VCS Agency - Lunar Capital

Share Focus: EPE Capital Partners (EPE)

Ethos Capital (EPE) invests directly and indirectly in a diversified portfolio of unlisted investments, which are managed by Ethos Private Equity, the largest private equity firm in sub-Saharan Africa.

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Inflation and its impact on stock prices

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What is Inflation?

Inflation is when the prices of goods or services rises sustainably. This is when we as consumers pay more for our goods and services. To put it differently, it means that our money is worth less. We get fewer goods or services for the same amount of Rands or Dollars. In South Africa and many other countries, we use the Consumer Price Index (CPI) to measure inflation.

Inflation can be caused by several factors. Here are some of the causes of inflation:

When the economy is doing well and people have more money, they may be willing to spend more on goods and services. This higher demand leads to increased prices.
When commodity prices such as oil goes up, it increases not only the cost of fuel that we use for travelling, but also the cost of transporting goods and services. This translates into higher costs, thus leading to inflation.
Exchange rates also play a role in inflation. If the South African Rand weakens against other major currencies, then this too causes rising inflation, because the cost of imported goods is more expensive in Rand terms.

Moderate levels of inflation generally imply a good economy, i.e. one that is growing healthily. High levels of inflation imply an overheated economy which will likely result in an economic crash. Very low levels of inflation imply a subdued economy.

It is the role of central bankers like the South African Reserve Bank (SARB) to try and manage inflation. They typically do this through monetary policy, i.e. by raising or lowering the interest rates that they charge to commercial banks. If they wish to reduce inflation, they raise interest rates. This leads to consumers having less money to spend on goods and services, as they have higher interest payments on the debt that they owe to banks and other lenders. In this way, the central bank tries to manage the economy so that it does not overheat. Vice versa, when they want to give the economy a push.

Inflation versus Returns

Inflation is a stealth threat to any returns. If your returns are below the rate of inflation, then you are in fact earning a negative return, i.e. you are losing money in real terms. So, when looking for where to invest in, one should always be mindful of the impact of inflation on one’s investment.

Where an investment pays a fixed rate like a bond, then the impact of inflation on returns is easily understood. As inflation rises, the value of the bond drops and vice versa.

The impact for companies, however is not so simple.

Inflation versus Stock Price Returns

There are several conflicting factors at play here:

As inflation increases, the returns on your investments should be lower in real terms, so arguably the share price should reduce.
However, inflation also implies that companies can charge higher prices for their goods or services. In this way they will earn higher revenues. So, this should negate the impact of lower real returns discussed the above.
Factoring in higher inflation rates into valuation models should also have a negative impact on share valuations, which could lead to lower prices.
Markets also operate in complex ways – from exuberance to pessimism, from forward looking to backward looking. So, at any point in time these factors may overshadow whatever inflation may or may not be doing.

It is thus not entirely obvious how inflation impacts stock prices. However, what one should look out for is any significant shifts in inflation. When South Africa broke the back of double digit inflation in the 1990’s, share prices and price earnings multiples increased commensurately. It is thus advisable to look out for any significant and sustainable shifts in inflation.

What are we looking at in terms of Inflation?

In the two markets in which Lunar Capital mostly operates; South Africa and the USA, we could possibly see some interesting developments from an inflation perspective:

In South Africa, the last CPI figures indicated a year-on-year increase of 4% per annum. According to Investec, inflation should increase to between 4.7% to 5.3%, given the VAT and fuel price increases. This is still below the 6% that is imprinted in most people’s minds as to where inflation is. In our opinion, this will have a moderately positive impact on stock prices (price earnings multiples) of companies that have a strong market position.
In the USA, inflation and interest rates are on the rise. In our view, this would likely put the brakes on any significant stock market rallies in the near-term. If anything, there may well be a further correction in the market.

