Old Mutual Wealth
Old Mutual Wealth
How to manage money during a global crisis?
In this series, our Old Mutual Wealth Investment Managers answer some hard questions and demonstrate how they do the hard thinking and work so that you don't have to. Their answers are based on an in-depth understanding of the local and global economy, financial markets, and the driving forces that will shape tomorrow.
Andrew Dittberner, Chief Investment Officer at Old Mutual Wealth Private Client Securities unpacks investing and the complex matters that go around investing.
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https://www.oldmutual.co.za/wealth/hq-investment/
Old Mutual 00:02
Investing your wealth is a journey that demands skill, in depth knowledge, experience, and conviction from the investment manager. From you, the investor, it demands time, patience, and trust in your investment manager's ability. While investing is certainly rewarding, it can be complex. You will have questions along the way, and we're here to help you find the answers.
In this series, our Old Mutual Wealth Investment Managers answer some hard questions and demonstrate how they do the hard thinking and work so that you don't have to. Their answers are based on an in-depth understanding of the local and global economy, financial markets, and the driving forces that will shape tomorrow.
Ian Fraser 00:46
Welcome back to the podcast. My name is Ian Fraser, it's good to be with you. Today, we are talking investments and the complex matters that go around investing. It says in front of me here "investment success is not about what you make, but what you keep". Wise words, let me not unpack that.
Let's welcome Andrew Dittberner, the Chief Investment Officer at Old Mutual Wealth and Private Clients Securities. Andrew, good to have you back on the podcast. We're talking investment today. What's your take on this before we really get going about investment as a philosophy, investment philosophy being so important?
Andrew Dittberner 01:23
Good morning, Ian. Yes, I think when thinking about "it's not what you make, but it's what you keep", I suppose that brings it back to investor behaviour. I think you can be the smartest guy on the street, but if you behave poorly, and in other words, you can't keep your emotions in check when it comes to investing, and you fall foul of many of the risks that are out there in this complex world at the moment, no matter what you make, it might be very hard to keep. As I say if your behaviour is not what it should be from an investment perspective.
Ian Fraser 01:56
Okay, you've gone straight to the behaviour, so let's talk about that. Because as an investor, you know, as somebody who's looked at shares very enticingly, they're there and they're ready to be making money for you. You buy in, and then all of a sudden, a week later, you find yourself down by whatever it might be. That's a tough place to be in. So, let's talk about that behaviour. What should we be looking for when investing our money? How should it roll out?
Andrew Dittberner 02:21
From a behavioural point of view, I suppose we can talk to philosophy and process which is important as well. But from a behaviour point of view, one needs to be - first and foremost, one needs to have patience. Because markets, as you say, can go up and down very quickly. And we could invest today and wake up tomorrow and we're down 5/10% very, very quickly. And at times like that, it's often very difficult for investors to remain invested and be able to see through the cycle.
We've become very used to a world for the last probably 10, you can go even probably 14 years back, where markets have generally moved higher. And suddenly, we now find ourselves after the first quarter of 2022, where there's been a lot of volatility and uncertainty in markets, given what's going around, you know, not just Covid, but the war in Ukraine, market valuations appearing to be high. The phones all of a sudden start to ring, suddenly clients want to start speaking, because it's uncomfortable. But very often these are the exact wrong time. So, from an investor behaviour perspective, one has to be patient if you invest in the markets and be able to withstand that volatility and have the stomach to see the cycle through.
Ian Fraser 03:34
Sjoe, as you say, have the stomach, that's the real big issue. If you can actually hang on. I want to point, rather obviously, it's a low hanging fruit. But Warren Buffett is widely regarded as one of the most successful investors of all time. And he's famous for investing only in companies and businesses that he quote, "understands". So, let's talk about that. Because we've spoken about the emotions behind it, here's Warren, who's investing in companies that he only really has a grasp on. What's that all about?
Andrew Dittberner 04:04
Ja. So, I'll get to that now. When talking about Warren Buffett, the biggest advantage that they've had on their side is time, so it comes back to the patience thing. They've been investing for many, many years. So, I think that's an important point when thinking about their investment approach.
But talking to the fact that he only invests in businesses that he can understand, that's - people often like more complex, you know, the more complicated something appears, the cleverer it looks, and people like to veer towards those sorts of strategies or philosophies. He keeps it very simple and as you say, he invests only in businesses that he understands, and that's all about... people often talk about standing inside their circle of competence. Keep it simple, invest in, you know, how profitable companies, companies that are easy to understand, there's not any financial engineering going on. You know, balance sheets not necessarily highly leveraged.
Just look for good businesses with solid revenue, solid revenue growth, that are profitable, not too much leverage. And, I mean, that's as simple as it gets. And that's exactly the sort of philosophy that he sticks to.
Ian Fraser 05:15
Before we run off to Andrew to ask if it's a good investment, it's probably wise for us to do our own investigation, and you've spoken about leverage, you've spoken about the company, understanding it, you've spoken about all of that. How important is really looking into a company's financials and their situation and finding out stuff, the news around the company before you invest, before you run to Andrew?
