Massmart and the case for cutting through the noise
- South Africa
- Massmart, Research, Sasol, Walmart
- March 10, 2021
After the market crashed in March 2020, I decided to take a risk. Believing that the valuations were ridiculously low and that they couldn’t possibly stay there, I emptied a big chunk of my access bond into the market.
Essentially, these were bonuses I had saved over the years. I treat my bond like a revolving credit facility at a great interest rate because, frankly, that’s what an access bond is.
I bought a diversified basket of shares. Within that portfolio, I focused on two high conviction trades and allocated significant percentages to them: Sasol and Massmart.
Sasol was a relatively easy ride. It shot up quickly and although it looked dicey at times in the latter stages of the year, I did well on it. I sold out entirely in December, not wanting to be too greedy and fearing that a second wave worldwide would crush the oil price. I was completely wrong of course and left a lot of money on the table, but in this game you cannot beat yourself up about not perfectly timing the entry and exit.
Massmart was much trickier. I bought it far too early and the price kept dropping. Believing fervently in my investment thesis, I kept buying all the way down, lowering my average in-price.
At the same time that I sold out of Sasol in December, I sold two-thirds of my Massmart exposure for the same reason (the second wave). I felt that the average consumer would be in serious trouble and I felt uncomfortable with so much exposure to consumer durables (goods like TVs that consumers can simply postpone the purchase of).
I’m so glad that I kept that one-third of my exposure. It’s been a great trade. But more importantly, what was the Massmart investment thesis and was it really so difficult to see at the time?
Don’t underestimate the value of common sense
There’s a general belief that you shouldn’t be actively investing in individual shares unless you know how to interpret notes 15 – 45 of the financials and you once studied the thrilling world of IFRS (financial reporting).
In my view, this is nonsense.
You absolutely need to be able to understand key financial ratios. You need to know where to look for the most important information and concepts (e.g. margin expansion and free cash flow generation).
However, many would be shocked to learn that only a tiny proportion of people actually read the supporting notes to the financials, including finance professionals in asset management roles.
There’s a lot in there that is immaterial to the overall outcome of your investment. This is the point I want to discuss in the context of common sense investing and the search for critical points rather than all the points.
The ability to cut through the noise and apply intuition to your investment decisions is invaluable.
Materiality and cost / benefit
Let’s assume you can arrive at a reasonable conclusion on a company within 3 hours, achieved through reading the analyst presentation (usually far easier to understand than the annual financial statements and always available on the company website) and some other basic research.
You can assign a cost to each hour. If you are worth R500 an hour for services you can provide someone, you’ve “invested” R1,500 in the research you’ve conducted.
Now let’s assume that reading and understanding every single note requires you to spend a further 7 hours. You’re now 10 hours deep, or R5,000 of your time, and your family is annoyed with you because you are “always at your computer”.
As a retail investor, you might be investing say R10,000 in that specific stock. You’ve “spent” an extra R3,500 on research, or 35% of the capital you are putting in.
Provided you own a diversified basket of companies and we apply this logic to this range of shares, you need to ask yourself whether (on average) you are going to improve your return by 35% simply to break even vs. the extra time you spent (R3,500 divided by R10,000 invested).
I want to be absolutely clear here – doing your own research is a non-negotiable.
My point is around how much time you spend on it and whether you should feel overwhelmed by voluminous financial reporting, especially to the point where you feel too scared to ever take the first step into the markets.
Back yourself, but do it responsibly
My concern is that too many investors are put off by the perpetuated idea that they are “incapable” or “unskilled” and should rather leave it to the professionals. You know – the companies with fancy office buildings in Sandton or Cape Town; the ones who know what they are doing.
Often, those money managers underperform the market. I saw a shocker this week thanks to a Ghostie who offered to share his investment statements with me. The manager in question had only achieved a 2% annualised return (after fees) over the past 8 years. Astoundingly, the annual fees were also 2%.
Put differently – the manager made as much off this investors’ life savings as the investor did. I have a massive ethical problem with that.
If you are willing to put in the time and effort to learn about the markets and how companies report their financials, you can absolutely dip your toes into the investing game and learn from the experience. Don’t empty your pension and do crazy things, but don’t be put off either.
A good idea is to speak to your financial advisor about setting aside a portion of your wealth that you can actively manage. Even if you don’t beat the market, you’ll probably learn a great deal along the way and that has value too.
Going back to Massmart
So, what was it about Massmart that made the decision to invest so easy for me?
Massmart was already in big trouble before lockdown. The business had been poorly managed and the strategy didn’t make sense. There were jewels in the crown (like Makro and Builders Warehouse) and extremely rotten apples (like the cash and carry businesses you’ve never heard of and the sorry state of affairs at Game).
Despite this, Walmart (as majority shareholder) had clearly made the decision to fix the business rather than let it die. They had parachuted in a new CEO (Mitchell Slape) to get the job done.
Amazingly, they didn’t make a buyout offer to minority shareholders before going off and fixing Massmart as a private company, which is precisely what I would’ve advised them to do. It would’ve been the right advice, as they would’ve captured all the upside that they have clearly brought to the table.
Instead, they decided to let the minority shareholders participate in the turnaround and that was irresistible to me.
As the share price crashed and the CEO went to great lengths to reaffirm Walmart’s commitment, I remembered how impressed I had been with the turnaround strategy they had put forward and the no-nonsense approach of Slape in his analyst presentations.
This was clearly an action-man who had the backing of the world’s greatest brick-and-mortar retailer with the deepest pockets in the game. In my mind, there was no way they would allow Massmart to fail.
I could’ve spent weeks analysing Massmart and missed out. Instead, I took a punt and kept buying, bringing my average in-price down and unlocking a >100% return (and counting) in the process.
In the latest Massmart result, they disclose details of a loan from Walmart of R4bn made in April 2020 that has been rolled a couple of times. Comparing the size of the loan with the cash flow statement tells a very clear story: without Walmart, it’s very likely that Massmart would’ve collapsed like Edcon.
The investment thesis worked and it was based largely on common sense, not a deep knowledge of the world of IFRS.
Commit yourself to lifelong learning, but don’t feel so intimidated by the markets that you never even give yourself a chance to get a few trades right.
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