S&P 500 Annual Averages per Decade

The following table shows average annual results for each decade:

	Price Change	Dividend Dist. Rate	Total Return	Inflation	Real Price Change	Real Total Return
1950\’s	13.2 %	5.4 %	19.3 %	2.2 %	10.7 %	16.7 %
1960\’s	4.4 %	3.3 %	7.8 %	2.5 %	1.8 %	5.2 %
1970\’s	1.6 %	4.3 %	5.8 %	7.4 %	-5.4 %	-1.4 %
1980\’s	12.6 %	4.6 %	17.3 %	5.1 %	7.1 %	11.6 %
1990\’s	15.3 %	2.7 %	18.1 %	2.9 %	12.0 %	14.7 %
2000\’s	-2.7 %	1.8 %	-1.0 %	2.5 %	-5.1 %	-3.4 %
1950-2009	7.2 %	3.6 %	11.0 %	3.8 %	3.3 %	7.0 %

Source: http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm

The table above shows that investing in the equities markets has been a good hedge against inflation in the long-term. Interestingly though, this is not true for two out of six decades in the table shown above. The negative return in the 2000’s reflects the impact of the global financial crisis of 2008-2009; and the negative return of the 1970’s reflects high inflation in the USA. However, over the 6 decades, real returns have been excellent (7.0%).

Our approach to investing is to acquire great businesses at good prices and to hold them for as long as possible. The macro-economic environment is additional input into our decision making, but we rely much more on individual business analysis in our decision making. Ultimately, we aim to have real (i.e. above inflation) growth in the investments we make over the long-term.

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The Land Question?

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In my opinion, the Land Question in South Africa raises a broader issue. It is the question of retribution for the crimes of colonialism and Apartheid. The Black Economic Empowerment policies attempted to address these issues but these have fallen short of meaningful empowerment of the previously disenfranchised. It has also had unintended consequences – fronting, favouring those close to the ruling elite, a laager mentality amongst many whites, etc. Add high levels of poverty and inequality, little access for many people to be able to earn a meaningful living; and this creates a ripe environment for a major social backlash. This backlash can take many different forms, from widespread civil unrest to xenophobic attacks, tribalism, racism, land seizures, etc.

What can government, citizens, activists, businesses, organised labour and the person in the street do to address this issue for an outcome that is likely not going to be satisfactory for most?

The ANC December Congress passed a resolution to adopt a policy of land expropriation without compensation. The Economic Freedom Fighters (EFF) is ensuring that this issue stays at the forefront of the national agenda. Rightfully so. It is unfortunate that since the dawn of democracy in the country, not much has been done by the elite (political and economic) to address this issue in a more wide-reaching and meaningful way. Having access to power and the ability to influence decisions, allowed these elites and their cronies to benefit greatly. It is not in their interest to rock the boat too much.

Now however, it is too difficult to sweep this issue under the carpet or pay mere lip service to how it will be addressed.

Irrespective of what the outcome/s will be and how it is addressed, it can be guaranteed that there will not be a satisfactory outcome for all. In fact, many may get little satisfaction. So, it is imperative that this issue is dealt with the utmost care and with an execution strategy that ensures that in fact as a whole we are better off as a country.

Perhaps, the starting point would be to develop a set of principles that cover the following key questions, amongst others:

Is it about Land reform or more broadly about economic reform?
Do we deal with the broader issue of reparation for the evils of Apartheid and colonialism or only about restoring rights where there is clear evidence ofdispossession and forced removal?
Under what conditions will expropriation without compensation take place?
What should be done about other policies (BEE for example) that haveattempted to redress past issues? Should these continue, be scrapped or changed
to get better outcomes?
How will potential beneficiaries be assisted to lay claims and how can they beset up to get the best for themselves and the country?
How will we deal with potential capital flight and its cousin, lack of newinvestments?

These are complex issues to solve, so setting up a set of principles upfront with the right set of stakeholders will be an essential and critical first step. It should also guide how trade-off decisions will be made.

Our clients at Lunar Capital ask us what the impact on one’s investments is, in this scenario?

At this stage, it is very difficult to predict exactly what will happen and who would be the winners and losers. It depends on what kinds of redress will be sought, and how it could be affected. To what extent will government first redistribute the land/properties in its own portfolio? Are there some cut-and-dried cases that could be resolved quickly, and what are these? If properties that are expropriated without compensation are bonded by banks, will the banks have to carry costs of the default? If not the banks, then whom?

