You don’t have to make money the same way your neighbour does

RYK VAN NIEKERK: Welcome to this week’s edition of the Be a Better Investor podcast. My name is Ryk van Niekerk and in this podcast series I speak to leading investors and business leaders about investments. We also take a peek into their personal investment portfolios. We try to get a sense of how they analyse investment opportunities, what shares and assets they invest in, and whether they have more hits than misses. The idea is to identify a few golden nuggets of wisdom to help amateur retail investors to become better investors.

My guest today is Jan van Niekerk. There is no relation, although we both sat in the same mathematics class at university many years ago. He went on to become an actuary, and I did not. I became a journalist for all my sins. Jan is currently the CEO of RECM [Regarding Capital Management] and the CFO of RECM and Calibre. He was previously the CEO of Peregrine Holdings and the executive chairman of Citadel.

Jan, thank you so much for joining me. You have obviously been at the head of many asset management firms. Are you currently managing any funds?

JAN VAN NIEKERK: Well, Ryk, thank you very much for the opportunity. At RECM we have one specific fund that I manage at the moment.

It’s a qualified investor hedge fund, called the RECM Flexible Value Fund. It was set up five years ago, basically for the owners and friends and family of RECM to invest their money in one pool that can be managed properly and with the specific objective of generating decent returns over time. So that’s the only fund I’m managing at the moment.

And then obviously we are also responsible in the group for managing two listed investment vehicles. The one is RECM and Calibre, as you’ve mentioned. And then the other one is a story of investments, which is domiciled in Mauritius, but also listed on the stock exchange in South Africa.

RYK VAN NIEKERK: That is very interesting, that you manage let’s call it a closed hedge fund. But is that a typical approach from CEOs and C-suite executives in South Africa – to pool their money and to manage it almost collectively, obviously to maximise wealth?

JAN VAN NIEKERK: Ryk, I wouldn’t be able to speak for other people.

What we were looking to do is to have a way of making investments in a broad range of instruments where we have the most efficiency in terms of the lowest possible fees and execution. And then also to see if we can get them the most tax-efficient manner and also get the administration around that as little as possible.

It just turned out that this specific structure, which is a qualified investment structure, gives us most of those benefits. It happens to be called a hedge fund, but I think there’s a connotation to the name and the term ‘hedge fund’. So please, we do this because we want to make money from investments, not for the sake of calling ourselves hedge-fund managers.

RYK VAN NIEKERK: Well, we’ll come back to that fund a bit later. But just tell us a bit about your background. Where did you grow up and when did you decide that your career would be in the management of investments?

JAN VAN NIEKERK: Ryk, I’m a farmer’s son. My family have been sheep farmers in the big metropolis of Pofadder, which is up in the Northern Cape, just south of the Namibian border.

Early on in life I figured out that it’s way too hard to make a living that way. So I studied at Stellenbosch – that’s where, as you said, you and I met. I became an actuary.

But early on, even in high school, I was buying and selling shares through the bank manager at the branch in Pofadder in those days. And then at university I spent a lot of my time at the stockbroking office around the corner – Huysamer Stals at the time in Talk Street. I’ve always been involved in investments and getting more and more involved in private ventures as well, because business interests me.

RYK VAN NIEKERK: What was the very first share you bought?

JAN VAN NIEKERK: It was a company called Rustplats, Rustenburg Platinum. That’s in and up somewhere in Impala [Platinum], if I’m not mistaken, eventually over the time. And the second share I bought was called Veka, V‑E‑K‑A. It was a clothing manufacturer at the time. The only reason I bought them was because I liked their names, and the share chart looked pretty. There was no detailed analysis on that.

RYK VAN NIEKERK: So you live in Pofadder, you work, you buy shares through the bank manager – and you bought a platinum share. If you’d held it till today, it should have been really valuable, especially if it is in Impala.

