Recently, investors have been asking us whether the recent steep price declines of Steinhoff and the Resilient Group of companies are presenting good buying opportunities. After all, Steinhoff’s share price has fallen by 97% and Resilient’s by 67%, from their respective highs! Furthermore, another popular investment, bitcoin, has seen its price fall by 59% from its highs. Investors should rightly ask whether these investments are now presenting good buying opportunities. After all, there are typically two types of investors, those that panic during chaos and those that invest when there is value on offer during the chaos.
During our research, one of the fundamental characteristics of a good fund manager is the that he or she is be able to derive, with a relatively high degree of conviction, whether a potential investment is cheap or expensive. In order to do so, the fund manager has to 1.) establish a value for the potential investment to a relatively high degree of conviction 2.) buy that investment for less than their estimated value. It is after all, on occasion, the right strategy to panic and to sell a holding when it is suddenly, and rapidly falling in price. This is particularly true when investments are falling in price because the value on offer was based on false assumptions.
During our recent interactions with fund managers it became apparent that they are not able to rely on the financial reports, when it came to Steinhoff and Resilient, and could, therefore not establish a value for these companies, with a relatively high degree of conviction. They, therefore, are not investing at current depressed prices. With regards to bitcoin, no value can be established because the value of bitcoin is derived from the belief that one will be able to sell it on to another party at a higher price.
Recently Naspers announced that it was reducing it’s holding in Tencent, a Chinese internet technology company, raising USD10bn and plans to use some of this capital to separately list its classifieds businesses. The market was disappointed as it wanted to receive either a dividend or share buyback, given the large discount Naspers was trading at to their estimate of its value, and as a consequence the share price fell by 16%. The fall in the share price further widened the discount to the intrinsic value and offered an attractive investment opportunity for some investors. Most local fund managers are invested in Naspers already, as this is a cheap entry point to acquire Tencent, and are holding on to their existing positions, given their estimate of the value on offer at the current price.
We are not advocating buying or selling any of these investments. Instead we are advocating the responsible allocation of capital. Suffice to say, none of the fund managers our clients are invested in own the first three investments.