they're smart. They're generally coming from a professional, if not professional, then a small business background. The really other interesting thing is, there's such a market out there for more information on how to do this yourself. The whole industry is geared towards getting you to sign up with a financial advisor or getting you to sign up with a rap platform or a super fund or whatever. And, you haven't done parts of the IFSL cost to obtain a license, that's not necessarily the best way to invest because you know, there's a whole lot of other moving parts of the going on there. Most of which are around keeping a lid on risk. But as we all know, risk and reward are a trade-off. And if you keep a lid on risk, you're probably not going to get much more than the index in terms of the Share-market investing.

Tony (9m 50s):

And therefore, you might as well buy an ETF or an index fund, or an LIC and save the fees. But if you really want to do better than that, then you've got to dig around and come up with your own system. It's not hard to do better than that. people sort of intuitively know that they can do better than that. It's just finding the right system and approach to doing it.

Phil (10m 9s):

Yeah, finding the path or the way, or, yeah, I so hate that term journey, investment journey here over the way. I'm going to Institute El Camino the investing way. So, it really is important to have a systematic approach and it's not going to resonate. Q A V is not going to resonate with everybody. No. And there are plenty of other approaches as well. And some of them are more technical and some of them have more value like your own, but it's really about having a system and sticking to that system. Isn't it?

Tony (10m 38s):

Yeah. Look, I don't really care if people are out there buying high-growth stocks, if they're buying Bitcoin. I mean, it's up to them. It's a broad church. There are plenty of ways to make money, but just work out what you're doing first. As you encounter issues and problems, think about how you respond to it, write it down as part of your system. So the next time it happens, you know what to do. You don't have to reinvent the wheel every time. And as I said before, get the basics, right? Get the framework right on when you're going to buy, when you're going to sell; how long you hold for. All those kinds of things. And part of that is evaluation. So you're not just buying a story, you're buying something when the price is right and not overcooked. So all those kinds of things need to be distilled down into your formula and your system, but you've got to have one.

Phil (11m 22s):

Yep. And it's something that helps you to deal with the emotions that inevitably arise with when your money's on the line.

Tony (11m 30s):

Correct? yeah. I mean, that's a really big part of investing in taking the emotion out of it's another benefit of having a system because yeah, after a while, I don't think about the money in terms of dollars and cents. I think about it as a piece or a token, I guess. You know, I've got a portfolio of 15 to 20 tokens and this is what they're all doing. And I tend not to focus on the dollar value. that's something that comes after a while of moving around. But that's an important part of the El Camino as well of the journey. But yeah, I mean our brains have been wired by evolution to run from lions and to hunt mammoths and all those kinds of things. They haven't been wired to necessarily invest in the stock market.

Tony (12m 12s):

And of course, there are people out there who know how we're wired and they play on that wiring to try and get us to do things that they want, which aren't in their own best interests. So the only real way around that is to understand that Mr. Market is going to be optimistic one day and pessimistic another day, is going to be bipolar, and just having a framework to deal with that.

Phil (12m 35s):

And I remember a previous episode we called situation normal. This was just when everything was going down in 2020-- March 2020,when we had the first COVID situation. And it was just great to say 'situation normal. Don't worry about it, don't think about it.'

Tony (12m 50s):

Yeah, correct. That's exactly right. This is a market, just like if you go to the gold market in Abu Dhabi in Dubai and haggle with the people selling you different types of gold, you're going to have good days, bad days come back next week. And everything's going to be twice the price.All the kinds of things happen in markets and they go up and down. And again, if you don't have the framework for dealing with that, the first time he goes through a crash, it's like, what the hell just happened? How come I've lost all this money? You'll be the roadkill. You won't be on the journey. You'll be the roadkill. So you've got to have a way of approaching that systematically and it helps you mentally deal with it as well.

Phil (13m 26s):

Hmm, Are there any common questions and comments that come from listeners and subscribers to QAV that you have noticed recur?

Tony (13m 34s):

Yeah. I think probably the most common one is that they get QAV, they're implementing QAV, and then they take their eye off the ball. Something happens or they didn't apply the rules diligently. And that's a big thing. I mean, I remember going to the first dinner we had in Melbourne with our listeners and you know, one of them said, what's the number one thing I need to do now that I'm getting involved in QAV and I've switched across and I'm investing with it. And I said, understand you to do this every day for the rest of your life. You have to be diligent. And so the common questions that we get are: oh, I missed the sell price for that stock and it's dropped further. What do I do? You know? And that's a common type question and...

Phil (14m 12s):

And what do you say to that?