JAN VAN NIEKERK: The platinum mines have changed their makeup over many years and these assets get swapped around between [them]. I don’t think it was Impala at the time; they bought it out, so I would’ve received some shares in another company in the interim. So yes, I didn’t hold it all the way through. I should have, but I didn’t.

RYK VAN NIEKERK: Let’s talk about your investment approach, and especially the evolution thereof, because I assume your approach changed significantly from when you were at school and you bought your Rustplats share, to today. Of course you are a lot more qualified, you have a lot more experience. How did your approach evolve and what exactly is your approach today?

JAN VAN NIEKERK: The interesting thing is, when you start off, human nature kicks in, and the one big lesson that I think all of us can take from that is that to be successful in investing, you need to understand that you will be fighting human nature, your own nature, all the time, because all the things that have kept humans alive in the wild work exactly the wrong way around when it comes to investing in listed instruments, where the prices change all the time. Your natural inclination is to want to go with the herd, and unfortunately that doesn’t lead to good outcomes.

So my first experience was being a 13-year-old buyer and seller of shares in Pofadder through the bank manager. The only source of information we had was the Afrikaans newspaper that arrived [the] next Friday; last Sunday’s paper. By the time the information and the newspaper in Pofadder got to me, the guys on the floor at the stock exchange had bought and sold their shares already. So reading the newspaper to make decisions didn’t work then, and it still doesn’t work today.

So that was the first lesson – don’t invest on the back of what you see in the newspaper. And certainly, if you want to invest with the news, that’s not going to work. You might [want to] go against what the newspapers say.

Then I thought, well, if I draw lines on the share graph, on the piece of paper with the share graph prices, I can figure out what’s going on. And then I also figured out that technical analysis works for many people, but again your personality and your DNA need to be suited to that way of investing. If you are bound to second-guess yourself, then technical analysis is not a good way to do it. So I had to figure out that that doesn’t work for me, for my personality.

And then I was lucky enough to have a bursary from Sanlam and I ended up in the investments division with Sanlam. At the time I thought, well, now I’ve arrived in heaven because there are all these analysts around you and they know everything about every company. So now I was going to be able to use that information and make money from investments. Then I learned the lesson that big teams of people have [disparate] sets of views or opinions. So in a big investment team we agreed on the facts of the investment very quickly.

So, if someone had to put down a specific company, let’s take an example, Sasol, within three to four hours, all the analysts that are at the table would agree on the most likely outcome of Sasol’s earnings for the next three to five years. But then it will take you two weeks to figure out what to do with that information because all of a sudden someone says ‘But my uncle works at Sasol and he’s told me that things are not that [good]’, and someone else says ‘Well, the price is falling, so let’s wait for a couple of weeks’.

So the disagreement in big teams never comes around the facts; it arises around the interpretation and the philosophy of how you want to use those facts to make money.

[You have] the realisation that smaller teams make better decisions. If you want to work in a team and not on your own, listening to too many people, you end up in paralysis; you’re not able to make those decisions. So those were sort of the big lessons.

And then at some stage I managed to read the book The Making of an American Capitalist [by Roger Lowenstein], which was sort of the original book written about Warren Buffett. That stuff made a lot of sense. I wanted to invest, and like many people wanted to be Buffett and invest like Buffett. It took me about 15 years to figure out that there’s only one Buffett and that’s Mr Buffet, and the rest of us have to invest in a way that suits your own personality. I think the hardest part of my life was wanting to be like Buffett and having to realise that you cannot invest like him, and that you have to do your own thing. Once I made my peace with that, my investment portfolio started working much better for me and for the people that invest with me.

RYK VAN NIEKERK: You’ve said a lot of things here, and I want to focus on two of them. The first one is ‘don’t follow the herd’. Of course that may suggest that you are much more of a contrarian investor, where you go against the mainstream perceptions. How do you not follow the herd?