We would be cautious of companies that own large tracts of land in rural, peri-urban and possibly even urban environments. Largely for now, we would not panic. The state has many options to address the issue of land reform before it needs to use the “expropriation without compensation” tool. We are also of the view that the current administration will deal with this issue sensibly, but it will likely face lots of criticism from both the left and right. The country has sufficient intellectual capacity to execute on this properly. It is up to government to ensure that it resources this task team appropriately.

A very good outcome can come from this for the long-term benefit of the country if dealt with from a point of principle and executed with an intention of properly empowering those who have been marginalised in the past and continue to be impeded by a lack of access to earn a decent living. This will be good for the country and for long-term investors.

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Share Focus: Discovery

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Discovery’s purpose is to make people healthier and enhance and protect their lives. Does it make a good investment?

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Goals Conceded, Saved, Missed and Scored

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In a football league, the team that becomes the champion at the end of the season is the team with the most points¹. Three points are awarded for winning a game, one for a draw and zero for losing. A game is won by scoring more goals or conceding less than the opponents.

Recent irregularities, scandals, rumours, and negative reports on various companies have created lots of angst amongst investors. In this article, we dwell on some of the companies that have been caught up in these events and how it impacted the Lunar BCI Worldwide Flexible Fund (Lunar), if at all.

Did we concede any goals that we could have prevented?
Did we save any goals that would surely have been scored if we didn’t defend well?
Did we miss goals that we should have scored?
Did we score goals because we were well-positioned?

Viceroy Research

It started in December 2017, firstly with the sudden resignation of Marcus Jooste, CEO Steinhoff. This was followed a day later with Viceroy Research’s report on Steinhoff. Steinhoff’s shares drop by approximately 90%.

Since then, we had rumours of negative reports on Aspen, a published report on Capitec by Viceroy, a published report by 360One on the Resilient group of companies and a scandal involving DSTV, a subsidiary of Naspers.

How was Lunar affected?

Steinhoff (SHF): Lunar was not invested in Steinhoff. Our main reasons for not investing in Steinhoff were 1) as a group, it did not fit in with our investment themes; 2) we also viewed the company too complex to understand; 3) we were uneasy with the company’s strategic direction. Steinhoff had large holdings of PSG and Shoprite in its portfolio, and Lunar was invested in both of these. So, tactically, we decided to reduce our holdings in these 2 businesses even though we liked them. Our view was that Steinhoff (and management who were highly leveraged) would be forced sellers of their holdings to repay bondholders and lenders. We would thus be able to acquire both PSG and Shoprite at better prices later. As it turned out, this was correct for PSG but not for Shoprite, as PSG’s shares dropped, but Shoprite’s in fact rose. We avoided the Steinhoff issue but were marginally caught in the waves that it created. The net result was no significant impact to our fund. We view this as a goal saved.
Capitec (CPI): When Viceroy did come out with its second report, it was a surprise that its report was on Capitec. Lunar was not invested directly in Capitec, but we were invested in PSG. Approximately 50% of PSG’s net asset value was and still is made up Capitec. This report came at an inopportune time for us, as we had started rebuilding our holdings in PSG. We successfully bid in the Steinhoff sale of PSG shares. PSG, in our opinion has excellent underlying businesses, a very strong management team, and it was trading at a discount of approximately 17% of its net asset value. Their businesses fit in well with our investment themes. We were of the opinion that Capitec was overvalued because the share price was implying much higher growth than what it could likely achieve. But, our view was that the discount was a sufficient cushion. Once the Viceroy report came out, we stopped building up our position and again reduced our stake in PSG. We do not agree with most of Viceroy’s allegations and would most likely add to our holdings in PSG once the dust settles and Capitec is trading at a better price. This has impacted the fund marginally and we view it as a goal conceded. The question we ask ourselves is: Could we have avoided it?
Aspen (APN): Before Viceroy’s report on Capitec came out, the market speculated that one of the companies that Viceroy is targeting is Aspen. This put some pressure on the Aspen share price. Lunar was and still is invested in Aspen. In fact, we increased our stake somewhat when the share price came down. The business fits in well with our investment themes and whilst in the past valuation was an issue, it is trading at much better value now. There is no impact on the fund holding Aspen, in fact it allowed us to buy increase our holdings at better prices. We view this as a goal scored.
Resilient (RES) and related companies NEPI, Fortress, and GreenBay: We have generally been quite negative on the property sector, especially those with large shopping centre holdings. We were and are still not invested in any of these. In the property sector, we prefer the logistics warehouse plays, those leased to logistics and internet retail businesses like DHL and Amazon. Goals saved.

