Dr Michael Jordaan steps out from the shadows

RYK VAN NIEKERK: Welcome to this week’s edition of the ‘Be a Better Investor’ podcast. It’s a podcast where I speak to leading investors, business leaders and personalities in South Africa about their approach to investments. The idea is to find those golden nuggets from their perspectives and experiences to assist amateur retail investors to become better investors.

My guest today is Dr Michael Jordaan. He was of course the former CEO of First National Bank. He was appointed to this position at the age of only 36. After he transformed the bank to become the most innovative bank in the world in 2012, he moved to the corporate world and started his venture capital company, Montegray. One of his investments is Bank Zero, which is really transforming and disrupting the South African banking market. Michael, thank you so much for joining me. First of all, what is your full-time job at the moment?

Dr MICHAEL JORDAAN: Hi, Ryk. Thanks for having me.

I do now what I want to do for the rest of my life, which is work all the time and be on vacation all the time. I do that by investing in other small companies and startups, and then I try and add value to them on a strategic but not an operational level.

It’s a wonderful way to solve problems in the world through startups, and it’s a very interesting way of investing because you are very, very close to the action.

RYK VAN NIEKERK: Yeah, but there’s a difference between assisting strategically and actually having a financial interest in that company, because I’m sure you will not agree with what those entrepreneurs are doing, not always agree. How do you keep your distance?

Dr MICHAEL JORDAAN: You know, the secret to life is always about people. You will approximate your five closest friends. They’re going to have the biggest impact on your behaviour and your personal life. In your professional life it’s the same thing – you’re going to do well if you surround yourself with people who are better than you, and I’ve been lucky in life to have been able to do that.

When there are differences of opinion with entrepreneurs, it’s a matter of debating it on a very factual, unemotional basis, and then to make peace with whatever the outcome is. The right people are persuadable if you bring the right facts and the right arguments to the table. But similarly, you have to be in a position to be persuaded. It’s all about the right people and then having enough respect for each other, [so] that you can have a proper debate when there are differences of view.

RYK VAN NIEKERK: Let’s talk about investments. I’m sure you would’ve started from an early age. When did you start to look at investments, especially equity investments, and when did you buy your first share?

Dr MICHAEL JORDAAN: Ryk, it’s a funny story. I figured out compounding relatively early on in my life, and I actually started a little business breeding rabbits because I’d figured out they compound very fast [Ryk chuckles] and I sold them to the pet shop. I fed them with groceries that the grocery shop around the corner judged too old and was throwing away. So my input costs were zero and the bunnies grew pretty fast.

Then I had a little bit of capital. This was at primary school that I was able to invest. My mother took me to the local branch – she actually had to go to the branch. I don’t think the branch manager had ever seen as young an investor as I [was]. That’s when I bought my first share. Now, the name of this share is fairly relevant. It was called [Triomf]. It was, I think, a Louis Luyt company and it was a fertiliser company, and I was just lucky that it also did quite well. That was the start of my investment career. It started with breeding bunnies and then moving on to investments.

RYK VAN NIEKERK: And using the proceeds to buy your first fertiliser share. How long did you hold that share for?

Dr MICHAEL JORDAAN: I can’t recall exactly, but it would’ve been a couple of years. I must say I’ve tried my hand at trading markets and I haven’t been good at trading. My market timing is not something I would try and give anybody advice upon. Generally I’ve learned that I have to invest in things and hold them for the longer term. Yes, that was the case with my first share. I can’t give you the exact amount, but there’s something about having a longer-term perspective and, there too, letting things compound.

RYK VAN NIEKERK: What was your investment approach then? I just want to qualify that immediately – obviously it has changed, you are now a venture capitalist and you think about investments quite differently. But, before you ventured into the venture-capital industry, how did you approach investments and how did you especially view equity investments?

Dr MICHAEL JORDAAN: Ryk, I think I need to say that I’m still learning. The markets are incredible. They’re bigger than us. They’re more dynamic than us, they are  24/7 all over the world and, whenever you just think you’ve learned something and you are smarter than the market, the market has a way of teaching you. If I think back now of how little I knew when I started and what informed my decisions then, it was maybe a brand that appealed, something that seemed to make sense, something that the market wanted. Then, in retrospect, it was a huge amount of luck.

My approach has obviously changed over the years. I am a student of finance. I love finance. For me it is a game, possibly one of the most exciting games one can play out there, a scorecard that constantly reflects. Where my approach I think has matured is that I’m now far more focused on the long term, which means I’m okay with volatility, [and] far more worried about the management and the leadership of all of these investments because of my approach that everything is about people.

