Don’t start off by going long and short



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RYK VAN NIEKERK: Welcome to this Week’s Be a Better Investor podcast. My name is Ryk van Niekerk, and in this podcast series I speak to leading professional investors about their investment journeys. We try to understand how they analyse investment opportunities, what companies and assets they invest in, and whether they have more hits than misses. The idea is to identify a few golden nuggets of wisdom to help amateur retail investors to become better investors.

My guest today is Asanda Notshe. He’s the chief investment officer at Mazi Asset Management, and he has been in the investment business for two decades. He’s an actuary and began his career as an actuarial analyst at Alexander Forbes Financial Services. Before joining Mazi, Asanda worked at Stanlib, and headed up the product development division. He has been at Mazi for 14 years and has worked in many roles there, including being a senior portfolio manager, a research analyst and a member of the executive committee.

Asanda, thank you so much for your time today. First of all, tell us about your background. Where did you grow up, and what were your career dreams when you were young?

ASANDA NOTSHE: Thank you very much, Ryk. Appreciate the opportunity. I grew up in Durban. I was born in a township called Hammarsdale in Mpumalanga, which is kind of on your way between Durban and Pietermaritzburg. I went to school there and then subsequently went to Durban High School, DHS, and then went to university at UCT to study actuarial science.

So career wise, to be honest with you, access to information just around careers and different opportunities was not readily available. And so to say to you I knew exactly what I wanted to do probably would be a lie. I wasn’t really clear. I think I, fortunately I was not bad at accounting and maths and so on, so my path led me towards actuarial science.

I’ll be honest with you – when I started doing it, I had no clue what it was about.

I was just told that you needed to get a certain mark in maths and English and get a certain number of points, and there was a promise of [getting] a relatively okay paying job. So that’s what I ended up doing.

Luckily for me, I’m very fortunate that it ended up being actually the thing that – had I had the knowledge – I would have probably chosen anyway. So quite fortunate in that regard.

RYK VAN NIEKERK: Normally the road of an actuary leads to the insurance industry. But obviously you ended up in the investment industry. When were you first exposed to investments?

ASANDA NOTSHE: If I just look back, my grandfather and my uncles used to run what they called a ‘general dealer’ business in the township. Maybe just a shade bigger than a spaza, effectively, in today’s terms. So I would have observed that.

I guess it wasn’t investment per se, but I sort of recognised that the whole idea was to invest in stock and then take that stock and sell it at a profit or slightly higher than what you bought it at, and generate a profit.

So I’d say there was probably a bit of exposure there and that piqued my interest in terms of that space. But I didn’t really know in a formalised way that that is investment.

I think where things got interesting for me – you mentioned the actuarial science – is that in a funny way actuarial science is almost misdiagnosed in terms of what it actually is, because it is about trying to figure out and understand trends, understanding things that are into the future, to make investment decisions – such as making assumptions about investment opportunities.

So when I started at Forbes, looking at a pension fund, you’ve got assets and liabilities. As an actuarial analyst you focus a lot on the liabilities in terms of trying to quantify those and understand how they would look into the future in terms of mortality and morbidity and things like that. That was fine for the first two years, but after the third year you are kind of checking your own work and updating everything you’ve done.

Then I looked and observed the asset side of things and where I could see, okay, guys are making investments to match their liabilities, and they are making those decisions in a world that that’s ever-evolving with different types of asset classes and opportunities. That was where I think my interest really picked up. That was actually part of the reason why I made the switch from the liabilities to the asset side of things.

RYK VAN NIEKERK: When did you buy your very first share – and this is important – with money you’d earned yourself, because sometimes it makes that decision quite hard.

ASANDA NOTSHE: Yes, absolutely. I remember quite clearly it was in 2010, so I was a bit late in getting involved, dipping my toe [in].

But at Mazi we still ran hedge fund portfolios. So I bought and was long Sanlam, and then shorted Santam.

The idea really was to say, look, I think Sanlam will do a lot better than Santam.

So to accentuate that opportunity you sell some of the thing that you think is not going to do as well, and you use that money that you’ve realised to buy more of the thing that you think is going to go up.

I must say I didn’t do too well on that trade – maybe not a glowing sort of a situation there – but that was really the first dipping of my toe that I did.

