Buying undervalued shares when others are pessimistic

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SIMON BROWN: I’m chatting with John Biccard. You will find him at Ninety One. He runs the Value Equity Strategy Portfolio. John, appreciate the time. Earlier in the month, you were in South Africa, winning the News24 FundHub Industry Performance Awards for your value investing.

I want to get a bit around value investing but, before we do that, almost the psychology of it. I know as an investor there’s often comfort from the wisdom of the crowd – even if that crowd is wrong. But you go and position yourself almost anti-crowd as a value investor.

JOHN BICCARD: Yes, I think the first point is you really want to be buying when others are selling, and selling when others are buying. It makes sense if you think. If everyone’s buying something, the price is going up, the valuation will be going up, and it doesn’t make sense. All the data shows and the performance of funds like the value funds show that everything depends on the price you pay. Not in the short term. In the short term, when everyone’s buying, it’s going up. You can make money on a three-month or one-year, maybe even a three-year basis.

But on a longer-term basis it certainly makes sense to be buying when everyone else is selling, because you’re going to get a better price.

Obviously, you need to go and do the work and make sure that you know that you’re not buying a buggy-whip company in 1900, and you want to do the work and make sure that the company you’re buying has the balance sheet to survive the tough times that it is going through at the time, which is causing the price to be low. So you have to do that work.

But once you’ve done that work, you need to stick to it and buy through those dips.

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This is a longer-term process and sometimes, over the 25 years I’ve been running the fund, the quickest turnaround because generally we buy whole groups of shares or countries or industries that are cheap. The best case is kind of a three-month turnaround – that two, three months to a year. You wait three months.

The worst case was when we bought platinum ten years ago; we waited for four years. So you’ve got to have the courage to wait for that.

SIMON BROWN: Again, it’s the proper classic long-term investor. I’m thinking back to the likes of Benjamin Graham and The Intelligent Investor, whereas the world has moved to holding periods that are shorter and shorter. Value investing rewards that old school ‘hold for longer’.

JOHN BICCARD: Yes. Obviously, there are cycles in the whole thing and there are definitely value and growth cycles. But that’s maybe more relevant in the US market where it’s been in a massive growth cycle for 20 years now. That’s more function of tech than value versus growth, whereas in South Africa up to about five years ago we were in a 10-year growth cycle, which was the glory years for Myspace.

But in the last five years it’s been a much more even market in South Africa between value and growth. That’s firstly because we only had one big-tech stock, which was Naspers.

Secondly, in South Africa in the last five years the whole market got so cheap that it really was Naspers and one or two other stocks and everything else was veg. So it was a much more even playing field.

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SIMON BROWN: Value needn’t be the beaten-down Sasol at R50. Yes, Sasol  is up fourfold in a year, but it can be just healthcare stocks that are cheap, not necessarily completely beaten down and gutted.

JOHN BICCARD: 100%. Actually, those are the stocks we prefer to buy, to be honest. We made a lot of money out of platinum 10 years ago. But it’s a little that sort of Sasol or platinum; it’s a little more scary. The better ones are really Pick n Pay. At the moment in the fund we’ve got Pick n Pay and the two hospital stocks. But it’s not a case of them being average value and safe.

They’ve got to be also beaten down. And if you look at Netcare’s share price the last 15 years or Pick n Pay in the last 30 years, they fit the bill; they are as beaten down. The truth is that Sasol was at R70, so they’ve still got to be beaten down.

But in a way those stocks I prefer because they have an inherent franchise. And always with commodities it’s naturally more volatile and there’s more chance of you being permanently wrong, whereas if it’s Pick n Pay or it’s a hospital there’s less chance because there is an inherent franchise in the business.

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SIMON BROWN: A last question. You mentioned a moment ago the value growth and how the market would at a point swing towards one or the other. If we’re in the growth world there is still, I imagine, a lot of value in that market. You might just not be getting rewarded for it because the Fomo [Fear of Missing Out] trade is to chase the growth stocks which are giving, as you say, short-term appreciation.

JOHN BICCARD: Yes. So our view is very simple in that we say the future is totally uncertain and we’re not trying to predict the next growth industry or what growth companies will earn in three years’ time. Everything is kind of 50-50. My experience with the market is you can’t really forecast earnings in five years, so all we go for is stocks or sectors where the market is 100% certain that it’s not going to recover. So Pick n Pay  is a good example right now; the market pays you to take away the Pick n Pay business; you buy a Boxer.

The market is saying Pick n Pay will not turn around, no one will ever buy it, and that Sean Summers won’t get that business right. I actually don’t know. The truth is all I know is that if the bet is 100% that he’s not going to do it that just seems too severe, and I’m prepared to bet against that – people who say it’s 100% certain that it’s not going to happen.

Really a lot of investing is we don’t know the future. You just want to be invested with the odds more on your side.

SIMON BROWN: I think that’s it. We’re fine where the odds are on your side because the future will reveal itself, but we don’t know. We’ll leave  it there. Ninety One’s Value Equity Strategy portfolio manager John Bicccard, I appreciate the time.

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