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True value investing allows a trusted share its ups and downs

John Biccard of Ninety One explains his long-term investing philosophy, citing his experiences with Impala, Tiger Brands and Cashbuild in particular.

RYK VAN NIEKERK: Welcome to this week’s edition of the Be a Better Investor podcast. It’s a podcast where I speak to leading investors and business leaders about investments and how they approach investments in their personal capacities. We try to get a sense of how they analyse investment opportunities and whether they have more hits than misses in their portfolios.

My guest today is investment legend John Biccard. He has a reputation as being one of the best fund managers in the country. He is also seen as one of the country’s foremost deep-value or contrarian investors. He invests in mostly unpopular shares, which most other asset managers steer away from.

John, thank you so much for joining me. How do you feel about the title of being one of the leading contrarian investors in the country? I would imagine it’s between you and Piet Viljoen.

JOHN BICCARD: Well, I think it’s kind. But I’ve been in the industry a long time. I’ve been basically in the stock market for 30 years, so there is a bit of bias.

A lot of success in life is if you’re the last person standing. I think my biggest strength is it’s not how smart I am, it’s how I determined I am. I think a lot of the secret, especially in value investing, is to keep going and to stick to your positions.

All types of investing is to make the decision, stick to it and keep compounding your money by consistently doing the same thing over and over again. Even if you start small, if you make a lot of correct decisions in the long term, eventually you’ll make some returns and you’ll make some money.

RYK VAN NIEKERK: We’ll get back to that determination later on, because sometimes you need to really grind your teeth when things go against you.

But just tell us about your background. How did you become a professional investor?

JOHN BICCARD: After I studied I joined the sell side, which is the stock-broking industry. That was in about 1990, and I joined a company called Simpson McKee Stockbrokers and basically I was a sales analyst for 10 years. That is analysing and writing reports for the asset-management industry. Then eventually Simpson McKee got bought out by HSBC, and I worked for them for a few years.

After 10 years I wanted to go on to the buy side – that is, invest the money rather than advise the people who are investing the money – and I joined Investec basically 10 years into my career, 20 years ago.

For the last 21 years I’ve been with Ninety One, which is the old Investec, and I’ve been running the Value Fund for that full 21 years.

RYK VAN NIEKERK: Before that how did you decide to pursue a career in investments and investing?

JOHN BICCARD: I’ve always been interested in the stock market, even when I was 20, but at 20 you don’t really know what you’re going to do exactly. When I finished studying I actually had a range of job interviews from retail to industrial companies and I happened to just get a job interview at Simpson McKee Stockbrokers, and I got hired.

So I can’t say I spent my whole life wanting to be that, because I think at 24 years old you don’t really know what you want to do. But I did have a financial degree and it looked an interesting job. So that’s how I got into it.

For the first five years I didn’t really know what was going on at all. I was learning and writing reports, but I can’t say I was a value investor then. I probably always had that bias, but I only really worked that out after five to 10 years in the market, although I think everyone does have a natural investment style.

So, because I’m a bit of a pessimist – let’s say I always see what can go wrong more than what can go right – I think I’m naturally biased to be a value investor.

But I only really became a value investor properly, as in I worked out exactly how I’d like to invest, after 10 years in the market. So that’s the other thing. It takes some time to work out what kind of investor you are, and that doesn’t really matter.

Obviously I’m a value investor and that’s how I do it. But you can actually make money as a growth investor or as a momentum investor.

But the secret is to work out what style you like, and then to stick to it and not to flip-flop between the styles, like you’re a value investor, but then the share halves and then you sell it all, and then you buy something that’s doubled because you want to be a growth investor.

The secret is to work out what your strengths and weaknesses are, and your plan, and then to consistently stick to it in the long term. The long term means 10 years of the same kind of investing. Investors are not investing their own money. Even if you’re buying funds, you know, funds are like shares. If you’re buying funds and you decide you’re like your fund, you have to stick to it. You can’t change if the funds starts doing badly.

RYK VAN NIEKERK: You also call that experience, because history seems to repeat itself. But what was the very, very first share you bought in your personal capacity?