RYK VAN NIEKERK: But a very, very interesting trade, because I don’t think I’ve ever heard of any professional investor whose very first investment included a short position on a share. Why did you also include a short position in addition to the long position on Sanlam?

ASANDA NOTSHE: I probably shouldn’t have, Ryk, to be honest, but because I think, in terms of just the investment approach at Mazi – and I’ve adopted that as well as a personal investment approach – the thinking there, at the time anyway, was that we look at opportunities on an objective level.

So we are trying to figure out the value or the intrinsic fundamental value of an opportunity. Then we say ‘Where is the opportunity in that?’ So unlike maybe a long-only investor, where you are buying and you’re holding, at Mazi some of our portfolios do have the opportunity to benefit from things that actually go down.

[My] thinking then was, okay, I think this one in the form of Santam probably won’t do as well, it might fall. So if it does I’ll benefit because I’ve taken a short position. And then on the opposite [side], I think Sanlam will do better.

But conceptually the thinking was to say investments are in our world. In our thinking, really trying to be objective about the nature of the opportunity, not to get emotional, or not to get almost unreasonable in the way that you assess. And looking at hedge funds you really need to apply yourself in that way.

RYK VAN NIEKERK: When you take a short position it means that you expect or foresee – or in many cases hope – that the share price will decline and you can make money from a declining share price. Conversely, if you go long on a share, it means that you believe the share price will rise.

And I think the shorting of shares is not really an option for amateur retail investors, is it?

ASANDA NOTSHE: Yes, it is a bit tricky for amateur retail investors, just because of the structures involved, the capital that one would need to have.

I think there are emerging opportunities in terms of some of these derivative-type products that they call CFDs [contracts for difference] that banks and the like and stockbrokers would offer. I think though, for an amateur investor, from that perspective I always kind of make the analogy of somebody who, let’s say, runs a bank or is a mechanic or is in the trade where you can come along as a client of that particular person and try to do what they do yourself. The reality, though, is that they [the professionals] do that on a daily basis.

So to that point, Ryk, I wouldn’t necessarily advocate going into that – the depths of shorting and so on – but rather maybe keep it relatively simple in terms of taking a position on things that you think are going to do well for whatever reason, and where perhaps you have, I’m going to say, a limited amount of money that you can lose.

So maybe to just go into a bit of that detail for the benefit of the listeners, with the short position, you can start by, let’s say, selling a share at R10, and of course you’re hoping that it goes down. So you ‘borrow’ it from someone who owns it, and you sell it and get the R10.

Now, if things go well, that share price goes down to R5, and so you can use some of the R10 that you got to buy it back.

You buy it at R5, you give it back to the person who had given [or lent] it to you, and keep the R5. That’s if it goes well.

Conversely – and why it’s something not to get too exuberant with – if the opposite happens, if that share price starts to go up, so R15, R20, R25, R30, you then have an increasing loss because you only have R10 in terms of the share that you sold initially. But now, to give that share back to the person, you need to pay a lot more than the R10 that you initially received when you sold.

That’s why with going short and so on they typically say there is an opportunity for unlimited loss.

If that share for whatever reason goes up to R100 or R1 000, who knows, effectively your exposure is unlimited or uncapped.

Whereas if you buy a share and you think it’s going to go up, if it doesn’t, the worst that can happen is you lose your R10 – if you had invested R10 in that particular share.

RYK VAN NIEKERK: Yes, it’s very, very risky and you need to know what you’re doing when you dabble in CFDs and other derivative products. But subsequent to that first trade did your investment approach change?

ASANDA NOTSHE: Well, I think one learns a lot by doing. What’s happened to me is I’ve been in the space for a long time and one learns a lot. The approach hasn’t changed. I still focus – on a personal level and, I think, as Mazi – on understanding businesses at a fundamental level.

So what does the company do? Who are its clients? Who are the competitors, suppliers, and who regulates that particular company? What is its strategy? Is it sustainable? Who manages that company? Putting all of those sort of aspects together one can really paint a picture of what it is that the company does and its prospects going forward.

For retail investors one of the things that I would probably advocate is to invest in things about which you’ve got a fairly good understanding.

So it does maybe require taking a bit of time, doing some reading.

It’s one of the really fun bits of what we do, because we get to learn about a lot of different things. We can have a good conversation about a retail company, a mining company, a bank, a logistics company, tech, telecoms – all across the board – because of the work that we do.