Naspers (NPN): The issue with Naspers is not the same as those above, other than one of its subsidiaries (DSTV) was involved in some dubious transactions with the SABC and ANN7 (previously owned by the Guptas). This scandal may have had a marginal impact on its share price. However, Naspers was one of the top performing shares on the JSE last year on the back of a significant increase in the share price of Tencent, its Hong Kong based investment. Lunar was not invested in Naspers, even though it met our investment themes, for the following reasons:
- A large portion of Lunar’s offshore investments are in technology companies (Amazon, Facebook, Alibaba, Nvidia). We did not want to over-expose the fund to the technology sector by also adding Naspers as an investment;
- Whilst Naspers trades at a discount to its net asset value, our view is that the discount is justified as the remaining businesses in the Naspers stable run at a loss, and that Naspers does not own its shares in Tencent, it only has rights to the earnings and dividends in the company.

                                                               ____________

So, how did we perform as a fund in the five scenarios above? Overall, we played a good defensive game, avoiding many goals that could have been scored against us. We got caught somewhat in the whirlwind of activity around Steinhoff and Capitec, which created repercussions for our holding in PSG. But, we also managed to take advantage from the situation around Aspen. Perhaps we missed a big goal by not investing in Naspers, but we would have been proper fools if there was a big correction in the technology sector.

Lessons learnt

This is a good time to reflect on our investment guiding principles:

We buy quality businesses at fair prices.
We debate and identify the thematic trends that will deliver growth in the 3-10 year horizon. Our portfolio will be concentrated, reflecting the thematic trends and companies we want to be invested in.
We only buy companies that we understand: how they make their money, what their risks are, and what their strategy is, etc.
When prices are low, we gear up; similarly we sit on cash when prices are high.
We measure and report our performance – and we strive to be honest about the reasons for our success/losses.
We meet regularly and debate as a group what the investment themes are, the companies to consider investing in, the investment philosophy/style, etc.
We take every opportunity to learn and refine our investment management skills and our knowledge of the companies we are invested in.
We keep an investment diary: we write-up the investment philosophy, the selected investment themes, the investment case for each company we consider investing in and then check back when we divest, the reasons for our success/failure.

We think that these guiding principles are still intact and some valuable lessons have been learnt in the last few months:

Aggressive short-sellers will become a more prominent feature of the South African markets. This will present both risks and opportunities.
The risk of permanent loss of capital increases as the market becomes frothier. But, staying out of the market can be even more hurtful to the investor. Finding, the right investments and balance in the portfolio becomes even more critical during these times.
Volatility is not risk. Risk is being invested in a bad or over-valued business.

1 If two or more teams have the same points, then the team with the largest goal difference is the winner. There are further rules if goal difference is also the same, but we won’t go into that detail here.

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Lunar BCI Worldwide Flexible Fund End of Year 2017 Report

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Market Overview

The calendar year 2017 was another roller-coaster year for the investment markets in South Africa and globally. Some of the more significant events include:

Ratings agencies downgraded South African sovereign debt to junk status, citing political and economic risks facing the country;
Serious allegations of mismanagement and corruption in state-owned enterprises, including Eskom, Prasa, SAA and the SABC;
President Zuma reshuffled his Cabinet resulting in amongst other changes, Pravin Gordhan and Mcebisi Jonas being replaced by Malusi Gigaba and Sfiso Buthelezi as Minister and Deputy Minister of Finance respectively;
A volatile Rand, starting 2017 at around 13.75 to the US Dollar and ending the year at 12.35. The Rand reached 14.40 to the USD during the year;
The resignation of Markus Jooste as CEO of Steinhoff and the related fraud at the company;
The ANC NEC elections which ultimately resulted in Cyril Ramaphosa being elected as ANC President, but more-or-less evenly split along factional lines in the rest of the NEC.