I’ve learned how cash flow is everything. Frankly, I’m somewhat confused by modern accounting and IFRS [International Financial Reporting Standards], and if you give me an income statement I’ll look at everything, but most of my time will be spent on understanding cash flow.

So my investments are ultimately based on those things, thinking long term, happy with volatility, backing the right people and understanding the cash flow of investments.

RYK VAN NIEKERK: It is very interesting, because I have spoken to many professional investors with CA qualifications for this podcast, and their investment approach is very similar. It is a very, very thorough financial analysis of the financial results and they base all their decisions on what they see in the numbers.

Of course you are theoretically probably an economist. You’ve got an MCom in economics and you also have a PhD in banking supervision. You were the brains behind eBucks at FNB many years ago.  So there is definitely a difference in approach and it shows you there is not only one really, really accounting-analysis type of approach. There are other ways as well to identify successful investments. What have been your most successful investments in your view?

Dr MICHAEL JORDAAN: The interesting thing about these venture-capital investments is that ‘the show ain’t over until the [fat] lady has sung’. What I mean with that is I’ve got a nice portfolio of about 20-something investments. Some of them are performing quite well.

Rain, for example, has been a very interesting investment but, because they are unlisted and because they don’t trade on the market, I really don’t focus on exit value or the potential exit value. The focus is really on the business, trying to make the business better every single day when you engage with management or you interact with them as a board member.

So I would say overall I would think my venture-capital portfolio has exceeded my expectations, but it’s actually still too early to go and single out too many of the winners, because it’s a very long-term gain.

RYK VAN NIEKERK: Interesting that you jump immediately to your private-equity portfolio, and I definitely refer to equities, or listed equities, rather. How do you approach investments? Do you think they are different asset classes, fundamentally different – listed equity versus private equity?

Dr MICHAEL JORDAAN: If you take a theoretical financial approach, there are all these asset classes ranging from commodities to fixed-interest, to equities. I try and abstract my thinking and just bring it back to economics [which] I understand, and cashflow that I can understand. All of these things are inherently risky and it’s possible that you lose all your money. So there are a couple of things that I do try and diversify, and that would be not only across asset classes, but also across ideas. If I have a certain idea of the world – let’s say, I think we are going to be in stagflation for the next couple of years – that would generally suggest you have more exposure to commodities and possibly less to bonds, for example.

But now you have to be careful to construct your entire portfolio according to that reasoning. The nice thing about venture capital is that the macro situation matters less. So, if you have a tiny startup in South Africa and the economy only grows at 1% or 2% – which is too low and very disappointing – frankly it doesn’t really matter that much to that particular startup. It’s important that they are able to execute well on whatever the value proposition is that they bring to the market.

So I just try and focus on the basics, on the things I understand. You asked me [whether] I see them as equities or not. The definition, frankly, does not matter that much. What matters is that you understand what you invest in. If I had to give a tip to other investors, possibly the most important thing is to try and understand what you are doing better than the person next to you, because then, if you make a mistake you also only have yourself to blame – but then at least you learn in the process. A lot of people don’t go to the effort of, let’s say, even reading the annual report of a company; they’d rather have a hot tip from somebody else that’s covered it, or read a research report, because it makes it easy. But if you can go to the source, find out what management themselves are saying about the company in the annual report, or if you are in venture capital, be able to have a cup of coffee with somebody, I find that far superior to any other form of analysis.

RYK VAN NIEKERK: Do you own any listed equities at the moment?

Dr MICHAEL JORDAAN: I actually only have one. It’s Purple Capital. I’m very impressed by what Charles [Savage] and his team at EasyEquities are doing. I love the fact that they are democratising access to savings. In South Africa we have a very well-developed system for lending, and people borrow I feel too much and save too little. So the fact that you can make saving and investing exciting for people I think is a wonderful, noble cause, so I like startups that solve causes that I care about. And this democratisation of investment, making it easy for people to start also investing small amounts in fractional shares – I find that very exciting and therefore am also proud to be a shareholder of that one listed share.

RYK VAN NIEKERK: Do you still hold any FirstRand shares?

Dr MICHAEL JORDAAN: No. I held a lot of FirstRand shares, actually geared myself up to hold them. But you remember that was at a time when I was able to influence the outcome of the shares. I was able to work 24 hours a day, seven days a week at this one thing that I understood really, really well.

Incidentally, something I would strongly recommend is that CEOs should have exposure to their own company’s shares, but not just via our share-option schemes. The thing about share-option schemes is you have upside potential, but your downside is capped. But the moment that you put real money in, especially if it’s geared, you have a very different understanding of the risk of that investment. It does change your behaviour for the better, your productivity and the quality of the decisions that you make. So yes, I used to have a lot of FirstRand shares but, having been away for more than a decade now, it’s not something I understand that well any more.

RYK VAN NIEKERK: Sure. Most professional investors will tell you: ‘Do not use debt to buy equities. You only do that when you are really, really good and you know what you’re doing’. An interesting approach.

What is your approach to risk, because many people will also say the private-equity and venture-capital space is a lot more risky than the listed-equity space?

Dr MICHAEL JORDAAN: There’s this undeniable correlation between risk and reward, thinking you’re going to have no risk and a great reward. That’s just not possible, or you have to be supremely lucky to get that. So you have to lean in somewhat towards risk.

Now, I actually like risk, but what I mean with that is smart risk, deliberate risk, understood risk. Clearly you’ve got to minimise the risk where you can, make sure that you understand as much about the investment as possible. Make sure that there aren’t stupid risks that you could have kind of easily hedged away, but then lean into the risk that you fully understand.

So, let’s say you have a view that in time solar costs are going to come down and you’ve really understood them. Then by all means take your risk on solar, or that digital will overtake manual processes. So risk is good, but make sure that you really, really understand the risk that you’re taking.

And then there are certain things that you just have to do – like diversify. If you’re in a venture capital world, you have to make peace with the fact that some of your investments, maybe even up to half of your investments, are not going to make it. So you cannot put all your capital just on one investment. What happens with the overall capital portfolio rate, you say? Some people think it’s more risky than listed equities. Funnily enough, that portfolio then performs better than a portfolio of listed shares would do. But it’s all about understanding diversification, and that’s maybe one of the most important ways of reducing risk. So you can take actually very high-risk individual positions, but the overall portfolio can have a lower risk and a higher performance if you diversify.

RYK VAN NIEKERK: How many investments do you have within MonteGray?

Dr MICHAEL JORDAAN: I think my portfolio’s just over 20, and I find that for me the right size that I can focus my mind upon, but it is also determined by my capital. I don’t have any more capital to invest now, sadly.  So I’m sitting with my 20 investments, hoping that some of them will mature at some stage and there’ll be an exit. Then I will reinvest again.

RYK VAN NIEKERK: Let’s talk about crypto. You are invested in two crypto firms, the one is VALR and the other one was EasyCrypto. You started that with Earle Loxton, and then the Purple Group acquired it to become part of EasyEquities. You probably received your Purple Group shares via that transaction. What is your approach to crypto?

Dr MICHAEL JORDAAN: That’s a very broad topic. I was introduced to crypto in 2013, when I was at a singularity programme in San Francisco. I was fascinated by the concept of alternative money. It helped of course that I was a founder member of eBucks. By the way, I wish I could say I was the brains behind it. It wasn’t me. It was Paul Harris who came up with the topic.

But as an economist I just found it fascinating that there could be alternative money that is not issued by the central bank. And so I was very open and [receptive] to crypto at that time, to Bitcoin, [in] 2013. But I suppose I could say one of my worst investment decisions was that I bought some but should have bought a lot, lot more. In fact, Ryk, all my worst investment decisions are not the ones where my investments went to zero, but the ones I didn’t make.

That includes talking to Marcus Swanepoel from Bitex, now Luno, where I could have invested, right, right at the start. But I didn’t because at the time I felt it was still too close to my previous position, being CEO of a bank, and there was a conflict. There probably wasn’t; I was just over-cautious. But yes, I’m very interested in what crypto can do as an alternative system. I don’t think it’s going to replace as much of traditional finances that people think it will. The opportunities of cryptocurrencies, of decentralised processing, are going to give rise to lots and lots of new opportunities in the world. And so therefore I’m a backer.

But again, I wouldn’t advise anybody to put all their money in there. It’s very, very volatile. I certainly wouldn’t advise gearing against it, but I would say get off zero; it’s a asset class that you can’t not have in your portfolio.

RYK VAN NIEKERK: 2013 – what was the price of a Bitcoin then? Probably less than a hundred dollars.

Dr MICHAEL JORDAAN: You are quite right. But I don’t even want to think about that, Ryk. It’s a bad memory. What one has to do is learn from these experiences. I’m trying to learn from the times that I said no, and what it was that made me say no to such a ‘great opportunity’ – and to just not repeat that again in future.

But now remember venture capital is like that, If you say no, you said no to something that could go up 10 to a 100 times, and therefore you can and should actually take more risks on some investments that will go to zero. So it’s a very different approach to the one that you would typically find in the liquid stock market.

RYK VAN NIEKERK: Yeah, it’s interesting. I don’t know if it always makes sense to make the calculation because I, for example, owned Naspers shares when they were around R50/share and I sold them to buy a house. If you’re going to make the calculation, it’s probably one of the most expensive houses in that very middle-class suburb where I lived. I don’t know if you need to make that calculation, but do you own crypto today?

Dr MICHAEL JORDAAN: Yes, but I’ve significantly reduced my exposure recently. The total crypto market cap maybe is $1.7 trillion or $1,8 trillion, and my feeling is just that that is actually quite high, so I think the market will consolidate for a while. Also it’s not clear to me which particular coins will be the ones that win.

That was incidentally the thinking behind EasyCrypto, which a partner of mine, Earle Loxton, kind of brought to the party and that we’ve now merged with the EasyEquities platform. So the exposure that I do have is just to an index of these cryptocurrencies, and I’ve gone a little less aggressive than I had been in the past.

RYK VAN NIEKERK: If you look at the average retail amateur investor in South Africa – and maybe don’t limit it just to equity investments – how do you think these people approach investments, and how good are they?

Dr MICHAEL JORDAAN: I have a little bit of insight through EasyEquities and how investors there have performed kind of during Covid and the lockdown period – and they’ve actually done very, very well. Many of them piled into Sasol when the share price was very low and have subsequently done incredibly well.

So I think it’s a mistake to be too paternalistic about individual investors and say all they should do is give their money to professional managers to manage. Ryk, as you know, there is also a lot of evidence that suggests that even some of the top names in investment management underperform the index when you look at the performance of the fees.

That’s the one part of it, individual investors can actually do quite well. But, secondly, it is a very exciting adventure to go into markets. It makes you really think about the world and what’s happening, because everything affects markets – politics and wars and any type of event anywhere in the world. So I just think it’s a fascinating thing.

I suppose the main reason why I would never give funds to a professional manager is I love the whole investment process, and I think that’s the benefit for individual and retail investors. I think they are doing much better than people give them credit for. As I said, it’s not just about the performance, it’s also that there is actually enjoyment in being on top of your own finances.

RYK VAN NIEKERK: Yeah. Over the past few weeks I’ve spoken to several professional fund managers, professional investors. That’s what they do for a living. They look at numbers the whole day and they decide, based on the numbers, which shares should go up. The common thread of those discussions was that a hit ratio of six winners versus four losers is an acceptable hit ratio. I don’t know – if you spend so much time and you’ve studied so many years to try and identify winners, a 6:4 ratio is not that great.

Dr MICHAEL JORDAAN: [Laughing] Yeah, it’s not. But in venture capital that definitely can be adequate – if one of the six winners does really, really well. If you had to ask me to give one word of advice to all investors, it would be ‘diversification’. There are so many things that you can do. But the worst thing that a tiny investor would do is kind of put all their savings into just one counter, because then your chance of losing it all is very, very high, and you would’ve had a terrible investment experience. So just spread it widely.

But the moment you spread it widely, your performance can easily approximate that of professional investors, because they are very well aware of this thing called diversification – and they will be diversified as well. But once you do that and you take ownership of your own finances, I would strongly recommend that.

The alternative to that is to then simply put something in an index fund and track the market, knowing that over time equity markets outperform nearly [all] other investments available out there. But then you want to do it on a very low-cost basis. Hence the suggestion of a index tracker like an ETF.

RYK VAN NIEKERK: Just lastly, Michael, is a listing of MonteGray on the cards?

Dr MICHAEL JORDAAN: No, Ryk. I’ve done my bit in the corporate world. I’m trying very hard to actually stay out of the limelight as much as possible. MonteGray – I’m fortunate to have had a little bit of capital when I started it. I do think in my case my investment process and investment thinking will change somewhat if I have to be accountable to external parties for the investments that I’ve made. Right now, I know my mistakes are all my own, or actually that it’s my family who will feel the impact of them. So I kind of like the space to not be in the public limelight.

There may, however, be other ventures. I do think the listed markets are interesting and there are other listed opportunities, but it won’t be my MonteGray , no.

RYK VAN NIEKERK: I think many investors would queue to invest in that portfolio. But Michael, thank you so much for your time and insights today and good luck with all your ventures.

Dr MICHAEL JORDAAN: Thank you, Ryk. It’s been great talking to you, and good luck to all those other investors out there. We are all living in interesting times and it’s not always easy to know how to invest – but if you have the courage, if you follow the right process, you will get there.

RYK VAN NIEKERK: Michael, thanks so much for your time today. That was Dr Michael Jordaan.