When I took over the management of your portfolio in 2007 you did not ask me what my investment philosophy is or what the average holding period of your portfolio would be. You did not ask me for my performance track record or request a lengthy due diligence document filled with the normal gumpf. I do not mean to undermine your intelligence and as a businessman I always appreciated your keen interest in the stocks we invested in. I enjoyed your tough questions about the investments which did not pan out according to expectation and note your absent views on the ones that were doing really well (I would not have expected anything less from my father).
I want to express my appreciation for the trust you put in me (it only took 44 years to earn – LOL) to take care of and grow your hard earned savings. I hope I have lived up to your expectations.
Below is a summary of your portfolio’s performance and I apologise for waiting nine years before sending this to you. Your portfolio has only ever been invested in South African stocks and the returns are net of all expenses.
Over the same period, the median equity fund (of the 82 funds in the General Equity category in South Africa with a nine year track record) generated an annualised return of 9.43% (per Morningstar) and the best performing general equity fund generated 13.49% p.a.
These returns are well ahead of inflation which averaged around 6% and this in spite of one of the biggest crisis in financial markets since the great depression of the 1930’s.
Over the past nine years we made 16 new investments and sold 11 (the last sale was 2 years ago). That’s an average of less than 2 purchases per annum. Your portfolio rarely held more than 15 positions at any point in time. The concentration in your portfolio has at times been very high with some positions making up almost [ds_popup_explanation data=’The biggest holding has not outperformed the annualised portfolio return and has not skewed the overall results’]30% of the total[/ds_popup_explanation]. You may argue that these returns were achieved by taking on excessive risk but that depends on your definition of risk. If it’s short term deviation of returns from the benchmark (i.e. high tracking error); or a significant underweight to Naspers (which is now the biggest stock at 17% of the FTSE/JSE Shareholder Weighted Index); or large sector bets (over or underweight) then I have erred. I never applied my mind to this at all and prefer Warren Buffets view of risk – “Risk comes from not knowing what you are doing”.
I focused my efforts on identifying great businesses (mostly ‘compounders’) in industries I understood, backed by an excellent management team and made sure the price at the time of investment was reasonable against an estimate of its value. As a result, the one area that was mostly avoided were resource share (max 5% of the portfolio). Seldom (if ever) do these companies meet all 3 criteria above.
There were times your portfolio had a lot of cash. The rules are simple – do not lose money! When the market looked expensive I preferred to remain on the side lines. In spite of my best efforts, it did not always pan out that way. Three of the positions in your portfolio are currently loss making, and there were at least another three that did not generate a positive return. In most instances these losses are/were in deep value small cap turnarounds – which never turned around. Fortunately these mistakes were small in relation to the size of the winners. Currently, your portfolio has a significant exposure to preference shares (30%) which have generated returns ahead of the FTSE/JSE All Share Index over the past two years (which is a big fat zero).
I know the first twenty five years of my life were a drain on your resources, but I am fortunate that my job is my passion and hopefully I can continue to build on my inheritance for a long time to come.
Lots of love, your son