These and other factors such as valuations and market sentiment played out in the market:

The JSE All Share Index rose by 21% (including dividends), led by Naspers (+71.3%), Discovery (+62.4%), Capitec (+58%);
The Nasdaq increased by 28.24% for the year in USD and by 16.02% in ZAR.

Performance

The Lunar BCI Worldwide Flexible Fund reported an increase of 9.64% (after costs and fees and including distributions) for the year and 9.47% since our inception on 1 June 2016. The following factors were the main drivers of our performance for the year:-

We held higher levels of cash (20% as at year-end) as we were of the view that there was higher levels of risk in the market;
Small cap shares were under severe pressure. Whilst not a big part of our portfolio, we held and subsequently sold at a loss underperforming small cap shares (Consolidated Infrastructure, Rhodes Food);
Whilst we held no Steinhoff’s in our portfolio, our holdings in PSG and Shoprite were impacted. Steinhoff and related entities own large stakes in PSG and Shoprite and they were and still are sellers of these holdings to raise cash and meet the obligations of creditors:
- We mitigated our risk by reducing our exposures to PSG and Shoprite, but are of the opinion that these are still great businesses.
Our best performers during the year were:
- South Africa in ZAR: Discovery (+64.07%), FirstRand (31.28%), PSG (27.08%)
- Offshore in USD: NVDIA (+99.25%), AliBaba (+55.56%), Amazon (+52.32%), Facebook (+47.10%)

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We would have liked to have performed better than we did but are satisfied that most of our major investments have performed well. Our positioning was somewhat risk averse during the period. Where an investment did not pan out the way we envisaged, we analysed the reason/s for it and used that to improve our investment process.

“The stock market is a device of transferring money from the impatient to the patient.” – Warren Buffett.

We have been patient, and will be until we think it is time to be more aggressive.

Portfolio

Our portfolio composition is as follows:

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Outlook

There are a number of concerns in the global political and economic environments:

Likely interest rate increases in the developed economies;
A potential credit and related real-estate bubble in China;
The policies that the new ANC leadership will articulate and the ability of government to execute on it is still very uncertain;
Geopolitical tensions in Korea and the Middle east;
High valuations in the stock markets:
o The PE ratios of selected markets currently are:
– S&P 500 (US) has a PE ratio above 22;
– Nasdaq has a PE ratio above 27;
– JSE All Share Index has a PE ratio above 22.
These are high from a historical perspective, making the market appear to be overpriced, but there are large variations between individual stocks.

We anticipate that volatility will likely continue to feature in the market. Theme and specific stock selection will again play a key role in our portfolio composition and ultimately performance.

Theme Review

Our investment themes for 2017 were:

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We believe that by-and-large these themes are still intact and we have refined these as follows:

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We have refined these themes to better reflect the opportunity that they represent and the changes since we last revised our investment themes:

Millennials stamp their economic authority
o As millennials enter the ages when they start settling down, we believe that they will become a more important economic power. This will reflect in how they shop (on-line), where they buy homes and settle down (cities) and what they value (experiences, environment, family).
Baby Boomers need care
o As the Baby Boomer generation reach retirement age, they will need care (financial, health, services, drugs). In general, longevity has increased which implies that these services are required for longer and that the aged are healthier than previous generations. They will seek retirement villages that better cater for their healthier lifestyles.
Cities are where its happening
o The migration from rural areas and small towns to cities continues, with increased demand for housing and services (water, electricity, transport). The trend of megacities dominating economic activity globally is still intact. Foreigners continue to acquire properties in mega-cities.
African Middle Class taste the good stuff
o Globalisation and the increasing wealth of the middle class in Africa shape how they change their spending habits (supermarkets, global brands, travel).
Economic power drifts and shifts
o In the last few decades global GDP has shifted from the developed markets to developing markets by a ratio of approximately 80/20 to 60/40. China has been a large beneficiary of this shift, but other markets like India, Turkey, Brazil and Indonesia have also benefitted.
Resource scarcity spurs innovation
o The demand for energy has spurred the revolution in renewable energy. Agricultural technologies have also significantly improved yields in food production. We anticipate similar innovations in water and energy technologies. Commodity cycles will continue to ebb and flow providing investment opportunities.
Technology disrupts the status quo
o Information, pharmaceutical and genetic technologies will continue to develop and potentially disrupt industries and businesses. Blockchain technologies in particular have the potential to disrupt. It will be fascinating to watch how this plays out and what investment opportunities it will bring. The rise or death of cryptocurrencies will also potentially provide fascinating viewing and maybe opportunities. Similarly, looking out for the next block-buster drug or killer-app will be key in unlocking investment opportunities.