JOHN BICCARD: I think there was an old share on the JSE called Masoli. Masoli Asbestos, I think it was. That’s how long ago, people still mining asbestos 30 years ago, But I didn’t really know. I think that was the first share I bought; I was 20 years old. I was like looking at the chart and saying it looks good. They’ve got a nice mine. But I didn’t really know what I was doing.

RYK VAN NIEKERK: But you also have a big personal investment portfolio. Do you manage that portfolio differently to the Value Fund you manage at Ninety One?

JOHN BICCARD: No. You’ll see, and it is quite easily disclosed these days – what personal holdings everyone holds. The shares that I hold are all found in the Ninety One Value Fund. I’ve got quite a lot of my money in the fund as well but what I found is that, especially in the smaller cap shares, when there’s great opportunities I buy.

First of all, we have very strict dealing regulations at Ninety One, so it’s a very well-regulated process, so basically I buy as many of a share that I can for the clients and, when I’m finished doing that, then if I like the idea, then I buy for myself too. And then [in] correct ways I first sell out the clients and then I sell myself out after that.

So in institutional asset management, if you’ve got two concentrates in a portfolio, that is if you have 10 shares at 10% each, your short-term volatility of returns goes up a lot – and in institutional money management people don’t like so much volatility because it makes a client nervous.

So, whereas in my personal capacity I don’t mind having 10 shares, and basically I have 10 shares. Generally they’ll be smaller cap ideas, and they’ll be the 10 best ideas in the Value Fund that I’ll have as my own personal investments too.

RYK VAN NIEKERK: Is it biased towards South African stocks?

JOHN BICCARD: Yes, because most of my money is in rand. So yes, it is because it’s a rand investment.

And actually in the last few years, especially in the small and midcap space, I think South Africans’ small and midcap shares will compete with any global idea in dollar terms of being great value and giv[ing] you great returns. That’s actually been correct in the last two or three years.

Two years ago South African midcap shares in dollars probably got to a 20-year low in terms of price and valuation. That’s the time when you need to obviously put as much as you can into them, and in the fund – and my personal capacity [at] that.

RYK VAN NIEKERK: But the midcaps and small caps performed very poorly for around a decade.

JOHN BICCARD: Yes.

RYK VAN NIEKERK: From 2010 to 2020. You spoke about determination earlier – how long do you stomach that poor performance before you realise, listen, maybe my approach isn’t working.

JOHN BICCARD: You don’t; you keep going. You do the work to start with, and if you bought the share at a sufficiently low valuation, it doesn’t really matter if the share halves. You just buy more, and if it halves again you buy more still.

RYK VAN NIEKERK: What do you call that? Averaging?

JOHN BICCARD: Averaging. Well, it’s a massive thing. Just on the averaging. Because I’ve done the work and I decide the share’s cheap, and the share’s down whatever percent – it’s very unlikely that the share’s going to turn up on the day that I happen to buy it [laughing].

You could be wrong by three years or four years. But it doesn’t matter. If you have done the work and you buy it, and it goes down the next day, you buy more.

Then every time it takes another step down, you’d go and check the numbers again and check that there hasn’t been some material change. The truth of the matter is that 95 out of a hundred times nothing has changed and you keep buying. Occasionally, five out of a hundred times, something has fundamentally changed that’s worsened the situation. In that case, maybe you don’t buy more. And then maybe one out of a hundred times, I actually change my mind and sell the share at a loss.

But if you’ve done the work to start with, and if you’ve bought the share with a sufficient margin of safety that you think this share’s worth R100 and you’re buying it at R50, it’s very unlikely that something’s going to change your fair value from R100 to R50. It’s going to change it from a R100 to R80, or R100 to R90, or R100 to R120.

But if you bought it at a 50% discount to what you think the fair value is, the odds are you can keep buying it. It’s unlikely that things are going to change enough to change that valuation down by 50%.

That’s the secret.