JAN VAN NIEKERK: I think there are two things. The one is to cognitively realise that that’s not a good strategy. I think it’s easier when you talk to people to tell them and they will agree; but emotionally it’s difficult. Some people are contrarian just for the sake of disagreeing with other people. I don’t think that’s a productive way of going through life. I think you need to question whatever you see in the newspaper or in the media. So, well, someone has obviously thought about that statement very carefully and they want a certain outcome – and you always just have to wonder why they are telling this story or portraying the picture in a certain way. Is there potentially something in the background that’s slightly different that they’re trying to hide?

So how do you go against the herd? I think it’s just, Ryk, like you’re a triathlete or an endurance athlete. How do you become an endurance athlete? Well, you just have to practise. You have to do the same thing over and over again. And that’s why, if you are lucky and you have a long enough investment career, then you just practise more to go against what the herd is [doing].

Another way to do it is to just see what the popular opinions are – and there are many ways to figure [those] out. These days you can follow Twitter, and you can see where everybody is excited about something, or pessimistic about something, in terms of their comments.

The other way is just to look at the valuations that the market puts on assets. So when a company is trading at a very high price-earnings [PE] ratio, then by definition many people are excited about that business. And when it’s trading at a low PE or a low price-to-book or a high dividend yield – there are different ways to look at that – you can figure out that people are very pessimistic about that.

So there are a couple of ways to look for places where there’s an opportunity to go against the herd.

RYK VAN NIEKERK: You also said that your personality has an influence on your investment decisions. How so?

JAN VAN NIEKERK: I think it is important to understand whether you are an excitable personality. So, if you get excited about stuff or despondent about stuff quickly, then you need to stay away from investments where the price of the asset changes regularly, because, whether you like it or not, your emotions and your mood do get affected by your success in the market. If you bought something and the price goes up by 20% in a week, you can’t help yourself congratulating yourself and being excited. Or if you buy it and it goes down by 20%, then you get depressed. And if it happens a few times in a row, you start questioning your own abilities and your role in life.

So I think it is important to know whether you are a constant, stable personality or an excitable personality, or whether you are a grumpy personality where you always look for things that will go wrong. If you are by nature cautious, those things determine, sort of, the parts of the world where you should be looking for investments that fit your DNA.

Some people by [the] nature of who they are should be index investors. Somehow it looks exciting and interesting to buy and sell stocks, or get involved in other securities, because other people are making money there, but fundamentally they’re not wired to do that. And that’s where you get into trouble because you then end up buying the wrong instrument for the wrong reason and, when it doesn’t go your way, you sell it at the wrong time for the wrong reason.

So I think that it’s very important to understand your own personality, and nobody else can tell you about that.

You just have to have an honest conversation with yourself.

RYK VAN NIEKERK: So people with different personalities will have different portfolios?

JAN VAN NIEKERK: Absolutely. And will have joy in their life and profit in their pockets out of different portfolios. That’s okay. You don’t have to make money the same way your neighbour does.

RYK VAN NIEKERK: You also made an interesting point about facts and opinion. You said it’s relatively easy to get consensus about the facts about a potential investment opportunity, but it’s a lot more difficult to formulate an investment opinion based on the facts. How do you look at facts and use them to formulate an investment opinion?

JAN VAN NIEKERK: The conclusion of all of those lessons at the moment is the way we operate. I’m the individual. I take responsibility for executing transactions – so deciding when to buy, and when to sell. I have a team of two analysts that work with me on the instruments that we consider for the fund we manage. They help me with gathering information, doing the calculations to understand where what we call the fair values of the assets are. But ultimately there’s only one person that makes a decision.

The issue with how to take facts [and incorporate them] into executable transactions is [that], as soon as you have teams making decisions, then you compromise. And also what compromise means is when something works out well, everybody claims success. If something doesn’t work out well, then everybody blames the other people.

So single-point responsibility is one way to deal with that; one person incorporates the facts, makes the decision and moves on. And if you’re not successful at doing that, then let someone else do it, and you spend your time gathering the facts.

The other [thing] is how you take facts [and formulate them] into opinions. I think that is where experience helps and where understanding your own way of looking at the world works.