Where we do identify potential companies to invest in, we will apply our minds in determining what fair value is for those companies. We will only buy those that we believe provide the right rewards for the risk that we take. We wish to obtain above average and real returns at a portfolio level for our investors.

* * * * *

Thank you to our clients, staff, directors, and business partners for your support, guidance and friendship. Whilst there are significant risks in the financial markets at the moment, there will be opportunities from which to profit. It is left to us to identify these risks and opportunities by continuing to improving our investment philosophies and methodologies and ultimately providing a platform for growing the wealth of our families and communities.

Lunar BCI Worldwide Flexible Fund End of Year 2017 Report Read More »

Share Focus: Facebook

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People use Facebook to stay connected with friends and family, to discover what’s going on in the world and to share and express what matters to them.

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Delaying Gratification

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Delayed Gratification

In the world today, you can get most of what you want from a simple click:

Want to eat? Click.
Want a cab? Click.
Want a book to read? Click.
Want to know which of your friends are going to be in Johannesburg over the holidays? Click.
Want some entertainment? Click.
Catch up on news? Click

Gratification is almost immediate.

You want to invest? Click.

Unfortunately with investing, there is almost always no immediate gratification. In fact, if you invested in a predominantly equity based investment, then market gyrations can even have the opposite effect of gratification – causing you serious consternation as the value of your investment rises and drops.

In investing, your gratification comes only years later.

We know that it is “time in the market” that gives you the best opportunity to grow your wealth. Having the patience to allow your investments to get the benefit of compound growth over many years will most likely result in real growth in your wealth. But most of us are not wired to wait many years to see results – we want to see immediate results.

Incentives

The Vitality program from Discovery (a Lunar BCI Worldwide Fund core holding), incentivises healthy living. Whilst one can see the benefits of healthy living within a few months, the real benefits are substantially more in the long-term. So by providing Vitality points for day-to-day healthy living (exercising, eating healthy food, regular check-ups, etc.), Discovery has found a way to provide some early gratification for behaviours that one may only get the benefit of much later in life. Needless to say it is also good for Discovery’s business to have healthy clients.

At Lunar Capital, we regularly ask ourselves how we can incentivise investing.

If you have the patience to regularly invest over the long-term, then you don’t really need short-term incentives. But most of us do not have the patience and want some form of instant gratification. We need incentives to make us invest for the long-term. We need a Vitality programme for investors.

History and Culture of Investing

In South Africa, our history tells us that the majority of the population of this country were left on the economic side-lines. They did not have any way of learning about investing from their families as most families lived from hand-to-mouth.

Those that were in the economic mainstream would in all likelihood have had the benefit of learning from their parents about the importance of investing or seen first-hand the benefits that investing brought to their parents. They may also have had the experience of having a savings account or better still an investment account opened in their names when they were young. In this way they learnt early on about interest and compound growth. With this first-hand experience, they learnt about the value of delayed gratification in investing.

Post 1994, the Black middle-class in South Africa grew quite quickly. But investment levels in this sector is still very low. There are a variety of reasons for this, like providing support to the extended family and having to start building their economic lives from virtually nothing. But not having the first-hand experience of the value of long-term investing has also played a big role in low investment levels within our communities.

And hence our drive at Lunar Capital to improve the knowledge of investing within these communities. As a small business, we cannot afford to develop and run an incentive programme like Vitality at this stage. So, we try to incentivise people differently.

