JSE Direct with Simon Brown

How lucky are your investments? (#363)

Aug. 7, 2019

Simon Shares

  • Trade wars are back, but this time 'only' 10% on US$300billion of goods. No surprises? China is responding by allowing their currency to weaken to decade lows.
  • Fed cuts 0.25%. Trump says that's not enough, but he is priming an excuse. He has an election next year and if the market / economy is weak - he'll blame the Federal reserve.
  • Iron ore futures lost 10% last week and are currently around US$92, I been warning of this and Vale is producing again so the shortage is disappearing. Now sure Kumba Iron Ore (JSE code: KIO) has high quality lumpy iron ore which attracts a higher price. But the US$108 / tonne they got in the last results will not be repeated.
  • Delta (JSE code: DLT) and Rebosis (JSE code: REB) talking about a possible merger? In many ways it makes sense, but the issue is debt on the Rebosis CEO is quoted as saying they need to fix their debt levels, not sure that does this.
  • Nedbank (JSE code: NED) results show the quality of our banks. They're growing (yes very modestly at low single digits) but in an economy that is not growing. That takes skill.
  • Curro (JSE code: COH) trading update was bleak. HEPS growth of 3% - 9% after one offs are stripped out on a stock on a PE of around 35x (after 13% sell off on Tuesday). Stock back at 2013 levels and some c70% off the highs of late 2015. The lesson here is simple, all business models mature in time, growth slows and one needs to be very careful about what price we pay. On a PE of over 100x with slowing growth was madness.
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* I hold ungeared positions.

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How lucky are your investments?

Delphine Govender tweeted a great comment from Daniel Crosby about the role of luck in investing, or trading.

Never a truer word by @danielcrosby. The role of luck; market sentiment leads us as investors & our clients to think we were right because of the outcome; when being right in investing is about basis for the investment decision turning out correct (more than less). pic.twitter.com/qESB66vBqL

— Delphine Govender (@Delphine_DG) August 4, 2019


Truth is when luck strikes we claim it as skill, when it really was just pure good luck. Now don't get me wrong, when luck strikes - grab it with both hands.

But the problem is that by claiming luck as skill we skew out actual ability claiming credit where it's not due and as such we think we're better than we actually are and the problem here is glaring.

So in short when we're dissecting an investment we need to ask the question about how much of the return was luck vs. how much was skill. Now sure this isn't easy, but if we're honest with ourselves we certainly can spot luck and we need to admit as such.

Personally I know I had two very lucky trades. My first purchase in October 1987 (DiData) and Capitec* (JSE code: CPI). The former I was actually trying to buy another stock and the latter was more a purchase in anger as I had missed my preferred entry price and it just kept on moving higher. These two transform my portfolio returns, without them I still beat the market - but by a lot less.

So how did we spot that luck?

  • Did something significant happen you never expected?
  • Major competitor going bust?
  • New market proving way more profitable?
  • Serious shift in the landscape they operate in?
  • Legislation changes that favour their products?
  • Finding what they weren't looking for (gold miner finding PGMs)?
  • A serious expected risk suddenly disappears?
  • Did the stock valuation far and away exceed any realistic expected valuation?

None of this is rocket science to spot, you had reasons for buying. You list them (you do write down your research?) and then something comes out of left field to boost profits?

The flip side of course is bad luck, and sure that happens as well. So we also need to dissect bad luck. How much did it hurt but also do we keep on experiencing bad luck? If yes, maybe it's less about bad luck and more about lack of skill which we're blaming on bad luck because that's easier? Maybe we're just not very good at figuring out the risks?

I have long stated that the only book by Nassim Nicholas Taleb worth reading is Fooled by Randomness as it goes deep into the role of luck in investing, trading and life. Read it.

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