Don’t get distracted by the razzmatazz

RYK VAN NIEKERK: Welcome to this week’s edition of the Be a Better Investor podcast. In this podcast series I pick the brains of the top professional investors in the country and we delve into their investment approaches. We talk about the research process they follow to identify potential investments, their individual best and worst investment decisions, and we also look at what stocks they actually hold in their portfolio – both their professional and personal portfolios. The idea is to find a few golden nuggets from their perspectives and experiences to assist amateur retail investors to become better investors.

My guest today is Chantal Marx. She is the head of investment research at FNB Private Wealth. Chantal, thank you so much for joining me. Your title has always intrigued me a bit. Obviously you lead a team of researchers looking for new investment opportunities, but what do you do on a day-to-day basis?

CHANTAL MARX: Okay. We have a few heads of parts of research within the FNB stable. I specifically focus on client-facing research. So, when we are looking at my portfolio specifically, it is to put together actionable research for our clients who can either be portfolio managers within the business or more specifically retail clients of FNB stockbroking and portfolio management, as well as Share Invest. So the guys who are actually going onto their online platforms, and have to make investment decisions, we provide them with research hopefully in a language that they understand so they can make better investment decisions for themselves.

RYK VAN NIEKERK: So you crunch numbers, you look at trends and then you say, for example, Anglo American is a buy – and that is what you recommend to the client?

CHANTAL MARX: It depends. It’s a very complicated question. What we do is we look at it on both a long-term basis and a short-term basis. From a short-term perspective, we will look at our long-term investment case, so do we like the company overall, and then we’ll look at factors such as the technicals, for example, or short-term market dynamics like we are seeing right now, potentially a big sell-off which offers a really good entry point. And then we will issue something that we call a ‘trade idea’.

Outside of that we also do very in-depth work in order to formulate that long-term view and that we provide to clients, not to just try and profit short term, but to really identify and buy stocks that they can keep in their portfolios and literally forget about and not have a sleepless night about what is lying there in their portfolio. In that case we would actually look at basically everything. We’ll look at our expectations from a global macroeconomic perspective, what are expectations locally for growth, how that factors into the different divisions within that business.

We will forecast revenue, we will forecast margins, we will forecast cash flows and then get to a sensible valuation of where we think the stock should be trading, and compare that relative to where it is trading, to hopefully find a good long-term opportunity.

RYK VAN NIEKERK: Let’s talk about the ‘trade idea’ research. Is that a short-term punt, or how should your clients perceive it?

CHANTAL MARX: We always give a long-term view on the stock as well. It really is there to provide either an entry point for a longer-term investor in the stock that they already like, or a stock that we already like, or it is for guys who do execute on a shorter-term basis. We typically would give a time exit, a period over which the trade is expected to play out. We will give a target price and we will give a stop-loss level. So guys who are trading short term can execute on those ideas.

But we won’t put out a trade idea on a stock that we hate from a longer-term perspective, or one that doesn’t look good to us fundamentally, or where we distrust or dislike the management team, or where we don’t see longer-term structural support where we think it’s an industry that isn’t competitive. We will always put out an idea on a stock that we actually like from a longer-term perspective. So if you are a long-term investor, and you want to buy something and hold it forever, or at least for the next three to five years, our trade ideas will offer you a good spot to start getting involved.

RYK VAN NIEKERK: Give us an example. What were your last two trade ideas?

CHANTAL MARX: Okay. Let me quickly call them up. We actually had a trade idea that was meant to go out this morning on AngloGold and, as we wanted to press send, it was up 13%. So we decided not to send it out.

But outside of that let me look at what else we have been putting out there this week. We did have a trade idea out on Bidcorp yesterday, which is a stock that we really like longer term. It’s a very defensive company. It plays in food services, and put out really good results yesterday after we sent out this trade idea, which we were pretty stoked about. They’ve shown really good recovery off Covid-19 lows, in most of their jurisdictions actually exceeding revenue with margins recovering quite nicely as well. That looked good to us from a shorter-term perspective.

Then we actually put out a trade idea on a really interesting international ETF. I forgot to mention that this is both for local and international stocks. It’s called the First Trust Long-Short Equity ETF. The idea is that you buy this ETF and it almost simulates something like a hedge fund, which tends to do quite well in volatile markets. So instead of going through all the rigmarole of trying to find a retail hedge fund that you can invest in, you can buy this ETF on most of the global exchanges.