Teach a man to fish

By sharing our insights and the insights that we learn from others, we aim to make our clients more knowledgeable so that they can invest on their own. They can be more selective when acquiring the services of professionals, using them only for specialised requirements. In this way they reduce their costs and are also not influenced by the biases (some incentive induced) of their professional advisors.

Similarly, we also provide tools that allow investors to better track their net worth and their asset and liability profile. In this way, they can track the growth of their net worth and make informed decisions on where and how they need to invest to meet their long-term financial goals. We have run free workshops to help people track their investments and develop an investment strategy for themselves. Many people find that by tracking their investments over a few years and by observing this growth, this in itself becomes an incentive to invest more.

We also recently started a Share Focus campaign where we aim to regularly feature a company and provide some of our views on that company so that individual investors can use that in determining whether to invest in that company or not.

Unfortunately, none of these are the kind of incentives that provide instant gratification. What we aim to do is to “wire” into our clients and followers the importance of improving their knowledge of investing (LEARN); being invested over the long-term (INVEST); and by delaying gratification, getting much bigger rewards later on (ENJOY).

Learn to delay gratification

In a long-term experiment with children, where a child is put into a room with a marshmallow. The child is told that she can get two marshmallows if she does not eat the marshmallow in front of her until a bell is rung after approximately 15 minutes (quite long, especially for a child).

What was found was that those that could hold out, generally performed better in life as they grew into adults. One can interpret from this experiment that those who have the ability to delay gratification, will get bigger rewards later.

This is exactly the case with investing. Those that can delay gratification will earn outsized rewards later on. Develop a strategy to invest for the long-term and stay the course. The benefits will be much bigger than what you give up now.

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Share Focus: Stadio BEE Offer

Archive / By VCS Agency

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Stadio (SDO) recently unbundled from Curro, which is part of the PSG family. Stadio will continue
to be part of the PSG family. Post the unbundling, they have announced a capital raising rights
offer) as well as an offer to raise R200m from invited BEE participants.

View our Summary

https://lunarcapital.co.za/wp-content/uploads/LC-Share-Focus-Stadio-BEE.pdf

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Thinking about my biggest investing mistakes

Archive / By VCS Agency

Shhh..

As the Naspers (NPN) share price keeps on powering ahead, I can’t help thinking why did I ever sell the Naspers I bought for my wife’s portfolio a few years back (Shhh.. please don’t tell her).

In 2010, I bought some Naspers for my wife’s account for around R298 per share. Within a period of a few months, the share price rose by over 50% and I thought that this couldn’t get any better. Who wouldn’t want to earn a 50% return in a few months? So, I sold them to lock in the 50% gain. And since then, all I’ve done is painfully watch Naspers go higher and higher (not in a smooth line, it has had a few very sharp downwards movements too). Today, it is trading at over R3000 per share – so, by locking in a 50% gain, I (actually my wife) lost out on a 1,000% gain.

Mistakes

Every investor who has been in the markets for a long-time, will be able to relate stories like the one above.

To paraphrase Warren Buffett, there are two categories of mistakes that an investor can make:

Mistakes of Commission; and
Mistakes of Omission.

Mistakes of Commission

A mistake of commission is one where we consciously made a decision which was a mistake. Examples are:

We decided to purchase an asset, but we overpaid for it, i.e. it turns out to be a bad investment;
We decided to sell an asset, but we under-priced the asset. We thus miss out on the opportunity to realise the true value of the asset. This can also be called an opportunity cost. The Naspers example above means that we had an opportunity loss of 950%, even though we did not lose any actual money.

Mistakes of Omission

Mistakes of omission on the other hand, are mistakes that are made when we omit to do something. An omission may be that we miss to see an opportunity. Or worse still, we see an opportunity, but fail to act appropriately. In this case, we purchase too little of a great asset which is being offered at a bargain price. Charlie Munger, who is Warren Buffett’s business partner, regards mistakes of omission the more costly of the two types of mistakes for investors.

Common investing mistakes and possible remedies

Let’s walk through some common investing mistakes and how one could possibly avoid them.

