The current debate of whether inflation is transitionary or structural has a sub-argument that references rising soft commodity prices, food inflation and struggling consumers and argues that food producers will be caught in the middle. This narrative makes some sense, rising input costs cannot be fully passed onto struggling end-consumers and someone is going to…
Category: General
General posts.
Open Letter to Mining CEOs
Writing this letter occurred to me while listening to Simon Brown’s MoneywebNOW podcast this morning where he and his guests spoke around the current free cash flow most mines are making. What will the miners be doing with all this cash (flow)? It is certainly a topic amongst our team (we are bullish on commodities…
Winners in Lower-for-Longer
Mike Schüssler wrote a piece about how the pandemic-induced rate cuts are impacting South Africa (Economic recovery: Low rates are playing a starring role). Taking this further, I am going to build a top-down investment shopping list for those who believe that rates will remain low-for-longer and inflation benign. Simplistically, low interest rates are stimulative…
Company valuations: Why first principles matter most
‘The more variables going into a valuation, the more chance there is that that the outcome is actually rubbish’: Keith McLachlan, Integral Asset Management. I sometimes write better than I speak. Especially at 6am.. For the last answer of this interview, the key point I was trying to make is the following: All successful businesses…
How is South Africa Doing (right now)?
Earlier this week, Stats SA published a bleak GDP update for South Africa that saw the domestic economy shrink -7.0% y/y in 2020. Perhaps a little better than expected but still a huge contraction. But that was last year and is old news now. A more relevant question is how we are doing right now?…
Distell: Quietly Winning
Despite having most of its products effectively banned for a little over a fifth of the reporting period, Distell Group Holdings Ltd (code: DGH) published a sterling H1:21 result. Group revenue grew +3.8% y/y with volume growth of +0.8% y/y, profits and cash flows were equally strong and the Group’s balance sheet degeared further. Context…
Is Inflation Picking Up?
As with most of the world, South Africa’s inflation rate has been falling for a number of years. This becomes incredibly clear when you see it visually: Yet, globally bond yields are lifting, yield curves are pushing out, soft and hard commodities are rallying & energy prices are rising. All the indications are that inflation…
Redefine Properties: Is this REIT-listic?
Late on Friday, Redefine Properties (RDF) published its long-awaited dividend announcement for the year-ended August 2020. You can find the full announcement here: LINK. A Real Estate Investment Trust (i.e. “REIT”) has some special privileges and they come with some onerous requirements. If you don’t satisfy the requirements of being a REIT, you lose the…
Timing Your Market Exits
‘A good exit starts with a good entry’ — Keith McLachlan. Full interview found here: LINK.
How to Fix the JSE
We cannot fix problems if we cannot be honest enough to admit that they exist. If we are honest with ourselves, there is something deeply wrong with the JSE’s stock market and it appears systemic. One way to see it is that the JSE’s ecosystem is stuck in a negative feedback loop. Our stock market…
Good Businesses Tend To Stay Good
OLD ARTICLE – Original posted on January 24, 2018 I have a counter-intuitive argument that scale can create problems. Why do I say this? Anecdotally, we know that you cannot choose which stock to invest in based purely on the size of the company. We know that investing is not that easy. But can we prove…
Management Shareholding Abuses
OLD ARTICLE – Original posted on June 21, 2018 A traditional view wants a listed company to have their management as large shareholders. This gives them skin in the game, aligns them to shareholders and incentivizes them to succeed. All perfectly good reasons. But, this did not prevent Steinhoff from happening. If anything, this was…
What Is & Is Not Fraud?
OLD ARTICLE – Original posted on July 24, 2018 The American-styled short-selling model works on aggressive negative press releases, research and other PR stunts (now apparently including legions of anonymous Twitter accounts) to drive a share price down. Fair is fair, none of these actions are illegal if they disclose their beneficial interest. While this…
When Does Valuation Matter & When Doesn’t it?
OLD ARTICLE – Original posted on October 5, 2018 Introduction: Fundamentals are what you get but valuation is how much you pay for it. The less you pay for a given set of fundamentals, the more you weight the odds in your favour that the investment will have a positive outcome. Hence, even if fundamentals are…
Tax-Free Savings Accounts: Buy Risk & Sell Time
OLD ARTICLE – Originally posted on June 4, 2019 A Tax-Free Savings Account (TFSA) offers a superb, tax-efficient mechanism to compound long-term investments for South African citizens. In the below example, I use an assumption of 15% CAGR per annum from a basic South African equity investment and assume that you are paying a marginal…
What Do Auditors Do & Not Do?
