The importance of ‘violence’ in a portfolio

‘You need to make up your own mind around whether what the market is seeing is correct, or the opposite. Sometimes it’s very difficult’: Craig Gradidge of Gradidge Mahura Investments.

RYK VAN NIEKERK: Welcome to this week’s edition of the Be a Better Investor podcast. It’s a podcast where I pick the brains of the top investors in the country and we try to understand how they approach investments, how they pick winners and what they do when they end up with a dog in their portfolio.

My guest today is Craig Gradidge. He is the Gradidge in the financial advice and investment group Gradidge Mahura [Investments], and he has a long list of qualifications. He has a BCom and a BCom Honours. He has a postgraduate diploma in financial planning, as well as an MBA. He is also the vice-chairperson of the Investment Competency Committee of the FPI (Financial Planning Institute of South Africa), and he serves as an independent expert on the investment subcommittee of Medshield. But, probably more importantly, he has been in the industry since 1996. Craig, welcome to the show. Gradidge Mahura offers a very diversified offering. How big is the investment arm?

CRAIG GRADIDGE: Good day, Ryk, and good to chat to you. Our investment arm is just close on R1.9 billion assets under advisement, so it’s grown in the last few years. The business has been around since 2008, [when] we got our timing horribly wrong in starting the business. We got our licence during the epicentre of the global financial crisis, but we managed to survive – and here we are kind of 14 years later.

RYK VAN NIEKERK: Is it a focus area for you going forward? Are you formulating structures to do research into equities and other asset classes to try and obviously build this business, but in a more formalised way?

CRAIG GRADIDGE: Yes, that’s certainly part of the longer-term strategy of the business. With these businesses you’ve got to first build up a track record. You’ve got to build up a bit of credibility in the market. You’ve got to service the client base that you have. Over time, as you build the business, you are then able to bring in these different components. That’s certainly a bit further down the road. For now, we continue to build the business and service our existing clients.

RYK VAN NIEKERK: Craig, let’s talk about you. Do you have your own investment portfolio, and do you really dabble in the market?

CRAIG GRADIDGE: Yes. I’ve been investing in the market in my personal capacity since 1998, so I’ve seen a few crises over the years, caught a few winners, caught a few losers as well, but it’s been an incredible journey just to learn from markets over the last sort of, what’s it, 24 years now.

RYK VAN NIEKERK: Can you remember what share was your very, very first investment?

CRAIG GRADIDGE: I can, it was Murray & Roberts. The story behind my first investment was a strange one. I worked in Houghton and I had a meeting in Sandton. Driving from my office to the meeting I drove past about four or five Murray & Roberts signs. I think one of them was where Melrose Arch is now and I was struck by the fact that I’d seen so many Murray & Roberts signs on that short trip. I came back to the office and had a look, and that share was trading around R2.90. I opened my trading account, put money in and bought and sold not long afterwards – I can’t remember, about a year afterwards – at double what I had invested. Had I been a bit more patient I could have sold at R100. That was my first lesson in kind of holding on to the winners and letting the winners run. But nobody gets poor by taking a profit, apparently.

RYK VAN NIEKERK: Absolutely. If you take a profit, it’s never a loss. I’ve spoken to many investors, and their first investments are also linked to personal experience. You drove past a few signs and obviously that created a positive sentiment towards the share; you had a glance at it and then you bought it. Would you do that today?

CRAIG GRADIDGE: I’ve done that on several occasions since. I remember when I moved to Cape Town years ago, I think it was in the early 2000s, I had a company phone and I had strict limits around usage of the company phone. So, I got another phone so I could phone the girlfriend who is now my wife. [Ryk chuckles] I remember going to a BP garage, getting airtime for about R30 or R40, and I got home – and I’d lost the ticket. So, I had to go back to the garage and get another one, and then got home, and spoke to her for all of, I think, six or seven minutes, and then the call cut. Now, you know, when you’re young and in love six minutes is nothing. But I was just struck by the fact that, even though I hadn’t used the product, I couldn’t get a refund on the ticket I’d lost. I spent quite a lot of money on those few phone calls. Phone calls were a lot more expensive back then. That’s how I bought MTN for, I think, about R75. So, it was different experiences.

RYK VAN NIEKERK: But if you look at any investment website – asset management, a firm’s website, even on your own website – all the investment strategies are built around research, built around long-term strategies, but many investors use a gut feeling and a personal experience to choose shares. Obviously, when you buy shares with a gut feeling, luck must play a massive role. How do you see luck as being part of an investment strategy?

CRAIG GRADIDGE: I think when it comes to investing on that basis – with both those investments, I certainly didn’t put a lot of money on the table – the longer [you are] in the industry and completing studies and all of that, then it becomes a bit more formalised and you start looking at revenue trends and margins and return on equity and various variables.