Mistakes of Commission

Buying and asset and overpaying for it:
- Buying a very good business but at an inflated price. This often happens towards the end of a bull market. One is often influenced by sentiment – so-and-so stock is performing well and therefore it is a must-have in your portfolio. Arguably, if everyone knows that a particular company is doing well, then its share price should reflect its popularity (i.e. it is unlikely to be cheap). To minimise this type of mistake, one has to be able to analyse a company’s underlying value and only invest in it if the price is less than its intrinsic value.
- Buying into a bad business, thinking that it can be turned around. It is true that one can buy a bad business at a good price and earn a decent return from it and that businesses can be turned around, but this is not the case for all bad businesses. One of my own philosophies is to simply ignore bad businesses irrespective of whether they offer value or not. It does not fit into my style of investing, so I stick to what I know best. However, if a good business goes through tough times, then I will look at it closely and possibly decide to invest in it if my assessment is that it can be turned back to its previous glory.
- Getting caught up with a “great tip” from someone well-regarded or who simply talks a good story. Media and especially social media provides lots of pundits telling us about what to buy and sell, etc. If you had taken the advice of most of these pundits, the chances are greater that you would have lost money rather than made great returns. Make up your own mind on what to invest in and when to invest. Use a strategy that you are comfortable with.
Selling an asset at below its intrinsic value.
- The example, I gave on Naspers above, is a good example of this. Maybe with a little more homework, or a bit more analysis, I would have not sold. The other side of the coin is that I could have done all the analysis in the world, but still came to the conclusion to sell. In this case, I would need to accept that I could not have made a better decision at that time and ask myself how I would tackle a similar situation in the future. I’ve learnt to hold on to good companies for as long as I can and hence our bias to “invest in great businesses for the long term” at Lunar Capital.

Mistakes of Omission

Not identifying a significant buying opportunity.
- The universe of investing is so large, that it is impossible to cover it entirely. This means that you should identify your investment universe and build your knowledge, skills and strategy for that specific investment universe. It does pay however, to every now and the take a look at other industries or analyse trends that are taking place in other markets. Often, a trend (think biotech; renewable energy; cryptocurrencies) is not sufficiently noticed until there are a few years of significant growth. It helps to keep your eyes and ears open to trends outside your comfort zone. If this trend appears to be quite strong, then try and build some competence in it or tap into other professionals that have a better understanding of that trend/industry.
- Every now and then, significant buying opportunities come about (think after the 2008 global financial crisis). At times like this, one needs to be very aggressive in buying these highly discounted businesses. Unfortunately, market sentiment at that time will not be great. So, again if you’re disciplined in your investment valuation methodology, you would buying when “there is blood on the floor.” Similarly, if there is a business that you would love to own, buy as much of it as you can if and when it shows great value (i.e. is cheap).
Not identifying a significant selling opportunity.
- Another mistake is not to sell in time. In this case, one may be missing a negative industry trend or also a company specific issue. A case in point is the recent results from the fast food industry. All indications were that the consumer is struggling, that fast food businesses were over-paying for franchise licenses from global players, etc. This would have been a good time to have sold some of these businesses, before their results even came out. Many investors who have enjoyed the great returns that Famous Brands (FBR) provided over the years would have assumed that this will carry on forever. They would thus miss important indicators that significant headwinds are facing the industry as a whole. So, they typically hold onto those shares until the results come out, which is often too late.

Some other examples of investing mistakes

Over a period of over 25 years in investing, I can go through many mistakes that I’ve made over the time. Over and above the Naspers example, here are a few others:

Holding onto to Stocks and Stocks (a construction company) until it went bust (100%) loss.
Creating arbitrary buy or sell prices because it sounds or feels good. Example: I’ll sell if I get a 50% return or I’ll sell when the price reaches R100 per share.
Thinking that old sector industries would never make a come-back, thus missing the early stages of the previous Resources boom.

The list can go on and on. I’ve used all of these as learning experiences and fine-tuned our investment methodology as a result of this learning. I’m satisfied that the results of the good decisions far out-weighed the mistakes over this period.

Perhaps my biggest mistake is writing this piece and admitting my Naspers mistake to my wife.

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