But yes, it’s the same investment approach in terms of really focusing on and taking the time to understand investments at a fundamental level, and then making an investment decision based on that understanding.

RYK VAN NIEKERK: That’s a thorough investigation or research effort on a particular company. As an actuary you can understand the numbers quite easily, and then you complete the picture with some external information regarding the quality of management, etc.

But not all amateur retail investors, as you’ve just said, have the time and ability to do that. That makes it sometimes very, very difficult for these investors to make money. They become disheartened whenever they take a decision mostly based on emotion and a gut feeling at a young age, and that’s how they get into the market.

So put yourself in the shoes of, say, a lawyer, a young lawyer who’s not in the financial services industry, who wants to get into the market – how do you think they should approach it?

ASANDA NOTSHE: Ryk, I’d take half a step back and always say to people ‘Before you invest, I think it’s very, very important to understand your financial position’.

So as a start I’d say, look, if you’ve got debts, for instance, invest in your debt. That’s a guaranteed return, because you get to save the interest.

But maybe talking more at a conceptual level around financial planning, understand where you are, and also understand how much you should be investing given your overall picture. Okay, so let’s park that.

Now you’ve determined how much you’re going to be investing. I think as a retail investor what one needs to do in going about investing is to first give yourself a time horizon. So you kind of say, look, I’ve got a particular goal, perhaps, that I’m investing towards – I think that’s also an important aspect of it. So: ‘I want to save for a deposit on a house in five years’ time. I want to be in that position and I want to start now.’

That I think gives you a really, really good starting point in terms of saying I’ve got this amount of time, so the things that I’m going to invest in, I’m going to really give them the opportunity to do the work for me because I’ve got that amount of time.

I think secondly it is to identify, perhaps, either people or companies that you perhaps think have the know-how, that you can then look at and work with in terms of getting information.

So you might then say – and sorry, Ryk, I’m going to put in a bit of marketing here – you’re going to read Mazi’s quarterly newsletter, for instance, and pick up what it is that they’re saying. And of course any other company.

Then using that – and you are now sort of affiliating yourself with professionals, people who do this on a daily basis – maybe gives you targeted information about where opportunities are. In addition to that, obviously, there are podcasts such as from yourself and other publications.

So yes, you’re perhaps not going into the depth that we might in terms of how we go about investing, but I think you do need to give yourself a chance and educate yourself in a way that is reasonable accessible. A lot of companies at the moment are putting out information, content and so on, so I think that’s a really good starting point.

And then I guess a third step would be to really try to focus your investing on things that resonate with you in terms of what you understand.

Look, there will be many, many, many investment opportunities. Some may look more attractive than others. I think it’s always comforting and helpful in terms of managing your emotions. You noted, quite rightly, that it’s always helpful if you invest in things that you are clear about.

So let’s say you’ve invested in a telco company, and hear that MTN, for instance, oh my gosh is in Nigeria, and the naira, the currency, is devaluing and the company’s not going to do so well. If you had read something and that resonated with you, something that said, look, the opportunities for MTN in Nigeria are X, Y, and Z, maybe then – given that you’ve got a five- or 10-year investment horizon – you look through that and not necessarily sell at the worst time because of fear and those emotions.

So I think really basing yourself on some fundamental kind of knowledge is always helpful.

RYK VAN NIEKERK: What you’re saying is read, read, read, read – and take note of what professional investors say. And listen, obviously. I think it’s excellent advice, and many professional investors do air their views on news platforms regularly. It’s always easy to listen to those. And it’s always good to know you listen to the best type of professional investors.

But one thing I’ve often come across is that young investors still react to a ‘hot tip’.

They would stand around the braai and hear ‘Listen, the next big thing is going to be MTN’ – to use your example. ‘It’s about to do a big deal.’ Of course, in the modern era of investing such information is not really freely available. There are very strict rules about it.

But would you react, or have you reacted, to a tip in the past, and how would you advise young investors to act when they actually get a hot tip around the braai?

ASANDA NOTSHE: I think that’s always very tempting because there’s kind of a fomo [fear of missing out] feeling to it where you don’t want to miss out on something that you perceive to be inside information, if I can use that term, but really information that’s going to enable you to kind of advance yourself and do better than others.