I think people often then lose faith and lose confidence in the investment, and they sell out. Generally that’s the bottom. And the point is it doesn’t matter to me how much time it takes, because generally in this sort of investing, you make nothing. You make nothing on fact. Probably in year one you lose money, and year two you lose money and invest. But whatever, the catalyst comes to unlock the value [and] you make an outsized return in that third year or fourth year or fifth year to compensate for the fact that you had to wait for two or three years.

I think a good example would be Impala Platinum.

In Impala Platinum we made a lot of money in the last five years. Impala was a R300 share. We started buying at R80 after it had been falling for like six or seven years. The share actually bottomed at R20. So you need to think about that.

We started buying at R80 and like three years, four years later the share was R20, but we were still buying it. And the averaging down meant that the price that we paid at R80, by continuing to buy all the way to R20, our averaging price got to, say, R35, or R40 I think it was in the end.

And then eventually the share went from R20 to R200, you know, in a space of two years.

People would say, you are crazy, you’ve lost money, you’ve been waiting. But eventually you make 10 times your money to compensate for the fact that you first halved your money.

RYK VAN NIEKERK: Did you also invest in Kumba and Sasol when they had the spectacular implosions, then unbelievable recoveries?

JOHN BICCARD: No, Impala was the one. We missed Sasol two years ago and Kumba as well. But the actual story between those three shares is almost identical. Actually the interesting thing about all three of them was at the bottom. Sasol, Kumba and Impala, their share price was equal to what the shares earned like two years later. We bought Impala at R20 and it earned only R20 two years later. The same with Kumba, but I didn’t buy Kumba or Sasol. It was just Impala.

RYK VAN NIEKERK: I’ve spoken to many investors, and most of the CA [chartered accountant] investors I speak to really believe in the numbers. They analyse the annual financial statements of all the companies to a T, they read all the footnotes and then they formulate an evaluation, and then they stick to it.

But, interestingly enough, most of those investors believe a 60% hit ratio is acceptable. That’s what they aim for. And then hopefully they don’t lose a significant amount of money through the 40% of losers they actually buy. But the longer you hold a share, the probability increases that your hit ratio will be higher.

How do you approach hit ratios and winners versus losers?

JOHN BICCARD: I think you’re a hundred percent right. The longer you hold, that 60% goes higher. In the short term, on a day-to-day basis, your hit is about 50:50, because it’s just gambling, really. Whether she goes up tomorrow or today is a random walk. And then, as your time horizon goes lower, the true value of the share comes out. So a hundred percent – the longer you hold it, the higher the hit ratio.

I actually don’t know what the number is. The actual hit ratio, if you look at the 21-year history on the Value Fund, I think the return is like 17% per annum, which is well ahead of any other fund. So if that tells you a hit ratio is good enough to beat the market and beat other investors, what exactly that number is, I actually don’t know, whether it’s 60%, 70%, but you have to stick to that and the longer you stick with [it] the higher your hit ratio.

The second point is I am one of those investors that starts off by reading the annual report and going through every single line in the annual report. And then formulating what you think the fair value is on a blank piece of paper without reading other people’s reports, just saying: ‘I know what the business does, this is the long-term track record, these are the cash flows. I think it’s worth X and if it’s trading at a 50% discount, that’s when we get interested.’

RYK VAN NIEKERK: Is that your investment methodology – to analyse the actual numbers, because I know of other fund managers who speak to X employees, they speak to suppliers, and they speak to clients about a specific company, because in most cases you get a lot of makeup on perspectives when you read the annual report or when you speak to the executives – do you use other methods to influence that valuation?

JOHN BICCARD: No. I think that’s important because the starting point for me is any share that has massively underperformed the market for a number of years, preferably like five to 10 years. So it’s trading at a multi-year low to the market. It’s trading at very depressed multiples and unfortunately the case is, when that happens, generally the company has problems. So it doesn’t really help to go and speak to suppliers or even to management, because all you’re going to do is hear more news about the problems in the industry or the company, and that’s going to actually dilute your conviction to buy the share.

So I actually speak to management very little and certainly don’t bother to speak to suppliers or people in the industry, because I can tell you it’s only going to be bad news. So there’s no point in just rehashing the bad news.

