Strategy: Greg Hoffman

Sharemarket investors can learn from those who know the dangers of the African bush

Boyd Varty has a bit of Bear Grylls about him. He grew up in the eastern part of South Africa, near the famous Kruger National Park on the family game reserve, Londolozi. It’s an amazing-looking place, where Nelson Mandela went to recover after his 27-year imprisonment.

Last month Varty came to the end of a remarkable project. He’d spent 40 days and nights alone, living in a treehouse on a remote part of the Londolozi reserve. On each of those days he posted a short reflection via podcast. I enjoyed these wide-ranging reflections immensely, especially one titled “Safety Third”.

“I think that safety occurs in three phases,” explains Varty. “The first phase—and probably the most important— is a mindset and an awareness that you live in long before a dangerous situation. It’s a voice that is always whispering inside of you. It says ‘forward thinking, route planning, risk assessment, contingencies, knowing the terrain, local knowledge’. The second phase of safety is actually how you handle the dangerous situation itself, should one arise. The third phase is the safety itself, which is a result of the first two phases. Hence, safety third. Mostly the first phase done well—a safety mindset—will mitigate the need for the second and arrive you straight at safety third.”

Varty describes putting this philosophy into action when planning a run in the African bush. “In my experience, overcast conditions can mean hippos out of the water, feeding, which is something they don’t do when the sun is out and it’s hot—experience, local knowledge. I’m aware that in a few sections, where the brush thickens, I must change my pace and walk, adapt to the terrain—forward thinking. I plan a route and choose a time of day and terrain that would avoid elephants—mitigation. With all of this done right, I have the opportunity to run for hours.”

FROM VELDT TO BOURSE

It’s a long intellectual hop from the African veldt to the Australian bourse but there’s plenty investors can learn from Varty’s bush wisdom.

Mindset and awareness are the first phase. What mindset and awareness do you bring to investing? Do you have a long-term or short-term outlook? Do you have an awareness of all of the things that might happen to you? Syed Shah certainly didn’t.

You may have heard that in April, oil futures traded at a negative price. Shah was a day trader working from his house in the suburbs of Toronto. He began buying oil futures contracts in April. First at $US3.30 each. Then 50 cents and, finally, 212 contracts for just 1 cent apiece through Interactive Brokers.

According to Bloomberg, “what he didn’t know was that oil’s first trip into negative pricing had broken (his broker’s system). Its software couldn’t cope with that pesky minus sign, even though it was always technically possible … Crude was actually around negative $US3.70 a barrel when Shah’s screen had it at 1 cent. Interactive Brokers never displayed a sub-zero price to him as oil kept diving to end the day at minus $US37.63 a barrel.”

Shah had started the day with $US77,000 in his account. At midnight, he was advised that he owed his broker $US9 million. (Interactive Brokers is reported to have said that customers who suffered losses will get their money back.)

It’s our responsibility as investors to be aware of the risks we’re exposed to. And Shah’s story highlights that this awareness needs to start even before you buy your first share (or futures contract, in his case). For instance, what risks are involved in the stockbroker you use?

I use market-leading online broker CommSec. My wife uses competitor Bell Direct. Bell Direct is cheaper per trade, so why don’t we move all our accounts across? I now hear the clipped tones of Varty’s South African accent, “risk assessment, contingencies”.

To access Bell Direct’s cost-effective and very good online share trading platform, you must first invest your cash into the Bell Direct Cash Trust. Your share trades are then settled from this financial product.

The Bell Direct Cash Trust product disclosure statement explains that “all of the money invested in the Trust is lent to Bell Potter Capital and you are exposed to the risk that Bell Potter Capital may not be able to repay the loans and accrued interest … neither your unit nor any of the loans made to Bell Potter Capital is a bank deposit and they do not have the benefit of the depositor protection provisions under the Banking Act”.

If Bell Potter gets into financial strife, there’s a chance that my wife will lose much of the cash that is held in the Bell Direct Cash Trust attached to her account. For that reason, she tends to hold only a minimal amount of cash there. In Varty’s voice, “mitigation”.

By contrast, the cash I use to settle my CommSec

Develop your own ‘rogue’s gallery’ of directors and managers

trades sits in a bank account where the first $250,000 is guaranteed by the Australian government. Varty again, “knowing the terrain, local knowledge”.

BROADER PERSPECTIVE

When it comes to choosing individual stocks, the same applies. Local knowledge is especially important in a relatively small economy like Australia. Many Australian industries lend themselves to being effective duopolies or oligopolies. That has implications for businesses on both a day-to-day basis and also at a strategic level.

For example, bank shareholders should know about the “four pillars policy”, which has prevented any of the big four banks merging with each other for the past 30 years. And airline investors have keenly observed the unfolding case study of the different impact the Covid-19 pandemic had on Australia’s two main airlines. Being number one in a small market can have substantial benefits, financial, political or otherwise.

Local knowledge also helps in avoiding less reputable directors and managers. I encourage you to develop your own blacklist or “rogue’s gallery”. As you read about or experience corporate failures or frauds, note the personalities involved and map them across to other companies they may be involved in.

This “guilt by association” approach may rule out a few decent investments here and there but, over time, it’s served me well. In the African bush, Varty’s approach shuts off several possibly rewarding avenues. Yet that’s a reasonable price to pay for avoiding potential catastrophe.

The second phase is how you handle the dangerous situation when it arises. This year is providing plenty of potentially dangerous situations both physically and financially.

A high school student could tell you that the idea in the sharemarket is to buy low and sell high. But I saw a number of investors dropping their bundle in the March crash and selling stocks.

We all know that panics are the time to buy in the sharemarket. The challenge is that when you’re in the teeth of a crisis, it’s easy to imagine things getting even worse. The problem is that if just about everyone is thinking the same way then, almost by definition, it’s already priced into the sharemarket.

Rudyard Kipling was another man who was fond of South Africa. To paraphrase and mangle his famous poem If, if you managed to keep your head while all about you were losing theirs earlier this year, then you passed the second phase of safety with flying colours. In fact, you may have already landed at “safety third”.

Greg Hoffman is an independent financial educator, commentator and investor. He is also a non-executive director of Forager Funds Management (not involved in Forager’s investment process).