But there is a soft element to it, where people are talking about a business and there’s a bit of excitement and then you read the commentary from the financial statements around the prospects facing a business. So, when you start investing bigger amounts, certainly you want to have a lot more structure and perhaps a lot more research into the shares that you are buying.

But I think in a well-balanced portfolio there needs to be – well, I wouldn’t say there needs to be, but very often there is an element of taking a chance; a share may have fallen deeply out of favour and the price has been knocked down.

We know from experience that when things are good the market often drives share prices too high, and when things are bad, it often drives share prices too low. Those present opportunities either to get out or to get into a share.

With those sort of speculative bids you need to have good risk-management around that.

RYK VAN NIEKERK: Do you do your own research, or do you look at other people’s research?

CRAIG GRADIDGE: I certainly look at other people’s research. You get research that’s available on the platforms where I’m trading, and then also being in the industry you attend various manager presentations where they present their research. We then go back and do more research on those stocks.

RYK VAN NIEKERK: But that is complicated, because I see on Profile Media, for example – Profile is the data provider to Moneyweb – there is a summary of analysts’ recommendations. And sometimes, say if there are five recommendations, two would say it’s a buy, two would say it’s a sell, and one would say it’s a hold. So, research definitely isn’t consistent. You just need to pick the right research.

CRAIG GRADIDGE: Well, you need to make up your own mind. If everyone is saying ‘buy’, everyone can be wrong. You do get those scenarios where it’s unanimous – like five buyers, zero sells and zero holds, but you still need to make up your own mind around whether what the market is seeing is correct, or the opposite. Sometimes it’s very difficult going against the market, but sometimes it can pay off quite spectacularly.

RYK VAN NIEKERK: Absolutely. I’m looking, for example, at the consensus view from Profile about Naspers, and it is a strong buy. This share has decreased or dropped by over 50% over the past year. But research is not a guarantee for success and there are many, many companies or many investment houses that have more misses than hits.

In your portfolio what is the ratio between hits and misses?

CRAIG GRADIDGE: Look, as it stands, I think there are about three or four misses, three or four hits and kind of 16/17 sort of middle of the road, kind of positive middle of the road, similar to the market. But also there are a few misses that are no longer in the portfolio because they’ve triggered stop losses that I’ve put in.

If I buy a share and I think it’s a long-term hold and the results come out, and the story has maybe changed a bit and the share price drops, I’ve got a stop loss at 15% or 20%. If it’s a hold, I’d have the stop loss at 30% because with your speculative positions you expect a bit more volatility. I think I’ve had about three or four sales in the last year, so that would up my losses to about six or seven.

RYK VAN NIEKERK: Talk to us about stop losses. How important is that for a normal retail investor to consider?

CRAIG GRADIDGE: I think a stop-loss strategy is part of your risk management. As I say,

I think it’s prudent to have a stop loss in place because, one, you can be wrong about a company. Two, a company’s fortunes could change and they [might] fall out of favour with the market, or the sector falls out of favour.

When you make a decision and you’ve got this confidence that you are right about something, a stop loss kind of [protects] you from yourself. It stops you from kind of your own hubris and a kind of self-importance – overconfidence, so to speak. So, I think a stop-loss strategy is important. You should be clear about what your stop losses are, and where a particular share falls in. Is it a long-term core holding, is it a kind of a speculative position, that sort of thing, and when it breaks a stop you sell it.

RYK VAN NIEKERK: That’s one way of looking at it. Other investors would say, listen, one of the biggest mistakes you can make as an investor is selling while a share is going down, selling it too early and then you miss the rebound. Is that contradictory, or is it just maybe that you need to manage your risk within a cycle, and you need to make sure that emotion doesn’t influence the decision?

CRAIG GRADIDGE: Well, that’s part of the reason for the stop loss – that you take the emotion out of it. But you must be comfortable with a certain level of downside and you’ve got to draw the line somewhere. I think for everybody it’s different. There are lots of academic papers around stop-loss strategies; it’s a personal thing. Personally, if I’ve got what I know is part of my speculative part of the portfolio, and typically the other risk-management part around that is sort of size, if it’s a speculative investment I’m not putting 10% of the portfolio there, I’m putting 2% to 3% of the portfolio there and I’m putting it with a bigger stop. Whereas, if it’s a core holding in the portfolio, then perhaps a sort of 15% to 20% stop loss. It helps to take out the emotion.

RYK VAN NIEKERK: Do you think it has saved you money?

CRAIG GRADIDGE: It has. In some instances, it has. In other instances, particularly in sort of highly cyclical sectors, I’ve sold on a stop and it fell further and then turned around with the cycle and went through the stop level, through my buy level, and carried on a lot higher. But eventually you come to accept that as part of investing.

RYK VAN NIEKERK: Let’s talk about your best and worst investments. What would you regard as your best one yet?

