Dear Fellow Investors and Friends
If you’re new here, welcome.
Today is Thursday, the 2nd of November, 2023. It is the 306th day of the year, 59 days remain. The Springboks are, once again, the rugby union world champs! They have now been the champions for 1 460 days, and have (at least) 1 473 days left of their reign. Enjoy every minute of every day.
31 October was Halloween in America, which is a fun holiday for children. I remember trick-or-treating as a kid growing up in New York. It was the best day of the year; full of masks and candy and carved pumpkins and staying up late. I still look back fondly on those days.
In Mexico, the 1st and 2nd of November is the holiday called Día de los Muertos, a much more adult and philosophical holiday. All throughout Mexico and places where the holiday is celebrated, people gather to celebrate and remember their friends and family who have died. There is real value in taking the time to process and create a ritual that allows us to come to terms with this inescapable part of our existence.
Better to be on good terms with death and to schedule an annual check-up than to be surprised and shocked by this inevitability. As the Stoics say, “Memento Mori”.
So, use this time to fondly say goodbye to the people you have lost and enjoy those you are lucky to still have with you. That’s all we can do.
Happy Dia de los Muertos!
Quotes of the day
“In many instances, value investing proves fundamentally uncomfortable, as the most attractive opportunities frequently lurk in unattractive or even frightening places.”
“Until we know we are wrong, being wrong feels exactly like being right.”
South Africa won the World Cup…again. That’s four times out of 8 attempts for a 50% hit rate. New Zealand has won three out of 12 attempts for a 25% hit rate. So, are we the best rugby-playing nation in history? Many will say we are. But what about the six tournaments we didn’t win – does that change the argument?
Even during this World Cup, while watching the knockout stages, it felt like we were losing most of the time. After destroying England in the first scrum in the 2019 World Cup final, it felt like we were on top and couldn’t lose. This time, first against France, then England and finally New Zealand, we were behind the eight-ball for seemingly the entire match, winning each one by pulling different kinds of rabbits out of the hat.
Our opponents say it was undeserved – I beg to differ. Only a team with strong character and even stronger processes can pull off three miracles. Setbacks to your plan can occur on how the ball bounces, the referee blows his whistle, or through injuries. But only if you have ingrained strong processes can you overcome these arbitrary events for which no upfront planning (forecasting?) can prepare you.
You need a strong character to endure these setbacks, implement your processes and get back on plan repeatedly. And this is exactly what the Springboks did on Saturday.
What the Springboks did – and what their fans went through – reminded me of how value investing works. A value investor tries to buy assets priced below their intrinsic value on the stock market (as an aside, value investing doesn’t work in private markets – but that’s a whole separate discussion). The market will generally only misprice an asset to the downside when things are messy – when the ball has bounced funnily. And business is inherently messy, as anyone who has ever run a business knows.
If you apply your valuation processes consistently, from time to time, you get the opportunity to buy a share in a business cheaply. But the timing of when to buy is always an issue – buying too early is common among value investors. The liquidity provided by public markets doesn’t always work to one’s advantage. Fixing a business takes much longer than most investors’ patience can stand, so the share price continues to decline, as those investors with good processes but weak characters sell out, thinking they made a mistake.
So, value investors always find themselves in a situation where they seem to be accumulating losses consistently. This is a painful psychological experience for most investors, which they will naturally want to avoid.
This is until one day when the market realises the turnaround has been successful, or there is a buyout at a premium or a big special divided, and the share price pops. If the value investor has done her work properly, the overall return would be satisfactory despite the long period of suffering. Over the past while, we’ve seen pops in Bell Equipment, Adcorp, Calgro and SCS Group plc due to take-over offers, special dividends or successful turnarounds. These “pops” have turned “dogs” into good investments. These are all held in funds I manage at Merchant West Investments and also some of our vehicles at RECM.
Contrast this experience with the experience of momentum or growth investors. Or, as I like to call them, “the feel-good guys.” The stocks these investors like to own always have a good story attached, and the share price is always going up. And, importantly, everyone else owns them, too. No pain is involved; it’s all just Kumbaya by the campfire.
Until the story falls apart, as it almost inevitably does, and anyone who has run a real business will tell you – trees don’t grow to the sky. So when this happens, our feel-good guys lose a ton, turning the overall return from owning the investment into a poor one, sometimes even disastrous. Recent examples include EOH, Transaction Capital, Steinhoff, Sea Limited, or anything Cathie Wood from Ark Investments ever touched – 4IR or other.
Delayed gratification is not a choice most people make naturally, especially when there are negatives associated with the delay. This phenomenon explains many things in markets, amongst others:
- why value funds are so much smaller than growth funds, despite their superior long-term performance;
- why so many charismatic CEOs are selling a story rather than managing their businesses;
- why so few people can be value investors, thereby ensuring the factor doesn’t get arbitraged out.
As I see it, investors can choose between a long period of pain culminating in a short period of joy – like supporting the Springboks—or a long period of joy culminating in a disastrous loss – like supporting the All Blacks.
I know which “kant” I’m on.