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‘In a lot of spaces the long term is your best friend’

Cannon Asset Managers CIO Tshepo Modiba talks his biggest investment wins and mistakes, and how he picks his shares.

RYK VAN NIEKERK: Welcome to this week’s edition of the Be a Better Investor podcast. It’s a podcast where I speak to the leading investors and business leaders in South Africa about their personal equity portfolios. We talk about their biggest wins, their biggest mistakes, and we also discuss how they decide which shares to buy.

My guest today is Tshepo Modiba. He’s been in the investment business for more than 15 years. He’s currently the chief investment officer at Cannon Asset Managers and he’s also the founder and director of Seriti Capital Partners.

Tshepo, thanks so much for joining me today. I want to start off with your qualifications. You studied mathematical statistics, of all things. How did you move from mathematical statistics into the investment world?

TSHEPO MODIBA: Thank you for having me, Ryk. I would like to tell you that it was all very calculated and made through strategic decisions, but I really, I think, stumbled on the industry. A friend of mine just highlighted that there was an investment role available when I was finished with varsity and I happened to apply. That was my entry into the industry. I haven’t looked back since then. But it wasn’t a grand plan when I was much younger.

RYK VAN NIEKERK: So it was your first job and you liked it, and then that determined your career?

TSHEPO MODIBA: Pretty much. I’ve always had an affinity for numbers and that’s why I studied just about everything mathematical that you could do at varsity, and investment is driven by a lot of numbers. So it speaks to me.

RYK VAN NIEKERK: Absolutely. Very interesting indeed. But let’s talk about your personal investment approach. When did you buy your very first share, and what was it?

TSHEPO MODIBA: My very first share in my personal capacity dates back to I would say 2010, when I took a stab. My first bit of research was covering what was a company called Pinnacle Technology at the time. I found it incredibly fascinating as an analyst covering it. So that was my first stab at my own PA [personal account] portfolio.

RYK VAN NIEKERK: Was that a successful investment?

TSHEPO MODIBA: It actually was. I call it fortunate because I think at the time it was a lot more art than science. I was fortunate that it did incredibly well until I needed the money. So yes, the share price appreciated quite significantly.

RYK VAN NIEKERK: Now you are a professional investor, you are responsible for managing many people’s pension funds, their savings, and in many ways you will determine how comfortably they will retire. That is a very important and big responsibility to have. Does your personal investment approach differ from your professional investment approach?

TSHEPO MODIBA: Not at all. Well, there is one subtle difference. As a business we don’t focus in the private-equity space. So I do dabble in investments in my personal capacity and in private businesses. But beyond that, anything listed. There’s a seamless match between my approach to the personal side and what we do as a business. I think that’s also a function of capacity. Every bit of time that I have I dedicate to understanding portfolios that we’ll invest in as a business.

RYK VAN NIEKERK: So you don’t have a different risk appetite for your own money versus other people’s savings money?

TSHEPO MODIBA: I guess the risk appetite is translated in the non- or unlisted investments. Typically I’m a big supporter of entrepreneurship, so I’m happy to support new startup businesses as an investment professional. We typically aren’t looking at companies at that early stage.

RYK VAN NIEKERK: Tell us about your portfolio. What are your biggest investments and which shares do you really think will perform very well in the near term?

TSHEPO MODIBA: That’s tricky. I got nervous there. You said ‘near term’. I have no idea what’s going to do well in the near term.

What I do, though, have is a hope that a few stocks will do well at some point. I have no way of figuring out what that timeframe will be. In terms of business and [as an] individual, we scour both the local market and the international market for opportunities.

I think on the local side a company that is particularly interesting and attractive for me is Afrimat – for a few reasons.

If you look at the South African mining environment over the better parts of the last two decades, I think we can agree that there’s been a structural under-investment in mining. If you look at capex spend over that period, it actually hasn’t grown at all. Exploration funding has lagged behind the other majors in terms of resource production around the world quite meaningfully.

What that’s meant is that there’s a handful of really high-level both greenfield and brownfield projects that have become available and Afrimat has quite strategically acquired some high-quality assets in that space, and I think is well positioned to do incredibly well from that.

RYK VAN NIEKERK: They bought the iron-ore operation out of business rescue and they’ve also diversified into coal, which I think they did it at the best time they could have done it. A very interesting company indeed.

TSHEPO MODIBA: They’ve also gone into manganese. They bought, I think, Gravenhage assets last year and I think that will come online in the next couple of years. So the diversification part of it is a good component.

RYK VAN NIEKERK: I said ‘near term’ earlier, and you said that scares you. I’ve got an investment portfolio and I look at it every day. I get an email with the breakdown of it, and the performance of the individual shares. When they go down, especially if they’re down more than 4% or 5%, I don’t like it. I really don’t. Of course I’m an amateur investor, but I’m sure for a professional investor like you, it would also be slightly concerning – even those short-term or daily movements. Or how do you look at it?

TSHEPO MODIBA: I think part of any investor’s psyche is really informed by a few components. The first is, I guess, when you join the market.

I joined the industry in 2007, and a year later or a year-and-a-bit later saw one of the biggest financial crashes of all time. What that period taught me is that, firstly, there’s underlying risk with just about any investment. But, just as importantly, [it taught me] to look through the short-term volatility because, if you have positioned yourself quite well, coming out of that the downside means a meaningful bounce in certain sectors – not across the board.

So I think that traumatic period that I entered the industry in essentially has sheltered me from short-term volatility.