OLD ARTICLE – Originally posted on June 11, 2019 Following all the local corporate failures, the media and many (ill-informed) investors have savagely turned around and blamed the external auditors. While easy–and very human–to blame someone else like an external auditor for fraud, two things have become quite apparent: Many people do not actually understand what an “external financial…
Why Quality Matters for Small Cap Investors
The below is extracted from the December 2019 Alpha Prime Small & Mid Cap Fund investor letter where I briefly unpack our argument for quality in the small cap space: Quality: Above all else, we try to find good-quality, fast-growing, listed small cap businesses. Value: We invest in the cheapest of these options, constrained by our concentration &…
Lessons: Over-reliance on Management
OLD ARTICLE – Originally posted on January 7, 2020 The last couple of years have been very hard on those that invest in South African small cap stocks. Unfortunately, me, the Alpha Prime Small & Mid Cap Fund and my (incredibly resilient) investors have been no exception to this. Since the FTSE/JSE Small Cap Index’s…
Lessons: Two-edged Blade of an Anchor Shareholder
OLD ARTICLE – Originally posted on January 9, 2020 More than any other directive, human beings act in line with their individual incentives. In the natural world and bleeding into modern-day addictions to drugs, social media and pornography, human beings are predominantly incentivized by dopamines. In business, though, human beings are typically incentivized with money. The ability…
Lessons: Mining is (Dam) Complicated
OLD ARTICLE – Originally posted on February 10, 2020 I’ve been invested directly in a growing, junior coal miner for going half a decade, amongst several other mining-related investments. Likewise, I’ve followed a wide range of mining companies closely for even longer and previously was invested in a mining exploration company and poked around a…
Lessons: Management Over-value Themselves
OLD ARTICLE – Original posted on January 16, 2020 Per Wikipedia’s definition, “…illusory superiority is a condition of cognitive bias wherein a person overestimates their own qualities and abilities, in relation to the same qualities and abilities of other people.“ People tend to think that they are of above-average intelligence while, statistically, at least half are not….
Lessons: Narrow Doors Make for Tricky Thoroughfare
OLD ARTICLE – Original posted on January 27, 2020 As a fund manager of a small cap fund, I am keenly aware of liquidity in the stock market. It is not just a constraint but a risk that needs to be managed on both a granular and an aggregate basis. And, sometimes, it can also…
How Does Acquisitive Growth Work?
OLD ARTICLE – Original posted on January 4, 2017 Due to consolidation accounting (or “Group accounting”) rules, when one company controls another one (from 50% + 1 vote up to full-control of 100%, depending on circumstances), that first company (or the “parent” company) gets to accounting for both the financial performance of itself and the financial performance of all…
Lies, Damned Lies & Adjusted Earnings
OLD ARTICLE – Originally posted on September 23, 2016 When investing in a listed share, you are buying part of a business and own a portion of its future profits (or losses). Therefore, the per share earnings of a listed company are a big deal for investors with shares rising and falling base on them (or at least…
Forgotten Safeguard: Diversification
OLD ARTICLE – Original posted on April 7, 2016 The global economy is desynchronised with significantly diverging views at both global and country-level. China could implode, Europe could fragment and USA could falter. All of these could happen. And then you get commodity volatility coupled with massive forex swings (up and down)…. If you listen to…
Five Reasons Not To Invest In A Stock
OLD ARTICLE – Original posted April 1, 2016 Given the small cap space as a capital growth asset class and my predisposition towards being long, this website tends to be about which stocks to buy. Let me turn that on its head and give some (hopefully intuitive) pointers for which stocks to not buy. When you are…
Why Are You Investing in Small Caps?
OLD ARTICLE – Original posted on February 16, 2016 All the global uncertainty and domestic panic is a great opportunity to re-evaluate your risk profile as an investor. If you are reading this website, I think it is a fair assumption that you are interested in (if not actually actively) invest in the JSE small cap market….
The Value of Forecasts
OLD ARTICLE – Original posted on June 30, 2015 In the context of the stock market and its underlying individual listed companies, what is the value of building, making and using forecasts? By their very nature, forecasts for companies are an attempt to anticipate the future earnings of a company. They are not a promise of what the…