Tony (14m 15s):

Oh, the rule is there. It's below the sell price. You're still holding it, sell it and move on. It could go further. You've got to have these rules because there was one case I heard of recently, where another QAV stock, about someone who was investing in the smaller end of the market bought into a company. The share price dropped. They thought the correct thing to do was to double down and buy more. The share price dropped again. And then they asked the question, 'oh my God, what do I do?' So again, if they're applying the QAV methodology, there's rules around all those things. You don't double down. If it's below the sell price you sell and you move on. There's plenty of other stocks that are above their sell prices and going up to make that money back with.

Phil (14m 53s):

Phil: Hmm. Phil: Any other stories like that? Any other comments that you'd give?

Tony (14m 57s):

Well, the other one, I think has been common is people will come in and I encourage them to try and improve the process. Like if they've had a background of investing using, I don't know, return on capital as a key metric for it (which we don't use) what sort of insights can they bring to us from that? But what tends to happen is, and so again, the process is if you want to change the QAV checklist, that's fine. Run it on paper first for a while, don't use more than 10% of your portfolio to try out the new thing. And then if it works and we're talking about sort of a 12 -month process there, cause you need to go through a couple of cycles in the market of results announcements and all the rest of it, a couple of seasons, then we can look at putting it into our checklist.

Tony (15m 38s):

But what tends to happen is people go: 'well, someone, so on this other podcast said this. So I decided I was going to do some QAV and some of that. And of course when the cake doesn't rise, when it goes in the oven, they come back and say, what went wrong? And you've ridden two horses and they went different ways. That's what went wrong. Yeah. So I don't mind if people want to try and improve the process, but there is a process for improving the process. Yeah...

Phil (16m 1s):

That's great. A process for improving the process.

Tony (16m 8s):

A process for everything. And I don't have to think about it.

Phil (16m 11s):

So how much time is involved with the QA process where you say people have got to look at it every day? How many hours every day?

Tony (16m 19s):

No, they don't look at it every day. No. It's more, I encourage people to do things like read the financial press every day. So I'd spend an hour a day, every day, reading the AFR back. Sometimes it'll lead me to check a new stock. Like it might be a news story in there about a CFO resigning or something happening, some merger and acquisition activity going on. And that might make me do a bit of research, but generally, it's about an hour a day. in Company reporting season, and because we're focused on using the numbers, we're running our downloads almost every day. It can ramp up to a couple of hours a day, but that's usually for about two weeks, twice a year, but generally you're not doing much more than monitor things.

Phil (16m 59s):

So we're recording today on the 18th of November, and the market seems to have been not really going in any direction in any particular way. What are your thoughts?

Tony (17m 7s):

Yeah, I'm finding it a very choppy market at the moment. Probably since the dividend season happened, the end of the financial year and company started paying dividends. Normally they'd dropped down by 2 or 3%, then buying would come in and they, they go back up. But the sort of downturns has dragged on for a lot longer this time and going a bit deeper. There's people out there worried about inflation, which is usually bad for share investing--not always. And there are companies which help, but as the price of borrowing goes up, it's a cost to companies. So it can affect their profits. There's things like the Chinese property developer Ever-Graham. Which is looking very shaky and the Chinese property market, which might cause some ructions worldwide, if it starts to go down or collapse. But the...

Phil (17m 52s):

An attack on Taiwan...

Tony (17m 54s):

All these things are in thinking. I think in the moment in the market. Probably, inflation is the biggest one. But again, you know, our process is not to have a position on those. It's to keep following the process. And yes, I probably turned over more stocks than I normally would because they are sketchy in terms of getting close to there. So they sell prices for me more than regularly. But again, that's just a situation normal for the market. You go through periods of this happening and then it will resolve itself one way or the other. It'll either crash like it did during COVID, or it will go sideways. Or it will go up and you just can't predict it.

Phil (18m 24s):

Yeah. It's interesting. That's something that I've learned to have the last couple of years of doing this podcast. I used to have this idea that markets would be moved by politics. They are by policy, but politics has nothing to do with it. Really?

Tony (18m 39s):

Yeah. It's interesting.

Phil (18m 40s):

Changes of government don't seem to really affect markets or, you know, changes of leadership like we've had in prime ministers in Australia over the last few years. Politics doesn't really have a lot to do with it, does it? It's a misconception.

Tony (18m 52s):

It is. And there's kind of also the other misconception that the share market does better under a conservative government, both in the states and here, and that's been exposed under research. It doesn't always work that way. In fact, it tends to favor the other side of politics a bit better, but again, that's, you know, potentially just a statistical anomaly, but yeah, your comment was correct. It's the policy that affects the share market. And I can think of a number of examples where governments change policy and it's really affected particular company or a particular sector. I remember when Kevin Rudd was prime minister and they decided to change salary packaging. And there was a company called McMillan Shakespeare, which it's whole bread and butter is to package up cars as part of a salary package and other benefits.