RYK VAN NIEKERK: What is the name again?

CHANTAL MARX: The First Trust Long-Short Equity EFT. An ETF like this would do well during volatile periods, and that is why we decided to opt for this one. Also in last week…

RYK VAN NIEKERK: While you’re looking, I’m sure this ETF would’ve done really well over the past few years because we’ve seen such a volatile market.

CHANTAL MARX: I will have to pull up the latest performance graphs as of today. But when we put out the idea on Friday, it had a one-year total return of 8.2%. So not too great, but I think a lot of that would’ve been made up during this super-volatile period from the start of the year. In US dollar terms, 8.2% is nothing to frown upon, especially when you add some diversification to your portfolio.

RYK VAN NIEKERK: How many hits do you have and how many misses with these trade ideas?

CHANTAL MARX: Actually about 50:50. We did an analysis at the start of the year on how we fared last year, and it ended up being 50:50. The difference is that our upside is a lot more than our downside because we do stick to our stop losses. Unfortunately with a stop loss you sometimes can end up with quite a bit of remorse, because oftentimes you’ll have a stop loss on a stock that we really like.

That’s why, for example, if you’re a longer-term investor and you bought British American Tobacco when we said you had to buy it in February last year, you would’ve been stopped out if you were a short-term investor. But if you held on to it longer term, and you followed the trade idea for an entry point rather than anything else, you would’ve done quite well with that idea. But that’s also the reason why trade ideas work, because we are quite disciplined with our stop losses.

To give you an idea of how we fared last year, our local trade ideas delivered a portfolio performance of 38.2% last year against the JSE’s 29.3%, and our international trade ideas delivered a portfolio performance of 51.8% against the S&P’s 28.7%. We’re actually quite proud of this. Year to date we’ve also done quite well, mostly because our stop losses are working again because this year has been an absolute blood bath, right?

RYK VAN NIEKERK: This advice goes to your clients and the discretion to trade remains with them. Can you see that your clients actually use this information and trade accordingly?

CHANTAL MARX: Yes. Especially on the local side, we have quite a bit of investor interest. I think when it comes to professional traders, mostly they would use something like a local trader platform, which is kind of geared towards short-term trading, and then clients on the Share Invest platform that goes through the FNB online banking, would typically only trade to the long side. So we would see them trade, but they won’t necessarily trade out. They will take that longer-term three-to-five year approach and use trade ideas as an entry point.

RYK VAN NIEKERK: Do you follow your own advice?

CHANTAL MARX: As far as I’m allowed to. [Laughing]

RYK VAN NIEKERK: What are the rules?

CHANTAL MARX: Our rules are that we cannot trade within seven days of putting out a recommendation. Sometimes that results in the trade becoming a little bit less attractive and sometimes we do benefit from it. But I wouldn’t tell clients to get involved with a share if I’m not comfortable holding it in my own portfolio. And yeah, I’m very comfortable following my own advice, even though I’m very wrong at times.

RYK VAN NIEKERK: It’s an interesting dynamic. You want people who have skin in the game to give you advice, and then you have corporate rules to prevent you from talking up a certain stock. But are you an active investor investing, say, post the seven-day limit?

CHANTAL MARX: Yes. I’m an active investor. I actually didn’t used to be. I was exceptionally boring. I was just putting all my money into unit trusts. For years and years and years I’d have these running debit orders, but after the 2020 crash I decided that this was a very opportune time to start looking at stocks specifically. Also what we started seeing was that there were specific stocks that were looking a lot cheaper and a lot better value, and that we liked the narratives a lot more than those of others. On an index basis things didn’t look that attractive, so I felt it was an opportune time to start trading for myself or to start building up my own share portfolio.

RYK VAN NIEKERK: What do you think are fair expectations or return expectations investors should have because, if you talk to professional investors they say, listen, if you can beat the inflation rate by five percentage points then you’ve done well. But many people think currently our inflation rate is 5% so, if you have a 10% return per annum you should be satisfied. Many people would say, ‘That is just not good enough. I would like a much more aggressive returns and I’m prepared to take more risk’. What advice would you give to such a person?