The third one is understanding your own pain threshold – how much pain can you take?

The way I invest – there is a contrarian nature to what I do, which means that I don’t discuss my investment portfolio with my friends at dinner parties because, by and large, the stuff we buy they hate, and the stuff we don’t buy they like, so it doesn’t make for good conversation.

And in the last three years, the stuff we ended up buying was not environmentally, socially, or governance-relatedly acceptable. So the ESG [environmental, social and governance] crowd didn’t like it. But that was the reason why many of these assets became cheap. So keep your ideas to yourself.

I think the fourth point is as soon as people start talking publicly about specific names – and I think this is an important thing if you are investing – you have to look at the behaviour and the outcome of your portfolio. Some of the things you buy and sell will work out and some will not work out, but you have to look at the result of your combined portfolio. As soon as you start talking – human beings tell stories, that’s how we go through life, and we always just tell the stories of the stuff that worked out well or has worked out well recently. And what I find is once you publicly make a statement about a company or a management team or an idea, then it’s very difficult to change your own mind because you have told your friends, or you’ve told people on the radio about that. So part of the best advice is to keep your advice to yourself.

RYK VAN NIEKERK: But hopefully you can give us a peek into your hedge fund or the fund you manage. Can you tell us what is in there, or what sectors you like at the moment and where your money lies?

JAN VAN NIEKERK: We can definitely talk about that. The fund fact sheet is public information on our website, and there we disclose sort of the top 10 positions. I think I can speak around that.

As part of the positions we have in there we own a company called Lewis Stores, which is a furniture retailer that has been trading very cheap for a long time. The reason – and perhaps this is more an example of a thought process – Ben Graham originally coined the phrase ‘a net-net investment’, that’s a company where the share price trades at a discount to its liquidation value.

And the way we calculate the liquidation value for this company is we just take the current assets. So that’s just the cash in the bank and the debtors. So literally just [look at] all the money they can get in the next six weeks. We deduct all the liabilities they have on the other side. So all the leases that they still need to pay, all the creditors they still need to pay, the tax, all of that, and then [we look at] the value that’s left. So at current cash and receivables, less all the liabilities – that’s what we call ‘liquidation value’ – and the share price of this company is lower than that.

It means that if you can today go and buy the entire business, collect the money, pay all the liabilities, and you’ll have money left, then you get all the stock and you get all the brands and all the hidden assets on the balance sheet – all of that – for free.

So Lewis trades at a discount to its liquidation value, the business trades profitably, it makes enough money to pay dividends to its shareholders and it is buying back some of its own shares.

What happens is, if a company that is trading that cheaply buys back some of its own shares, the remaining shareholders own more of their own company afterwards, because some of the shares have been retired. That kind of setup in combination is something that normally works out well over time. We’ve seen happen it in many parts of the world, and that was the stuff that triggered us to invest and own Lewis.

So the share price has done okay, and on top of that we’ve received some dividends.

So the total return out of that has been quite good. The nice thing is, if management does the right stuff in a business like that, then we don’t have to make another decision. They are doing all the hard work on behalf of shareholders.

RYK VAN NIEKERK: I’m looking at Lewis’s share price performance over the past few years. Over five years the price has risen by 70%, over one year by 40%. In between it lagged at a very low PE, as you’ve said. When do these type of investments become a value trap? Do you regard such investments as a value trap and how do you react to it?

JAN VAN NIEKERK: Yes, I think you’re absolutely right. The risk of scratching around stuff like this is that you end up in a place where you never make money, and that’s why most of our investments have a time limit on them as well. So when we initiate an investment, after 18 months I will review it to say, well, this investment: is it panning out the way we know, or we have seen in the past how these things work? And if it’s not panning out, then we move on. There’s no use in getting stuck in something. So just remember Lewis pays a very high dividend yield. So the returns you are mentioning there, that’s what’s happened to the share price. On top of it, we’ve been paid a dividend yield of close to 10% a year for the last couple of years [waiting] for the value to unlock, so you have to add that on top.