Tony (19m 34s):

And it dropped dramatically the day after that was announced. So policy can have a real impact on the share market. Not so much who's in charge.

Phil (19m 45s):

You spoke about dividends a moment ago. How much do dividends factor into the QA process, and it's not just about growth, is it? Dividends are part of it as well.

Tony (19m 52s):

Yea. In fact, it's in a couple of parts of the checklist. So we look for companies which pay a dividend above the mortgage rate only because if a company is paying a good, solid dividend, it's a vote of confidence by the board that it will continue to be profitable because the last thing a board of directors ever want to do is to cut their dividend. That's virtually capitulation. They're telling the shareholders book room for a rough patch. We didn't see it coming. And that's not a good look for a board of directors. So they try and hold on to their dividend no matter what. So if they do raise it, they've got to be really certain that the future looks bright for the company. So that's one indicator of health. Another one that I've found over the years as a case-by-case situation is sometimes, you find a company with a very low PE and a dividend that's above that PE.

Tony (20m 37s):

And when you find that situation, it's a really good sweet spot. And that generally is a great value buy for a company. But again, they're just a couple of points on the checklist. Everything else has to be right as well, not just those two things, but that's how a checklist evolves You know, I've seen something which works. I've researched it and it goes in the checklist. And then it becomes part of the process going forward. I think what's going on at the moment is, with interest rates being low, a lot of retirees have been forced out of fixed income investments and into the share market. And particularly I think in the last half, we're seeing well are called dividend harvesting going on. So there are now funds ETFs LLCs, which are basically there to provide a steady dividend income stream for retiring.

Tony (21m 20s):

And it's fine there. I think moving the market a lot more these days than they have in the past when interest rates were higher. So that's definitely having an effect and not always, but what they tend to do or what they can do is there's kind of a cycle to dividends in, in our country. So most companies have a end of June financial year finish date, and then they have a half end of December. So that's when most of the dividends get paid after that. But there are also companies like three of the four major banks plus Macquarie who have financial years ending in September. And so they pay dividends in between all the other companies. And there's a few like the retailers who have a financial year ending in January, cause they

Phil (21m 59s):

Have enormous and a strange cycle as well. They don't want to

Tony (22m 3s):

They have to do their, their accounts over Christmas, which is their busiest time. So there's almost like this sort of harvesting going through the market at different periods, selling stocks, and then buying the ones in advance of the next dividend. You know, they'll sell out of the BHP in August and it pays its dividend buying into one of the banks or all the banks, which then report in September and they get a dividend from them in October, November. they're out of them. Then they're back into something else in December. So it's kind of like this harvesting machine that's going on. And I think I don't have any direct evidence for it, but my gut feel is that's driving the market a bit too. Right.

Phil (22m 39s):

Okay. So you expect dividends to be part of their return on investment for the QAV investor.

Tony (22m 43s):

Yes, we do favor stocks that pay dividends. Not every QAV stock pays a dividend, but we'll probably get--I think from memory, our latest results were about 3% due to dividend income this year. And then the rest is growth on top of that.

Phil (22m 58s):

And presumably franking credits as well.

Tony (22m 58s):

Correct. Yeah. Which have different meanings to different people, whether it's in a Self-Managed Super Fund or in your own name or whatever.

Phil (23m 7s):

Yeah. So it usually works as a text deduction. Doesn't it?

Tony (23m 11s):

It's a rebate on your tax for the tax accompanies are already paid on the profits, which have then gone to fund a dividend that they've sent you.

Phil (23m 17s):

That's pretty unique. Isn't it? Around the world.

Tony (23m 20s):

Yeah.

Phil (23m 20s):

It was Paul Keating I think brought that in.

Tony (23m 22s):

Yeah.

Phil (23m 23s):

No double taxing of dividends.

Tony (23m 24s):

Yeah.

Phil (23m 24s):

Anything else that you've learned over the last two and a half years with QAV?

Tony (23m 28s):

Yeah. I think the tools have become better. I've become more rigorous. So before I started doing QAV, I was doing it myself in a lot more of a manual way than well I'm doing it now. And a large part of that is because some of the great minds in our community have come up with really good tools. So we have a great spreadsheet program, Brett, who has put together a way of calculating out buying, sell prices based on the chance for the stocks and another member, Andrew who redid my spreadsheet in a much better way than what I had done it because he's a professional modeler and yeah, so this is a couple of tools which people have brought to us and offered it to the group and it's made everything again, simpler and more rigorous and quicker to use, which is Right.

Phil (24m 9s):

Also, I notice there's always a lot of discussion about the three-point trend line, correct. I mean, we can't really show that, but this is really a technical tool which shows a buy price and a sell price. And there's a very, very simple technical tool. Well, isn't it?