CHANTAL MARX: Prepare to be disappointed if that is going to be your approach. I actually have had the same issue in my own family, where we asked a family member what they wanted to do with an inheritance, and they said that they wanted to double the money in five years – and they were serious about it. The reality is that if you look at markets historically, if you look at them over a hundred-year period, CPI plus 5% or inflation plus 5% is a very, very reasonable expectation over time.

Over the last 15 to 20 years we have had record-low interest rates globally that have artificially inflated asset prices. That might not be the case into perpetuity, which means that you are going to be disappointed when interest rates are at a more normal level and returns normalise to where they’ve been historically.

From a South African perspective, you could probably expect 10% to 12% per year over your lifetime in terms of the JSE. For bonds, it’s probably closer to 8%, 9%; for cash 5% or 6%. And when you’re looking overseas and you’re looking at developed markets, and at those equity markets specifically, a very reasonable assumption is actually 5-7% from international equity markets, and not the 25-30% that we’ve been seeing over the last 20 or 30 years that has been driven, as I mentioned, by very low interest rates.

With some of these technology companies that just kind of blew the market out of the water, if you actually look at the underlying performance of the S&P excluding those companies, it looks a lot different.

RYK VAN NIEKERK: Many amateur investors would say: ‘Why did so many professional investors or highly paid fund managers not identify these opportunities in the technology sector? They have research teams, big ones. They analyse the fundamentals of the company and the macro environment to a T. Despite this, they missed these opportunities.’ Has the way investment opportunities should be analysed not changed significantly over the past decade or so?

CHANTAL MARX: I think it’s changed to a certain extent. When I started out in the market about 12-odd years ago, we were very disciplined in terms of looking at cash flows only, and assessing the management team and looking at previous M&A activity, and whether or not the return on invested capital has been working out – and we weren’t really focused on the bigger structural story.

Now, when you are looking at a company you almost start with, ‘Well, does this company have something that’s going to change the way we are going to do things in the next 10, 20, 30 years’ time?’ That’s almost the starting point. It’s almost become the starting point relative to where we were, well, 12 years ago when I started – and I’m pretty sure prior to that. So we’ve definitely started looking at thematics, the way that the world is changing and how companies are going to fit into that narrative or even drive that narrative to a certain extent.

That being said, that’s the starting point. But the cash flows need to be there. The management team has to be solid. They have to have a decent track record of investment to at least having a decent reason for why they’re investing money the way that they’re investing it because, if they don’t and if you don’t focus on these cash flows, and if you invest in pie-in-the-sky ideas, you might end up very, very disappointed.

RYK VAN NIEKERK: Yeah. But I think that’s the key point. If you highlight all of those good fundamentals and you make an investment decision based on those fundamentals, why do you only have a hit rate of 50%?

CHANTAL MARX: Markets are very unpredictable. You have macroeconomic factors that could count against you – for example at the moment we have a lot of our companies that are under pressure because of geopolitics that we didn’t necessarily see coming when we put out those ideas, or didn’t think that they were going to end up being as serious as they were – or have such a big impact. Inflation took the market by surprise towards the fourth quarter of last year, and that changed the outlook for interest rates.

So there are a lot of things that are outside of your control that do impact the near-term return on shares. But that hit rate that we’ve spoken about, the ‘50% right, 50% wrong’, is also based on us sticking to the short-term strategy, sticking strictly to that stop loss. If you’re going to use this for at least a three- to five-year view, you probably won’t stop yourselves out, and that hit ratio could look a lot different because it won’t be impacted by near-term events. That’s why in my being I’m a longer-term investor, and that’s where most of our focus lies. Trade ideas is one portion of what we do, but the real work that happens within my team – and that I love specifically, and am very passionate about – is actually looking at whether or not this company is going to provide you value over the next three, five, 10, hopefully 15, 50 years.

RYK VAN NIEKERK: Let’s talk about your best and worst investments. Let’s start with the best one. What do you regard as your best ever investment?

CHANTAL MARX: I have proof that my best investment ever was buying Sasol at R30. [Laughing] Thankfully from a house perspective we were also quite overweight in the stock at the time. We opted not to sell it. We did hold it all the way down. But it it’s definitely been my most successful investment to date.

RYK VAN NIEKERK: Do you still hold the share?