CRAIG GRADIDGE: My best one yet? … I don’t remember the exact timing, but that was buying Pinnacle Technologies at around 70 cents and selling it at around R14. So, it was a 20-bagger.

RYK VAN NIEKERK: That was probably during the dotcom boom in the late ’90s.

CRAIG GRADIDGE: No, no, no. That was in the 2000s. I think I had to sell because I had started the business and taken a salary cut. So, I was kind of exiting portions of my portfolio over time. But yes, it was in the 2000s, it wasn’t in the late ’90s.

RYK VAN NIEKERK: And your biggest dog?

CRAIG GRADIDGE: My biggest dog? You see, you can remember the winners. I think early on I got caught up with what was it, Greenwich – I forget some of their names. That was during the small-cap bubble that burst; there were some of those small-cap financial stocks.

RYK VAN NIEKERK: Okay. Well, as you say, sometimes you forget.

CRAIG GRADIDGE: Brainwave, there we go. Sorry.

RYK VAN NIEKERK: Brainware. That was Piet den Boer, if I remember correctly.

CRAIG GRADIDGE: Yeah.

RYK VAN NIEKERK: That’s many years ago.

CRAIG GRADIDGE: That was early on in the game.

RYK VAN NIEKERK: What advice would you give amateur investors? How do you think they can improve their game?

CRAIG GRADIDGE: I think you’ve got to be clear with investing. You’ve got to be clear about your principles. Ultimately, you’ve got to make a decision today, and ultimately only over time will you know if that was the right or wrong decision. So, when you’re dealing with that level of uncertainty and having to make decisions in a situation like that, you’ve got to have clear principles. So, be clear around your position sizing. Be clear around the strategy: are you going to go for growth-oriented stocks, value stocks, [or] a combination. I think it’s good to have core positions in a portfolio; so there … a broad-based index tracker is often a very good core holding. Over time you’ll find that it’s a lot more stable than the rest of your portfolio.

Be clear around is this is a speculative position that I’m buying? What are my expectations from this investment that I’m making today? And then be patient.

If you look at Twitter there’s a lot of discussion on: ‘this thing: the share has fallen; should I sell it?’, or ‘the share’s gone up, is it too late to buy’? People get caught up in short-term noise.

So, I think if you are clear around the principles and your objectives and the kind of companies that you want to hold, then do that and try not to get caught up in the noise.

If you do want a bit of excitement, take it with a portion of your portfolio and understand that the rest of the portfolio is kind of long-term boring equity returns.

RYK VAN NIEKERK: Can you maybe tell us which shares are in your core portfolio?

CRAIG GRADIDGE: I’ve got a few of the public BEE shares where I’ve built up sort of big positions over time. That’s just because there’s long-term value in there.

So YeboYethu is the biggest holding. Sasol BEE, which is a discounted Sasol share; it’s trading at the widest discount I’ve ever seen it at, close on a 55% discount. The long-term average for the discount is 30%, or around the 30% number. So that’s one I’ve been accumulating.

I’ve got a bit of MTNs I bought at the beginning of last year; I think at about R60. The average price was R60.

PSG is up there, and Glencore. Those are my top. Thungela has come in. Thungela started out as part of my speculative position, and then it kind of grew into a fairly big holding.

Some of the losers has been EOH. We are still up on EOH but, as I said, you always remember the winners.

RYK VAN NIEKERK: Yes. Just lastly, do you look at cryptos at all?

CRAIG GRADIDGE: Speculatively. What I’ve also done is I’ve stripped out the speculative completely from the main portfolio. I’ve played the speculative to EasyEquities. That’s where I hold my speculative part of the portfolio, far away from the main portfolio. That’s kind of to separate my mindset. That is, I know I’m on EasyEquities and I’m trading, and there’s kind of lots of ‘nudity and violence’ in the portfolio there, [Ryk chuckles] and I know what I’m there for. With the other portfolio it’s a lot more structured.

RYK VAN NIEKERK: Violence in the portfolio. How often do you trade?

CRAIG GRADIDGE: On the long-term portfolio not very often, probably 10, 15 times a year, maybe.

RYK VAN NIEKERK: Once a month.

CRAIG GRADIDGE: Yeah. On the speculative part I’ve been a lot more active. There I can trade three times a week. Like I say, it’s quite small compared to the main portfolio, so I’m not really bothered that there’s going to be tax implications with that. Then the crypto goes in, and all the small caps and things like that.

RYK VAN NIEKERK: Craig, thank you so much for your time and insights today, and good luck with your core as well as your speculative portfolios. Hopefully this year brings good returns.

CRAIG GRADIDGE: Thank you, Ryk. From your lips to God’s ears.

RYK VAN NIEKERK: That was Craig Gradidge. He is the Gradidge in the financial advice and investment group Gradidge Mahura Investments.

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