RYK VAN NIEKERK: Just mention a few other companies you’ve invested in.

JAN VAN NIEKERK: [Among] some of the other assets that we own is Thungela, which is a coal company that was spun out of Anglo American in June last year. The origin of the investment thesis was that Anglo owned some coal assets. [For] some of that they were joint-venture investors with other mining companies and some they owned outright. And then most of the coal assets they managed to sell because their shareholders were upset with Anglo American for not being ESG-compliant. The last bit that they couldn’t do was to get rid of the South African coal assets. So in their wisdom, they put all of those assets into a subsidiary company called Thungela and then distributed the Thungela shares to Anglo American shareholders. Those same shareholders told them that they didn’t want to own coal shares.

So it was quite clear to us that, to those shareholders, Thungela was a small company compared to Anglo American. So most of the big institutions then promptly just sold those shares without even looking [at] what the value of the price was. They sold Thungela at somewhere between R25 and R35 a share and promptly, within a year, I think, Thungela paid its dividend of R18 a share. This year they probably should pay a dividend closer to R50 [a share]. So you would’ve made your money back just on the back of the dividends already.

The reason the opportunity existed was because there was just this general sense in the world that ‘It’s a bad thing to own coal and coal is going to kill the world and [there is] global warming, and we must stop it immediately’ – whereas the real view is that we need to use less coal over time, but you can’t stop using it before you have an alternative in place.

So the world will need coal for quite some time, and Thungela will be able to sell coal to many people in South Africa and outside of the world for quite some time.

The share price – even today – reflects a lot of pessimism by investors around this. It also shows that many people have a mandate from their clients to say ‘I don’t want you to invest in something like that’, which means that the demand for Thungela’s share is low and it’s not cheap.

RYK VAN NIEKERK: But the share price has performed absolutely phenomenally since the listing. I think in many ways it’s an ESG decision, and not only an investment decision. Some asset managers are actually quite aggressive about only investing in green companies, if you could call them that.

Just lastly, Jan, tell us what has been your best-ever investment, and what has been the biggest dog you’ve ever bought.

JAN VAN NIEKERK: I’m going to have to think carefully. Thungela is probably [best]; it’s top of mind. I can dig out some others, but that’s been a spectacular investment.

In my early years many people will remember the company Peregrine was listed. I was obviously employed there, but Peregrine was one of those financial services companies where, after the small-cap boom of the 1990s, all of those shares became very unloved. I think the share price fell from R27 to R1.40. I recall we, as employees, bought shares at R1.40. Eventually that share was taken private at R24 or something like that. So that was a good investment outcome, ultimately.

And the worst? I’ve bought a couple of things that went to zero. Especially if you use options from time to time, some options expire worthless, but that’s by design. I’ve had a couple of businesses where the share price had gone to zero. What you need to do there is to make sure, when there’s a chance like that, just to keep the position in your portfolio manageable.

RYK VAN NIEKERK: Come on. Which companies were those?

JAN VAN NIEKERK: Well, perhaps let me talk about a recent experience. There’s a listed company called Rebosis, which has an A and a B unit, and there’s a lot of uncertainty around the future prospects, especially of the A unit. The outcome there is either the A units are going to be worth zero or worth a lot more. So I’ve made an investment in Rebosis A units on the basis that I think there is a chance that it’s more positive than not; but the share price has come off a lot this year already, because there’s just a lot more uncertainty. So I think that might have been the worst one in recent history.

RYK VAN NIEKERK: Jan, thanks so much for sharing your insights today. I think it’s been a very, very interesting discussion, but we’ll have to leave it there. Thanks so much for your time today.

JAN VAN NIEKERK: Thanks a lot, Ryk.

RYK VAN NIEKERK: That was Jan van Niekerk. He’s the CEO of RECM and the CFO of RECM and Calibre.