It isn’t pleasant seeing your stocks that you’ve taken a view on pull back in the market. But I think that context has always helped my understanding. As we highlighted at the beginning, I am a statistician by training, and part of that is understanding that in a lot of spaces the long term is your best friend. That is the approach that I apply to my investments.

RYK VAN NIEKERK: Let’s talk about the private equity part of your portfolio. It is a very difficult market to enter. It is very, very risky compared to listed equities – that may be the perception of most people. How do you get into the private equity space as an individual?

TSHEPO MODIBA: What we investment professionals spend a lot of time doing is making investments in businesses seem like a particularly complex enterprise.

The reality is, I think, a lot of individuals you could argue are venture capitalists in their personal capacity – probably more venture capitalists than private equity.

That is to say, if you are a part owner of a shop or a part owner of some plant that produces bricks, or whatever the case is, effectively you are an example of a venture capitalist who has an allocation to unlisted investments.

And I think that’s the mindset that broadly people should incorporate in their assessment of their overall investment portfolio.

Having said that, I am fortunate enough to have a wide range of a pretty good network of highly talented people across the various sectors. As part of that one gets sight of interesting opportunities in different sectors. If the balance sheet allows for it, then we explore investments into [those].

RYK VAN NIEKERK: Yeah, that is an interesting approach and I believe those networks are absolutely critical, because you need to discuss your view and bounce it off other people. I think in many ways people look at numbers and, as you said, you’re a statistician, but sometimes you need the opinion of other people as well. How much do you rely on the views of people you trust in your investment decisions?

TSHEPO MODIBA: I think you highlight a very important point within the opportunity set on the unlisted side. Ultimately most of it is really personal network. In terms of what informs the final investment decision, I pay as little credence to other people’s opinions as possible.

What I try to do is make the underlying investment thesis of a particular company – whether it’s listed or not – determine my end decision.

I like to essentially let the numbers speak for themselves. You want to assess a business by its strengths and weaknesses and build in some sort of financial projection or financial model that informs your decision-making. Ultimately that will help mitigate any inherent biases that come from other people’s opinions.

RYK VAN NIEKERK: Do you invest in crypto at all?

TSHEPO MODIBA: No, not as yet. My fundamental premise is that it may come across as quite boring. But if I can’t identify the drivers of capital appreciation or income – and again, I’m putting this on me rather than an assessment that they don’t exist – if I can’t identify those drivers, then I don’t invest in a particular instrument because I essentially haven’t found a consistent way of assessing what’s going to drive the appreciation of cryptocurrencies. I shy away from it.

RYK VAN NIEKERK: But have you looked at it?

TSHEPO MODIBA: I have looked at it, have looked at a few different ones, Bitcoin being the most prominent. But again, because I don’t really understand what drives the short-term and long-term movements I have not invested.

RYK VAN NIEKERK: Now let’s get to the question everybody waits for. What was your best investment ever, and what was your worst one ever?

TSHEPO MODIBA: In reality, some of the best investments have been essentially time spent in understanding investments. I’ve been fortunate enough to spend a little bit of time at NYU [New York University] with Professor [Aswath] Damodaran, who is essentially a guru on how to value businesses.

I’ve been fortunate enough to do quite a bit of reading around different investment professionals’ thoughts and viewpoints on what drives good investments or what drives bad investments, and that time spent has been essentially an investment in building tools that allow me to discern the upside on a particular investment or not.

And then in terms of some of the worst investments – there’ve been a handful. We were invested in, as an example, in DP [Investments]. I had actually a week before just up-weighted the share in the portfolio, the week before the Gulf of Mexico oil spill, and the share price then halved within the space of a day.

We’ve been invested in Gijima. I think we were buying at around R1.22/share and the ‘Who am I Online’ contract was under dispute and the share price plummeted.

So there’ve been a handful of instances where the market catches you. I think the important bit for any investor – because I almost feel like it’s inevitable that you’ll find those – is that you spend time assessing how you got it wrong. I think the ‘how you got it wrong’ is almost just as important as ‘how you got it right’.

RYK VAN NIEKERK: Did you get out quickly or did you sit on your hands?

TSHEPO MODIBA: Unfortunately in the case of Gijima we sat on our hands and so, no, we didn’t get out quickly.

I guess that’s also one of the learnings. If you are going to panic, you probably need to panic very quickly.

RYK VAN NIEKERK: Then there are many amateur investors who are trying to build portfolios and they like to do it themselves as part of a learning curve. What are the biggest mistakes you think amateur investors make?

TSHEPO MODIBA: I think one of the mistakes is essentially not doing your own research and not coming up with your own viewpoint of why you’ve been invested in a particular company or asset class, and rather leaning on other people’s viewpoints. I think that’s probably the biggest mistake that people make.

My personal view is if you’re going to be right or wrong you should be right or wrong based on your assessment.

That way you can essentially do an audit as to what drove the decision-making to align you in a particular path.

RYK VAN NIEKERK: Tshepo, thank you so much for sharing your insights, and may your investment portfolio go to new highs. Hopefully the private equity or the venture capital counters do really well, because I think that is a very interesting space and there’s a lot of room there, because it not only can create wealth, it can also build our economy because successful business are a key pillar of a successful economy, and may solve a lot of our social problems. So good luck with that.

TSHEPO MODIBA: Thank you kindly, sir. Thank you for your time, Ryk.

RYK VAN NIEKERK: That was Tshepo Modiba. He is the chief investment officer at Cannon Asset Managers. He’s also a founder and a director of Seriti Capital Partners.

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