The bottom line is you have to look at the fundamental value of the business and say the starting point is [that] the problems in the industry or the company in the long term will get resolved, and the value will get unlocked.

So just to bring it to practical things, a good example, the biggest holding in the Value Fund at the moment is Tiger Brands. Tiger Brands was R400/share five years ago; today it’s R140. It’s trading at an all-time low relative to the JSE. If I go and speak to you – [to] people in the industry – everyone will say Tiger Brands is doing badly. Well, that’s hardly news to me, that’s hardly news to anyone, because the share is R140 for a reason.

So I’m not going to worry about that, what’s happening today. I’m going to look at the long-term cash flows that Tiger Brands has generated. I’m going to look at the brands that they’ve kept for a hundred years …

I’m going to look at their balance sheet and I’m going to say the problems they have, some of which are self-inflicted and some [of which] is the industry, because food inflation is very high and it’s crimping their margins.

When those things mean-revert to what’s happened in the last 10 or 20 years, the deep value that’s in the share will be unlocked.

I just keep checking the balance sheet and the numbers, and sort of the anecdotal evidence or what’s happening day to day is irrelevant to me.

RYK VAN NIEKERK: You’ve referred now to Tiger Brands. Are there other shares you are buying now to hold for 10-plus years?

JOHN BICCARD: Yes. The new shares that we bought in the last six months are Tiger Brands, Netcare, Spar and Reunert. All of these shares have one thing in common – all of them are maybe between 40% and 70% below their all-time highs, where the market is close to its all-time highs. So they have massively underperformed the market.

All of them pay very nice[ly] – we’re talking between 5% and 7% dividend yields, all of them have healthy balance sheets. All of [them] are essentially good businesses that have fallen, for various reasons, on harder times and the markets became disinterested in them.

Go back to your Tiger Brands. When the share was at R400, which was only five years ago, the narrative of Tiger Brands was it’s the leading food company in South Africa, it’s got 11 number-one brands in South Africa, it generates lots of cash, it’s growing, it’s a great business. And people pay 20 times earnings for that.

Then, in the last five years, we can list all the things that have gone wrong. The earnings have basically halved – not halved, they’re down 60% in the last five years, and now the share trades on 11 times earnings. So the earnings are depressed and, at the same time that the earnings get depressed, the PE [price-earnings ratio] gets depressed, and that’s the mistake the market makes over and over again. When the earnings go up and the company’s doing well, they pay a high PE, you get a double whammy [for what] you are paying. The earnings are at the high level. Five years ago Tiger Brands was earning nearly R20 a share and the market was over R400. So the market paid more than 20 times earnings for the higher earnings. Today our Tiger Brands are earning R13/share, and the market’s paying 11 times earnings for it.

I can tell you, Tiger Brands is the identical company it was five years ago. People don’t think so, but I can tell you it is okay.

So that’s what you’ve have to do – you do the work and you wait. The truth is Tiger Brands will take years for something to happen and that will unlock the value, and people don’t have the patience. But then one year suddenly the earnings will start growing again and the PE will expand, and that’s when you will make those outsized returns.

RYK VAN NIEKERK: Let’s talk about retail investors. What is your perception of South African retail investors? Are they good maybe relative to US retail investors or amateur investors?

JOHN BICCARD: I don’t really know the answer to that, but I would say American retail investors, from what I see, a lot of them aren’t investors. Obviously the US has been in a 15-year massive, one of the biggest, bull markets of all time, which culminated at the end of last year in one of the biggest bubbles you’ve ever seen in valuations. So … most aren’t investors at all. They are just speculators in a bubble, whereas South Africa has been the opposite.

We’ve basically been in a terrible stock market for 10 years, so the odds are South African investors are more investors than American investors are, because … when there’s a massive bull market people’s basic investment capability gets thrown out the window, because just everything’s going up. You just turn into a punter more than an investor. So that’s all I’d say.