CHANTAL MARX: Yes. I still hold it. I’m very happy to still hold it. Up another 3.5% today because of what’s happening between Russia and the Ukraine basically driving the oil price right now. I did trim the position, though – actually quite early. What I tend to do with these things is I like the stock, I invest it for the long term, but once it’s reached a certain level, once it’s made a certain percentage of profit, I take my capital out and just keep the gains invested. I think it’s more psychological than anything else. But I did take a little bit of money off the table quite early on, I think [at] around about R200. For reference the stock is now trading at R340/share.

Then my very worst investment ever – and please don’t laugh at me, but the stock’s still listed. It’s called Luxe. It used to be called Taste Holdings. I went to a results presentation as a young grad, and I thought it was a fabulous company because they gave us all the best snacks. They gave us Scooters pizza, because that’s what they owned back in the day. They sold us the whole idea about how Domino’s is going to take over the South African pizza market. I thought it was absolutely fabulous. Thank goodness I didn’t have a lot of money to invest in it, but yes, what supreme disappointment that ended up being – and a valuable lesson. It’s probably the most valuable lesson I’ve ever learned: don’t get distracted or drawn in by the razzmatazz.

A lot of companies have a lot of razzmatazz around them, and it’s not necessarily a bad thing if you look at Steve Jobs and the presentations that they would give around the new products – even Tim Cook still does it now at Apple, and Adrian Gore always does something fabulous with the Discovery results presentation. I was once there where they tested someone’s sugar levels on stage to show off a new technology. So it’s not always a bad thing, but it should not be the reason why you decide to invest in a company – because you had a really good time at the results presentation.

RYK VAN NIEKERK: Or buy Woolies shares because you like their peaches.

Just lastly, what are the biggest mistakes you think retail investors make, and what advice would you have for them to have a hit rate in excess of 50:50?

CHANTAL MARX: The biggest mistake is panic selling. Perhaps that kind of ties into why I’m a long-term investor and not a short-term investor, particularly binding myself by stuff like stop losses, although that’s very important when you are a short-term investor. But panic selling is one of the worst things that professional and retail investors do. You get to a point where you’re so disappointed in how this stock has fared that you’re willing to take quite big losses just to be rid of it.

There is also the flip side, where you kind of hold on to something because you feel like you’re emotionally connected to it. But the overwhelming mistake that I see more often is people selling stuff out of a place of panic and not really thinking through. Well, has the investment case actually changed? Has the outlook for cash flows for this business actually changed? Is there a fundamental issue that we need to address here?

Obviously when a company’s management team is accused of fraud it’s probably a good idea to panic first. But when you do see a company’s share price come under a lot of pressure, perhaps for making a pretty sound business decision – nudge, nudge, wink, wink WBHO yesterday – then it’s probably not a good idea to just dump the stock.

RYK VAN NIEKERK: I understand exactly what you’re saying. Sometimes the biggest mistake is not buying the wrong share, but selling a share of a good company too early.

CHANTAL MARX: Yes, absolutely. It’s not even just unexciting because the share has fallen 20%, it’s also selling something that you feel hasn’t done anything. So you’re like, aarg, this thing isn’t doing anything for me, and then you just dump the stock; but nothing has changed around it fundamentally.

I think probably the right way to put it, because, as I mentioned, there’s a flip side to it as well, selling something or buying something at a point that is out of kilter with the fundamentals of the company, selling something that’s too cheap or buying something that’s too expensive.

RYK VAN NIEKERK: But it’s an interesting dynamic because many people hold a dog of a share and they hope that the share price will recover, and an investor who actually holds a good-quality company which is undervalued waits patiently for the share price to recover. How do you distinguish between the two?

CHANTAL MARX: It’s an almost impossible decision, really. I’ve just been looking at Prosus and Naspers over the last few days and that just keeps on going down and it’s just offering more and more value. But you almost don’t want to buy it too soon or, once you’ve bought it, you are kind of circumspect about it. You’re like no, I’ve bought it too soon. Stick to your levels and if there’s upside allow the share price to actually grow into that upside.

RYK VAN NIEKERK: Yes – a good example of a growth stock becoming a value stock. But let’s leave it there. Chantal, thank you so much for sharing your insights today. I’ve actually found a few nuggets which I will implement. Most notably I will try and get hold of your trade ideas. Is that publicly available?

CHANTAL MARX: It is available for FNB clients. So clients who trade on our other online platforms – Share Invest, Share Builder or on the Local Trader or Global Trader.

RYK VAN NIEKERK: Thanks, Chantal. That was Chantal Marx, the head of investment research at FNB Private Wealth.