Recent Articles
Fooling Some of the People All of the Time – David Einhorn
Fooling Some of the People All of the Time is written by David Einhorn founder of Greenlight Capital. I heard him speak at the Value Investing Congress in October.
Greenlight Capital took a short position in Allied Capital in 2002. He then gave a speech at a charity investment conference in which he explained why he shorted the company.
A war broke out between Allied and David. It seems remarkable what management got away with. David was attacked after his speech as a short seller and bearer of bad news, instead of the SEC conducting a full investigation Allied Capital.
Over the next 6 years there were over a dozen new share issues exceeding $1 billion. Many more millions in the fraud were paid for by the tax payer. In July 2007 the share were trading over $28 a share and hit a low of $1.07 a share in Feb 2009.
Hedge Fund World Cape Town November 2009
I attended Hedge Fund Word Africa 2009 on the 18-19th November 2009.
The speakers at the conference were:
Day 1
-Marc Faber (The Gloom, Boom & Doom Report) speaking from Hong Kong via video conference.
Marc Faber pointed out amongst other things that wheat is on a multi-year low.
-Dr. Mamphela Ramphela (Circle Capital Ventures)
Dr Ramphela spoke very positively about SA, and made it clear that government was aware of the critical problems in SA. There is also a vicious circle of corruption within SA, which she pointed out that the private sector was just as responsible as government for this.
Some of the critical problems SA is facing is the high crime rate, high death rate with Aids and the increasing discrepancies between poverty and wealth.
Because SA has a very strong banking sector the foreign guests made it clear that they see a lot of future potential in the country with its mineral wealth.
Panel Discussion with:
-Sunil Benimadhu (Stock Exchange of Mauritius)
-Titi Odunfu (Verod Capital, Nigeria)
-Kimon Boyiatjis (trident Capital, South Africa)
-Jean-Pierre Matthews (PSG Absolute Investments, South Africa)
-Jarrod Cahn (Credo Group, United Kingdom)
-Simone Lowe (Thames River Capital, United Kingdom)
-Allan Thomson (Trading)
It was pointed out in this discussion that South Africans and Europeans are domiciling there funds in Mauritius and the country will make good revenue going forward because of this.
It was also pointed out that the Nigerian market has not rebounded as strongly this year as other markets. This may be a good investment concept unless we have a huge correction in the markets. My personal feeling is that too many investors are waiting for this correction, keeping money out of the market which reduces the probability of such correction.
As volatility has decreased a put option may be a good insurances policy to consider to protect a potential downside. If you decide to strategically that you want to protect downside other interesting tactical asset allocations could be to go long, long term treasury bonds such as the ETF “TLT” or long volatility VIX, by purchasing ETF “VXX”
-Robert Foster (AIMA, South Africa)
Panel session with
-Arno Lawrenz (Atlantic Asset Managemnt, South Africa)
-Wendy Hattingh (financial Service Board, South Africa)
-Robert Foster (AIMA, South Africa)
-John Versfeld (Oryx, South Africa)
-Jean Craven (Barak Fund Management, South Africa)
He spoke on commodities in Africa. I got the feeling that they were well networked into Africa, and were arbitraging commodities between Africa and other exchanges. Not much help for the speculator.
-Dr Gareth Witten (Peregrine Securities, South Africa)
Panel Session with:
-Lance Williams (I Capital, South Africa)
-Ronald Chabvonga (Gondo Capital, South Africa)
-Daniel Broby (Silk Invest, United Kingdom)
-David Damiba (Renaissance Investment Management, United Kingdom)
-Rod Gravelot – Blanndin (JSE, South Africa)
Day 2
Roland Rousseau
He gave a very controversial speech about alpha verse beta and the role of the money manager. With ETF today one can extract all type of beta without the fees of a money manager.
So if one enters a value fund the benchmark of the fund needs to be compared to a value ETF. The true value of the fund manager / alpha can only be compared to this benchmark. There are even momentum ETF today to extract momentum beta.
I have still not drawn my own conclusion about this topic. The academic research that I have read suggests that 70 – 90% of performance is dependant upon assets class.
I attend the Value Investment Congress in New York where a number of hedge fund managers represent their ideas with excellent long term performance and they only hold between 8 to 10 stocks in there portfolio.
Mac Donald was highlighted, as an excellent investment as it was selling on a PE of about 14/15 at the time, is an excellent franchise business model with international revenue streams expanding into the Far East. I was not interested in acquiring into this sector via an ETF, but was very interested in purchasing this company.
If the entire market drops I sure the investors of the idea will still take the full beta knock of the share.
Panel discussion with:
-Rowan Williams (I Capital, South Africa)
-Simon Peile (Sygnia Asset Managers, South Africa)
-David Damiba (Renaissance Investment Management, United kingdom)
-Luvo Tyandela (Clade Investment Group, South Africa)
-Malungelo Zilimbola (Mazi Capital, South Africa)
-Daniel Broby (Silk Investment, United Kingdom)
Panel discussion with:
-Jonathan Hertz (Alpha Capital Management, South Africa)
-Bruce Simpson (Sanlam Investment Manager, South Africa)
-Bernard Fick (Prudential Portfolio Manager, South Africa)
-Sean Morris (Coronation Fund Manager, South Africa)
-Steven Liptz (36One asset Manager, South Africa)
Panel Discussion with:
-Fatima Vawda (27Four Investment Managers, South Africa)
-Arno Lawrenz (Atlantic Asset Management, South Africa)
-Anthony Williams (SABC Pension Fund, South Africa)
-Tebogo Tlatsana (Nedgroup Retirement Fund, South Africa)
-Obi John Okechwuku (Fidelity Pension Funds, Nigeria)
Panel Discussion with:
-Daniel Broby (Silk Invest, United Kingdom)
-Fatima Vawda (27Four Investment Managers, South Africa)
-Reuben Beelders (Gryphon asset Managers, South Africa)
-Gavin Glick (Peregrine Investment Managers, South Africa)
-Byron Green (Caveo, South Africa)
-Kevin Ewer (Blue Ink, South Africa)
-Michael Carsley (Red Kite Australia) spoke about opportunities in asset based lending. I recently attended a four-day workshop in structured commodity finance to get a greater understanding of the industry and the opportunities within it.