Tony (24m 22s):

It is. Yeah. So I'm not a big fan of charting and I've had a good look at it over the years and certainly, I'm not going to say people can't make money out of it. They obviously have, but I tried to just take one element of it. And the simplest element I could find is that if you look at the price graph for a company and generally over a longer term, so I use five years and monthly data. So I'm not seeing too many wiggly lines. I'm seeing trends, the stock price moves in channels, even if it's going up, but generally has an upper bound on the lower bound, and sort of follows a funnel or a path on the way up, and the same when it's going down. So I'm trying to draw a line for the downtrend and align for the uptrend. And when they break those lines, that becomes a buy or sell signal.

Phil (25m 3s):

Yeah. We'll let you see a lot of those Bollinger bands and things like that and these tools and it's like that it's a channel, isn't it? You can say something and that channel other like I think with Bollinger bands, the channel expands or contracts as it's going in a particular direction and that supposedly has got signals as well.

Tony (25m 21s):

Oh, there's many different versions. Many of them moving averages are another one which people use. And again, nothing wrong with any of those. I find with moving averages, they tend to lag a bit like if it's, say a three month trend over a 12-month trend, or whatever, you've got to wait for the three months before you see the move. Whereas if you're drawing a line across the bottom of the troughs or across the top of the peaks, you'll see it the day it crosses. So you get a much earlier signal, but again, you're just trying to keep it as simple as possible. But again, pick that benefit out of that particular history of share market analysis that we can add into our process to make it better.

Phil (25m 57s):

Well, I think it's just also important to understand how markets work and the price action is actually part of it. If you're not going to become a technical trader, I mean, that's a whole other discipline, right? But understanding how it works and just being able to even look at a chart and look at a company's share price over a period of time shows a lot of things

Tony (26m 16s):

It does. And it's particularly valuable for a value investor because the traditional value investor wouldn't look at the chart. They'd say, okay, let's see: CSL's cheap now and I'm going to buy some. Oh, CSL is still going down. What do I do? Okay. I'll buy some more. I'm convinced that my story and my evaluation is correct. Whereas what we do is we say, well, here are the couple of hundred companies that meet our broad checklist. Let's now look at the sentiment of them. Because for some reason, these companies, the share price is still going down. Do we have a high enough conviction to override that? Or do we just say there's another hundred companies that are going up that we can buy into that still meet the same criteria. And so that's the basic philosophy behind it is that sentiment is the hidden hand.

Tony (26m 56s):

I guess it's the consensus of what everyone else thinks about the shares and you know, it's the wisdom of the crowd. So I think what QAV does is, it takes a contrarian point of view, but it also combines it with the wisdom of the crowds because it's a market, right? I don't want to stand on the hill and, you know, be buffered by the storm because I'm bright. I want, I'd rather be at home at a cozy fire and, or playing golf or with other people who think the same thing about the share that I'm buying. Like I said, there's just so many opportunities out there. You don't need to hold onto a falling stock. Even if, if it does meet our value and quality metrics.

Phil (27m 31s):

So people can find out more by going to

Tony (27m 34s):

qavpodcast.com.au

Phil (27m 35s):

And also there's the podcast as well. Yes, that's right. With the fabulous Cameron Riley.

Tony (27m 38s):

And look, that's the other learning I've had over the last two and a half years we've been doing it. I mean, Cam's turned this into a great business. He's really done a great job and, you know, fostering the community and all that kind of stuff; and helping people learn the process. That's a really interesting dynamic. So I don't think people talk about investing and finances enough with their families, with their kids, with their friends. And I've known Cameron for a dozen years before we started talking about this, cause I just don't normally talk about investing with people. People are more likely to talk about the price of their house or a how a price is doing rather than what the share market's doing. They leave it to somebody else. But I think when Cameron's sort of learned what I did and the process I used. He said we've got to tell people about this.

Tony (28m 21s):

We've got to put it together into a podcast. And I think, like I said before, it's tapping into this desire from people to learn more about it. It's not taught in schools. I don't think it's taught at universities. I don't think you can do a course on value investing or technical analysis or whatever at universities. You can certainly be like economics and, and that kind of financial planning

Phil (28m 38s):

Will be touched on. Yeah.

Tony (28m 39s):

Yeah. But they don't teach it at university. So where do you learn about it? It's gotta be through word of mouth or doing your own research or reading books.

Phil (28m 50s):

And of course, listeners can use the promo code SFB to get a 20% discount as well. Yeah. Which is fantastic. Thank you.

Tony (28m 56s):

SFB Shares for Beginners

Phil (28m 57s):

Tony Kynaston thanks very much again for joining me today. Great.

Tony (29m 0s):

Thanks Phil. Good to see you again.

Shares for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Shares for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation