Category Archives: Investment Strategies

Transaction Capital


Transaction Capital (TCP) describes itself as “an active investor in and operator of credit-orientated alternative assets”. This is a fancy way of saying that it goes where no one else dares to go in the new South Africa. It has made highly profitable businesses out of financing and servicing the burgeoning mini-bus taxi industry and also out of buying up high-risk debtors books for a fraction of their face value and then systematically collecting the outstanding amounts.

Both of these industries are risky, but both also have enormous potential to be profitable. Transaction Capital has made an excellent business out of finding high-tech ways to reduce the risks which leaves it free to exploit these two “under-served segments of the South African and Australian financial services markets” almost without significant competition. Read More

Learning from Steinhoff


The Steinhoff debacle, which really came to an end on Wednesday when they published their re-stated financials for the 2017 year (reported in Business Day of 9th May 2019), contains some vital lessons for private investors.

The financials reveal a web of companies which were used by a group of unscrupulous executives to move money around, overstate profits and obscure fraudulent transactions.

Clearly, the investing public and even the highly-qualified and experienced analysts at various asset management companies like Coronation, Allan Gray and the Public Investment Corporation (PIC) were fooled into thinking that Steinhoff was a solid blue chip company which was growing rapidly.

Steinhoff’s financial results were analysed exhaustively. Steinhoff executives were interviewed and questioned about various aspects of the business. Auditors did numerous spot checks of the figures and wrote clean audit reports. Nobody realized until it was too late that the structure and the published results were just “smoke and mirrors”.

How can a private investor with limited time and resources protect himself against this type of cataclysm? Read More

Ease of Management


One of the most important issues when selecting a share for investment is to try and assess how easy the business is to run. Some businesses are very easy to run, while others face enormous difficulties. When you are considering whether to add a particular share to your portfolio you should try to place on a scale from easiest to hardest.

The hardest businesses to run are those which:

  1. Require huge capital investments in plant and equipment (which, of course, makes them more risky);
  2. Traditionally have high stock levels and large debtors books – leading to massive amounts of money being tied up in working capital;
  3. Require large numbers of unskilled or semi-skilled workers – which inevitably exposes them to union action;
  4. Those which have little or no “annuity income”. In other words, they start every month from zero and have to make sales just to cover their monthly overheads.

By contrast, the easiest businesses to run are those which: Read More

Institutional Blindness


The Business Day reported on 10th April 2019 on the Investment Forum in Sandton where several asset managers talked about the major share collapses of the past three years – most notably Steinhoff, EOH and Tiger Brands. The big institutions and major fund managers (like Alan Grey, PSG and Coronation) lost hundreds of billions of rands when these stock market “darlings” suddenly collapsed.

But in each of these cases, there was clear technical evidence that all was not well long before they collapsed.

STEINHOFF

In the case of Steinhoff, the share made a perfect declining triple top at least 15 months before the Viceroy report came out and caused the share to collapse. Consider the chart:

Steinhoff (SNH) January 2016 to April 2019 – Chart by ShareFriend Pro (Click to Enlarge Image)

Read More

Unbundling


From time to time, listed companies may take the decision to “unbundle” one of their subsidiaries or strategic investments to their existing shareholders. This means that they decide to give their shares in that subsidiary (or strategic investment) to their shareholders in direct proportion to the number of shares which the shareholders are holding on a specific date.

Their reasons for doing this are varied, but usually it comes down to a decision that the board has taken that the subsidiary or strategic investment concerned is no longer part of their “core” business.

For example, if company “A” owns 70m shares in company “B” and company “B” has a total of 100m shares in issue, then company “B” is a 70% subsidiary of company “A”. If the board of directors of company “A” decide that company “B” is not part of their core business, they might decide that, instead of trying to sell their shareholding in that company, they will unbundle it to their existing shareholders. If company “A” has 700m shares in issue at the time, then the shareholders of company “A” will each get 10 company “B” shares for every 100 company “A” shares that they hold – on a specified date. Read More