I don’t actually know about the specifics, but I can tell you that in an American market, if you just follow what happens on Twitter and in social media, no one’s really worrying what anything is worth. They are just trying to catch the thing that goes up next week.

RYK VAN NIEKERK: The Robin Hood effect.

JOHN BICCARD: Exactly. And that’s not investing. Eventually, when you invest like that, you get caught out, like people have been caught out in the last six months in America – and you lose a lot of money.

RYK VAN NIEKERK: What would your advice be for a retail or amateur investor in South Africa, somebody who wants to buy a shareholding for at least three years and tries to build [their] own wealth while also learning in the process?

JOHN BICCARD: To start with, I think the first thing I’d say is you mustn’t worry if you don’t have a lot of money, because you’ve have to start somewhere. If you start with R10 000 and you make 10%, you’ll say, oh, it’s only R1 000. But you have to turn your R10 000 to R100 000, then to R1 million. And when you make the 10% on a million rand, then you’re making R100 000 rand, you are making proper money.

So you’ve have to start somewhere and compound the money because in year 20 is when you’ll make the real money – when you make percentages on the real money. So you have to start somewhere.

The second thing is you must select your style and the way you want to invest, and stick to it.

Again, obviously I’m a value investor, I can tell you how I do it, but you don’t have to do it like that, but you must keep a consistent style.

Then thirdly, if you decide you want to buy fundamentally underpriced shares, start by looking at all the losers on the JSE, take the annual report, try to understand the business, the industry they’re in, and then understand the numbers.

Then, very importantly, make sure there’s a margin of safety, that there’s not too much debt on the balance sheet, or preferably there’s cash, and the valuation multiple is low and it’s out of favour.

Those are the starting points. Obviously it helps if you’ve got some financial knowledge that you can actually analyse the financials – but that’s something you can learn in time as well.

RYK VAN NIEKERK: What has been your best investment ever? And what has been your worst one ever?

JOHN BICCARD: The worst investment ever was the old Liberty International, which was highly leveraged and was a play on UK property. It was at the limit of the kind of leverage that we had. Then Covid hit at exactly the worst time and shut down the retail side of their business, which really resulted in liquidation. We lost all our money on Intu. So that’s probably the worst investment.

And the best investment – 20 years ago, Cashbuild, which is a massive business today, it’s R280 a share; Cashbuild traded at R1/share, I think it was. I always remember looking at Cashbuild at that particular time, 20 years ago. The share was R1. They had like 20 million shares in issue. So the market cap was R20 million for Cashbuild and they had no debt.

In those days I’ll always remember the turnover was R1 billion. They ran into some short-term problems with stock holdings and stock losses so they didn’t make anything. They were making no money, so the market said the business is worth nothing.

I remember looking and thinking it is a R20 million market cap, and there’s no debt. So for the whole business you pay R20 million, but you’ve got a billion ran worth of turnover. And that’s a nice way to look at it.

You say, how can a billion rand worth of building product sales in a good brand name be worth only R20 million? The share then went from R1 to R100 in the next – whatever – six or seven years.

RYK VAN NIEKERK: Do you still hold it?

JOHN BICCARD: No, unfortunately that’s the other thing. Value investors always sell too early. So bought it at R1, probably – I actually can’t remember what level I sold it at. I probably sold it at R30 or R40 or whatever. It then went to R100 and eventually it actually went to R400. But then things changed. You buy those heavily distressed assets. When you buy a business for R20 million that turns over a R1 billion, the market is basically saying it’s a business that is just not going to make it long term. It doesn’t have a business. And anyone who goes into a Cashbuild share, will see it does have a good business.

RYK VAN NIEKERK: John, thank you so much for your time and insights, and for sharing your insights today. I think it’s been a wonderful discussion and thank you. And hopefully Tiger Brands and the other companies you’ve mentioned within 10 years’ time will mirror Cashbuild.

JOHN BICCARD: Correct. Thanks for your time, Ryk.

RYK VAN NIEKERK: Thanks. That was investment legend John Biccard, and he is the fund manager of the Ninety One Value Fund. He’s been managing that fund for more than 20 years.

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