I think maybe a suggestion that would apply in that case as well is there are always two sides to a story or further information available on a similar topic. I would say, look, you may want to corroborate the information that you’ve received in some shape or form. So again, maybe look through the internet and see if there’s anybody else who’s speaking about a similar topic.

Now, granted, if it is a hot tip and perhaps information that’s not freely available, there may be some caution that one wants to exercise, simply because, in terms of the way that markets work, we’ve got regulators in the form of the FSCA [Financial Sector Conduct Authority] and the JSE who are looking at and observing whether people are acting on information that they’re not supposed to have or supposed to know.

So I think there is some caution around those types of things that investors need to be aware of in terms of just the regulations and the way that things work, really why that is there.

One might think, well, if I’m savvy enough to mix with the right people, rub shoulders with those people, then I should be able to act on that information and give myself a leg up.

The reality is that, for all the other investors who are on the opposite side of that information, you might be one of those as an investor in another instance where somebody else has got a leg up.

The reality is that these companies, especially listed companies, are public companies. Being public companies, they have a duty to make information available in the same way for everyone across in the market.

And so, having a hot tip might be exciting in one instance, but it might actually be a problem for you in another, in that you’re not actually allowed to have that information.

So I think being really careful, treading very carefully around that information would be advisable.

As I said, maybe corroborate and check whether this is something that’s really out there. Do other people know about this? And perhaps then use that as a guide in terms of whether to act on it.

But I’d say also apply the principles that I mentioned earlier, where you say, does this make sense? Is it something maybe out there and not acted on, or are people perhaps sceptical? Is it something that’s going to move this investment forward if I apply my mind? Does this make sense? So really be practical about it.

At the end of the day, even as professional investors, we are all human. Yes, we do this on a daily basis but we are also sometimes susceptible to those emotions. So [if] somebody says something out of turn in a conversation you don’t really want to take that with its emotions and act on it; rather corroborate it.

RYK VAN NIEKERK: The core message there is ‘be careful’. If you hear it around the braai, you’re definitely not the first to hear it. So I think the message is quite clear.

Just lastly, what was your best investment ever? I’m talking about in a personal capacity, the one you are proudest of.

ASANDA NOTSHE: Well, it was in 2012. I went to a lunch, one of these lunches with companies where you have an opportunity to engage with company management. It was with Koos Bekker.

At the time I think Naspers was probably trading at R300 or R200 – somewhere there, maybe even R400.

He then gave sort of insights into what they were doing, how they were trying to benefit from the opportunity in China. I think that resonated with me.

So I came back to the team and I said: ‘Guys, I didn’t understand maybe 60% of what the guy said, but with the 40% that I understand I think it is definitely worth exploring.’

So we did a bit of work on it and we invested, and I also invested on a personal basis – and I think that’s been a fantastic investment.

But again, you’ll never know everything about a company, but really trying to use and benefit from the fundamental views or information about a company has been good.

RYK VAN NIEKERK: Do you still hold those shares?

ASANDA NOTSHE: I don’t anymore. I think at points in time the company’s done quite well and I felt that there was a time and an opportunity to sell when I felt that the share price had got to a level where it maybe reflected what was fair in terms of the value of the company – and I then pursued other opportunities thereafter.

RYK VAN NIEKERK: And your worst investment ever that has been the biggest dog you bought?

ASANDA NOTSHE: I’d probably say that investment, that position that I took in Sanlam/Santam was probably the worst thing I did, because I lost money on that.

I was probably ill-advised in terms of doing it, as I said earlier. Yes, that was probably one of those.

I guess along the way there have been one or two others that haven’t done so well, but nothing that I’ve lost money on wildly. But yes, I’d probably cite that first one. So maybe the first one was school fees, as it were.

RYK VAN NIEKERK: Well, it’s good if your worst investment was your first investment, because it means that all your subsequent investments weren’t that bad at all.

But we’ll have to leave it there. Asanda, thank you so much for your time and for sharing your insights with us.

ASANDA NOTSHE: Thank you very much for the opportunity, Ryk, and all the best. Thank you and regards to the listeners.

RYK VAN NIEKERK: Thanks Asanda. That was Asanda Notshe, the chief investment officer at Mazi Asset Management.

For previous Be a Better Investor episodes, click here.


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