SIMON BROWN: I’m chatting now to Lee Cairns, wealth manager at Anchor Capital. Lee, good morning. I appreciate your time. A great article that you published out, I think, just yesterday or the day before – Tesla versus Exxaro, and the decisions that we as investors we make. You put the argument that Tesla is a great company. Elon Musk is astounding. The battery tech is brilliant. But on a price/earnings of 1150, it is priced for perfection and a whole lot more. Yet investors are loving and flying into it, even at what are eye-watering sort dotcom-level evaluations.
LEE CAIRNS: I don’t know about dotcom-level evaluations, Simon, but yes, it’s difficult to sort of get an understanding of this new world and what is and isn’t a good investment. So I think that the PE at Tesla has since then risen to 1600. And there just is a question mark as to your entry-level now. I think it’ll still be a company that’s around in 10 years’ time, but what would your investment have looked like with today being your entry point – that is something to put a question mark to.
SIMON BROWN: Yes, because as an investor, I always say to people the price you pay for a stock is one of the very few things, if not the only thing, we can actually control and manage.
You then contrast Tesla to Exxaro. So we’ve really got new-world exciting and the like versus Exxaro – very much mining coal, old tech, dirty power and so forth. The point of the matter is that Exxaro is sitting on a massively low price/earnings, a giant dividend yield, and Exxaro is going to survive. They are going to be around, they are not exciting. But from an investment perspective, you’re getting solid cash flow, a solid dividend, and easily a better investment from a valuation perspective.
LEE CAIRNS: Yes, absolutely, Simon. I don’t know what Exxaro is going to look like 10 years out. I think it’ll still be a company that’s around. It will certainly have the same reliance on coal than it does now. But it’s certainly needing that cash flow to try and reshape themselves to be more involved in the new energy space.
So if you think about what Naspers looked like 20 years ago, could you ever have imagined what they’d look like today?
There’s always that chance that managements ……[2:48] can take that.
And you have to have been given any credit for the cash in play that company got available to re-invent themselves. And even if they don’t, your margin for safety with that dividend is huge. So it’s just, again, a question of why you are ignoring it, just because of the fad for new energy, which is obviously the right thing for the world, but you’re giving us a company, no credit for what they currently do or what their ability might be in the future to recreate themselves to be part of that new world.
SIMON BROWN: And this is very much psychology of markets. You write in your note that when you came back into South Africa in 2001, we’d had a massive run in the US; our local market had underperformed and no one wanted to touch SA equity. Yet in the next decade, SA equity was absolutely the right place to be. But the S&P gave a negative return.
We are sitting there again. We’ve almost got to say to investors stop looking at the exciting stuff because that has already done its move. We need to hunt around the laggers, the boring because that’s where we are going to find the gems. That’s where we’re going to find the next great investments for the next five or 10 years
LEE CAIRNS: Potentially, yes. And then I think some of those exciting companies are absolutely worth looking at. But maybe the Chinese companies that are still only on the curve of the growth that the US has already seen are where to look to. If you compare Alibaba’s valuations to an Amazon, as an example, there’s a much better safety point for your entry now.
But I do think you need to sort of combine that with some of the companies that will still be around, that do still produce – food producers, industrial companies that are not that exciting, that are getting completely forgotten in the pricing because, while it is obviously exciting to give clients good returns, a big job of that is also preserving capital. I’m worried for people that are getting caught up in the must-be-all-in in dollars, must-be-all-in in tech; it’s the only place to be, and that people could get wiped out if they get too caught up in this hype that is around at the moment.
Let’s be honest, it’s really exciting and there are some amazing companies that are changing the world and will continue to change the world. But not all of them will. And if you’re caught up in the ones that you thought do not innovate quickly enough, I’m worried what it might do to certain clients’ portfolios, especially those in the later stages of life.
SIMON BROWN: The point you are making in the last question is really a sense that it’s not about either/or, it’s about balance, and that is always a sense of what investing is. As you said, you can have some exciting tech out of China and the like, but it’s about balancing that portfolio, which is just prudent risk management.
LEE CAIRNS: Yeah, absolutely. I think for South Africans, this has been dire last 10 years, so it’s an easy thing to sell – that South Africa is dead, and that overseas is alive – and that’s where you virtually have to be. I just think it needs to be done with some prudence, to say there’s a lot that still needs to play out for that to be factually true. And if you’ve got clients – especially someone their sort of the mid to late sixties – the likelihood of them living there 20 years of their time still in South Africa, regardless of what happens, is high. So the mismatch of trying to do what they need in local currency to live out that 20 years, with all being from offshore currency and assets, is a really difficult thing to do with surety.
It’s a wonderful world that we live in. Markets are markets only because there is a huge differing of opinion on things. But I do just feel there’s so much emotion in it at the moment, so much emotion being South African, so much hype about this new world stuff, that that is the time when potentially some pretty big errors and mistakes can get made.
The article was written while on holiday, getting a lot of time to reflect where you are at the end of the decade, and just thinking, what is the obvious conversation that you will have with everyone. And is it right? And is it that obvious?
SIMON BROWN: It was a great article; I’ll tweet it out. That was Lee Cairns. He’s a wealth manager at Anchor Capital. I appreciate the time.