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‘Investment strategies need to be practical’

‘If what you’re doing in the market keeps you awake at night, change it’: Keith McLachlan of Integral Asset Management.

SIMON BROWN: I’m chatting now with Keith McLachlan, investment officer at Integral Asset Management. Keith, I appreciate the early morning time. You were doing a presentation towards the end of last week on fundamentals of investing and the like. During the Q&A you said something which really resonated with…particularly newbies to the market, but I think some old hands as well, [who] are really trying to find the perfect investment strategy.

Your point was there isn’t a perfect investment strategy; it’s going to depend on individuals and kind of finding our own way, which makes it in a sense easier because we can do whatever we want, [and] makes it harder because there isn’t a blueprint that says, ‘do this, make money’.

KEITH McLACHLAN: Well, Simon, there isn’t a perfect investment strategy, but there might be a perfect investment strategy for an investor. The important context there is that whatever makes sense to that person and matches their risk profile, their time horizon, they can execute on. See, investment strategies also need to be practical.

I think the important thing is, once you understand the basics in financial markets and you’ve got your toolkit, you start to apply it in a way that makes sense to you. The only final step is to make sure that you are being paid for the risks you are taking – and they should be conscious risks.

What I mean by that is make sure, whatever you are executing on and however you’re approaching the market, that at the very worst the returns are justifying the risk.

SIMON BROWN: Absolutely. I would always say to folks, if your returns aren’t working, if you are consistently underperforming, you can always just go and buy an index tracker and resolve it on that.

But I like your point around ‘it’s going to be individual for an investor’. I came into the market far too long ago to remember my early days, but I remember going down the Peter Lynch rabbit hole; I remember going down the Warren Buffett rabbit holes – and it was about finding bits and pieces that kind of fitted.

I like your point. It made sense to me and what was important, what was comfortable for me – I could still sleep well at night.

KEITH McLACHLAN: That’s a very important measure, the ability to sleep at night. It may sound [like] an arbitrary anecdote, but if what you’re doing in the market keeps you awake at night, change it. Deep down inside, each individual investor knows if they’re taking too much risk, too little risk or appropriate risk.

This might be going down another rabbit hole, but taking too little risk is also a risk.

Remember, risk should in the long term match return and therefore, if you’re taking too little of it, you might be generating too little return in the long term. The point is only you can answer that question. Therefore, as an open-ended system with multiple approaches, this is one of the reasons it becomes so complex for beginners to gain a footing because they’re so noisy; everyone is doing different things with different tools in the same space. It’s very confusing.

SIMON BROWN: I like your point around there as well. There is a time issue, capacity. Your job is you’re an investment officer. You spend your days reading balance sheets and talking to CEOs and the like, and that’s your job. For most of my listeners, investing is actually a side hustle in many senses. They simply don’t have the hours in the day, and they’ve got to take cognisance of that as well when putting together a strategy.

KEITH McLACHLAN: An investment strategy that is not practical is not a good investment strategy. It’s got to be executable. Finance and investing is actually a deeply logical science. What also confuses it is your overlay on the fact that it does have large elements of risk in it, which to the outsider looks like chance. But it’s not, this is not gambling. This is taking conscious and educated risks and being paid for those risks that you’re taking. But in the absence of it being practically executable, it’s not a good strategy.

So don’t just find the investment approach that suits you and your world, and makes sense to you; find the one that you can execute on as well.

SIMON BROWN: Yeah. That is actually possible to do. I take your point, there’s loads of risk out there. There’s loads of noise out there, which is also something. Certainly when I was a newbie, I struggled with it.

A quick, last question while I’ve got you in the line. Sabvest Capital came out with a trading update yesterday for the year ending December. I know it’s a stock that you keep an eye on and you like. It was a really strong trading update, with their sort of removing of the end structure. Looking at that chart, it’s done incredibly well. In the year or so since they’ve done that, stocks doubled.

KEITH McLACHLAN: Absolutely. Sabvest run by Chris Seabrooke has got a fantastic … years. He’s compounded that Nav at about 19% to 20% year on year for 15 years. Once or twice for a couple of years one could point to luck, or environment or macro factors. Fifteen years is not a track record to be sniffed at; that’s a superb track record. This Nav, over this period, that trading update, pointed to growing by at least 19%.

So we are smack-bang growing as we should be growing, but it’s also open. It’s an uncapped trading update. So the Nav could be growing by a lot more. It’s really, really well managed and still sitting at an over 30% discount to the low end of that range in terms of the trading update, coupled with the fact that there is no external management committee. That’s a very important point here, where you’ve got management that has aligned interests with you as an investor, they’re not siphoning money off into an external Manco. They’re really managing it with the same exposure and the same interest with you as a shareholder coming in.

This is really, I would say, one of my favourite investment companies on the JSE.

SIMON BROWN: That net asset value is going to be up, as you say, 19% or more, which is at R88.58, the stock still trading, and it closed at R61 yesterday.

We’ll leave it there. Keith McLaren, investment officer at Integral Asset Management, I appreciate the early morning.



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