Andrew Dittberner 05:38
Ja, well, I mean, that's probably almost the starting point if you're going to think about investing in a business on your own accord. You want to invest in... everyone, it's very much an overused term that I think is always used, everyone says, invest in quality businesses. No one's gonna go out there and say they're investing in a rubbish company, right.
But if you're trying to figure out the good from the bad when thinking about quality companies, the first place to start is obviously the company financials, you know, looking at, as I've mentioned, balance sheets, profitability, do they have margins that are sustainable? Are their margins stable over time and are they growing over time? Are they able to generate revenue, sustainable revenue over time and revenue that's growing? And then very, very importantly, is that real revenue? You know, often companies might book revenue, but they actually don't have the cash in the bank yet. So, you've got to look at cash flows. What they're saying they're generating from a revenue perspective, is that actually being turned into cash flow? And not just accruals, for instance, or accounting cash flow. So, cash flow is very, very important.
And then obviously looking at the management team and looking at the track record of a management team. How long have they been in place? What are they done? Where were they previously? At the end of the day, a CEO's job is to allocate capital, and what's his track record like in that regard? So, there's some softer, more subjective issues I suppose that one can look at, but from a hard number perspective, there's no better place than to start than the financials.
Ian Fraser 07:12
Andrew, let's talk about discipline. You've alluded to it in the beginning of this conversation, and we've spoken about not worrying terribly much about the ups and downs. But I want to talk about bubbles and trends that are very hot right now and people buying into these trends. Do you have to kind of create a strategy for yourself and then just stick to that when it comes to bubbles and new fads?
Andrew Dittberner 07:36
Ja, absolutely. So, that sort of comes to when we think about valuation. So, there's a big difference between a good investment and a good business. And I think it's an important distinction between the two. You can have a great business, but if it's exceptionally overvalued, and you invest at that point in time, it could turn into a very, very poor investment, despite the fact that it's a great company.
So, you've got to be careful of getting caught up in the hype, getting caught up in the noise. And you've got to come at it from a valuation perspective. What do you believe this company's worth? And where is it currently trading it? And there's many, many examples of bubbles that have happened in the past, we can think back, probably in recent times, the.com bubble of the 2000s, when you just had to put a.com at the end of your name. ianfraser.com would have attracted a high valuation based on the fact that it was a.com to the name. And people just got caught up in that frenzy. Companies weren't producing any sort of revenue and people were willing to pay up.
And today, we see elements of that. We can think particularly in the NASDAQ top space, like an example that jumps to mind is Rivian and Lucid, two companies that are looking to get into the electric vehicle space. Yet they don't sell any electric vehicle. But I think it was Rivian that had a market cap of 150 odd billion dollars over the past 12 months at its peak. Now, $150 billion is the equivalent of Glencore and Anglo American combined. It doesn't even sell a single car. Now that's people getting caught up in the fad. It might one day produce a car but be careful about getting caught up in these trends, fads.
Ian Fraser 09:29
Well, look, I wouldn't mind one of their electric SUVs, I must be honest. So, ja, I do understand, I do understand. Let's touch on a final point before we go, and that is diversification. Don't put your eggs all in one basket. We've heard it over and over, but it is super important, isn't it?
Andrew Dittberner 09:46
Absolutely. So, this probably comes back to your very first point that you mentioned right up front about getting wealthy and remaining wealthy. Obviously, you get the few complete outliers, your Elon Musk's of the world that gets super wealthy, and generally they do that by taking big risks in one investment, whether it's Tesla, Amazon in Jeff Bezos' case. You can name many others.
But once you've made that wealth, and I'm talking again to these outliers, you've actually got to maintain that wealth. And to maintain that wealth, the best option is through diversification. If you maintain all of your eggs in a single basket, we know that if you're overexposed to a single risk, you could very easily lose that wealth, just as you created that wealth. So, coming to your point, diversification is one way to ensure that you maintain wealth over time.
Ian Fraser 10:55
Exactly, you just ended off perfectly. I was gonna say, and of course time, you know, the old adage of "compound interest is your best friend". That with diversification and all of the other things which we have spoken about are certainly going to play into your hand.
Andrew Dittberner 11:08
That's it, absolutely.
Ian Fraser 11:09
All right, Andrew, interesting chat, and quite a grounded chat, really. These are things which I suppose we all need to be reminded of time and time again, because we do get caught up in the turbulence of all the hype and the media etc. bigging things up, and really just to keep our head about us. That's what you guys are there for as well. So, thanks for that very solid advice. Andrew Dittberner, the Chief Investment Officer at Old Mutual Wealth Private Clients Securities. Thanks for your time and your advice.
Andrew Dittberner 11:38
Great, thanks Ian, likewise.
Old Mutual 11:41
Old Mutual Wealth is a world class investment destination, offering you a wide range of investment strategies and specialist wealth management solutions. Whether your goal is to grow your wealth, generate income, or preserve capital, we select the best and most suitable investments based on your investment strategy and our extensive research and collective insights. It's vital to work with reputable specialists who can effectively structure an investment portfolio that is tailored to your unique needs and objectives. Email us at hardquestions@omwealth.co.za, so that we can help you take your wealth further.