It is the first time I have heard a hedge fund assert that they can obtain a return for investors of 20% per annum using this strategy, competing directly with banking structured finance divisions.
-Lance Basserabie and Philip Nel of Standard Bank South Africa.
-John Mauldin (Millennium Wave investments, United States of America)
Second is Nothing – Alan Knott-Craig
I have completed the autobiography of Alan Knott-Craig (‘Second is Nothing’), the first CEO and the founder of Vodacom.
An interesting point that comes across in the book is that to be a successful an entrepreneur needs to put in a tremendous amount of work and dedication to turn a vision into a reality. Alan suffered two strokes doing this before deciding that it was time to reevaluate his life.
Other interesting points that come across are that you really need to understand the drivers of a business. He decided to put his network along the national routes in SA. This was a controversial move as the logical thing at the time would have been to focus on the coverage in the cities. Alan realized that being able to use your cell phone anywhere was just as important if not more important.
He also clearly understood and explains the importance of marketing the product and how he went about doing this.
When building a company the size of Vodacom he also realized immediately that if he was to succeed he had to politically sensitive and aligned.
The original shareholders involved in the company were: Telkom, Richmond and Vodaphone.
A Demon of Our Own Design – Richard Bookstaber
This is a comprehensive book in which Richard Bookstaber covers many topics and theories that include:
-The 1987 crash and the demise of LTCM.
-A new way of looking at the Tulip Bubble / Mania of the 1600. i.e. the experts / collectors of exotic tulips were not the people that lost money in the crash. It was the uneducated population buying tulips that were easy to produce with no collectors qualities. A future market was also created for the tulips that facilitated the crash.
-The book explains how systems work and what types of system are most likely to crash. Accidents are analyzed in the airlines industry with the ValuJet crash and in nuclear power plants with Three Mile Island and Chernobyl. The conclusion being tightly coupled, complex, leveraged systems in the financial markets are candidates for disaster.
-The author also examines the defense mechanism of the cockroach to see how it has survived major changes to its environment and compares this to furu fish that was found in Lake Victoria, which bacame distinct after a foreign predictor fish was introduced.
His analysis of hedge fund types are also interesting:
1. Asset class – fixed income, equities, currencies and commodities
2. Direction – Long, Short, Long/Short and Neutral
3. Investment type – Relative value, Statistical arbitrage, Merger arbitrage, Credit arbitrage and Distressed debt.
4. Geographic region
5. Liquidity
In other words non hedge funds are a sub-category of this, so invetments can be studies as a whole.
Reflexivity – George Soros
I read the ‘Alchemy of Finance’ by George Soros some time back and did not understand the full significance of his theory that he calls ‘reflexivity’.
A reflexive relationship is bidirectional; with both the cause and the effect affecting one another in a situation that renders both functions causes and effects. I have recently read ‘a Demon of Our Own Design’ by Richard Bookstaber.
In the book ‘A Demon of our own Design’ he describes a number of financial crisis including the crash of 1987, and the demise of Long Term Capital Management (LTCM). He takes his analysis further to the failing of nuclear power plants and compares these systems to financial markets.
It is often the safety mechanisms that are put in place that can be responsible for the crisis i.e. a reflexive relationship is created. The safety mechanisms placed in the nuclear power plant often were cause of the disaster itself. It is also government regulations ‘safety mechanisms’ that can cause financial disasters. Reading this book really helps cementing the reflexive relationships Soros explain.
An example of ‘reflexivity’ is that a price of an asset should reflect the underlying fundamental value of the asset. George Soros shows that it can be the other way around i.e. the price of an asset can change its fundamental value. One example is that as a banking system makes credit easily available to purchase property, the fundamental value of the property will increase and a positive feedback loop is created.
Another reason Soros disputes the ‘Efficient Market Hypothesis’ and proposes a ‘reflexive’ theory in his book ‘The crash of 2008 and what it means’ is that shorting a stock has asymmetrical probability risk of going long the same stock.
I recently wrote on Inter Oil. A ‘reflexive’ concept would be that if one had to short the stock at $50, it could still raise to over $200 dollars. If the company had to raise further capital, and use that capital to make acquisitions, the company’s fundamental value could theoretically raise. This could potentially blow up the short.
George Soros states that this is the worst financial crisis we have been through since the 1930’s. He calls this bubble the super-bubble and states, “there are no normal, near equilibrium conditions to turn to. We are facing a period of greatly increased uncertainty where the range of possible outcomes is much broader than in normal times.”
What is interesting is that GuruFocus shows that he has 211 bets in his portfolio valued at 2.61 billion dollars. 49.3% of this is invested in Oil and Gas, which gives us some ideas his thematic investing style.