Some industries have zero pricing power such as the mining industry who are price takers - a horrid space to be as your costs rise and you have zero control over income. Sure you can increase production to try manage income, but that often impacts supply driving prices lower as we see in the platinum industry.
Construction also has very little pricing power when building something is now pretty much just a commodity with stiff competition all competing for the same contract with price being the only key difference.
Telcos have little real pricing power as data is data so they are trying to make it all about the added extras.
I like to invest in industries that can determine their own prices to varying degrees.
Luxury cars are priced more on what the market will bear rather then actual cost of manufacturing. This is great for margins and profits but tough to sustain.
Luxury jewelry is the same, price is more about status and looks then cost to produce.
Burgers for example have pricing power but it is limited by two factors. What the customer can pay and what the other burger seller is charging. But you do have a fair degree of power ~ just be careful of UK gourmet burgers:).
Retail also has fair pricing power albeit to different degrees. Luxury certainly has more power than consumer staples, but the later has power in that they are staples.
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I hear it all the time - the smart money which typically seems to translate into somebody with lots of money. A big trade goes through the market and everybody is talking about smart money? There is no smart money. Money does not talk and having lots of it doesn't make somebody smarter than anybody with less.
So why did Christo Wieses money warn him?
Also witness Steinhoff (JSE code: SNH). Including preference shares total value was some R300billion now a few million and the smart money all owned it up at the lofty levels. When the story broke Coronation (JSE code: CML) wrote a long letter saying they were holding on as all will be fine. Yet news last week is that they have bailed. They did the same with African Bank (JSE code: bankrupt)
Read Fooled by Randomness by Nassim Taleb. We ascribe behaviours to money and people with lots of it that is simple seldom true.
There is no smart money, just money. You can of course make smart money decisions and that would include not blindly following anybody.
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Stor-age (JSE code: SSS) results were totally solid and in a very niche property space that is doing very well. When they listed a few people recommended them to me and I wasn't convinced. Well I was wrong.
Sasol* (JSE code: SOL) was one of the first stocks I ever bought and my longest holding in my 'til death do us part' portfolio having first bought it around 1994. A few years ago I gave serious thought to exiting, but held on albeit deciding not to add any more to my portfolio. But I have been thinking and digging and frankly it is a change company and looking good. The Lake Charles project has been a mess in terms of cost over runs, but it is now nearing completion and that means two important points. Firstly, no more spend on the development and secondly in a few years the profits will start to flow from the project (even if they're not as great as promised). So I am starting to buy again, however my usual pricing methodology doesn't work here for two reasons. Massively cyclical always breaks my method and Lake Charles changes things. So asking around the view seems to be that HEPS of some R60 is possible for 2021 and if we apply the average PE of 9.3 that equals a price of R558, so that's my fair value and I am happy to buy at the current R488.
Help, I've lost money!
OUTstanding Money: Types of savings
In the last few weeks a number of people have asked me about what offshore shares I own. The answer is simple, none. I do own a small holding in VOO which I bought in 2002 with some offshore money I earned, but that's it.
Here's the thing, I know a lot about the local market and a little about even the smallest shares on the JSE. I have spent literally decades investing and trading on the JSE and hence decades building my knowledge of our market. Further it certainly helps that it is a small market, so it makes life easier and let's not forget that watching and studying the JSE is in part my job.
But as soon as I step offshore the size and complexity of the market is frankly over whelming. The NYSE has three times more ETFs then the JSE has stocks. Globally there are some 100,000 stocks. How does one select which are the best of the best? This is more than a full time job, this is a full time job for a full sized team.
Chatting to somebody recently they mentioned they wanted to buy Honda. I have no idea if it is a good stock or not. But what of the other US motor companies (Fiat Chrysler, Ford, General Motors, Tesla, Toyota) and then what of those listed in Europe where there are even more listed? Does Japan have any listed? Suddenly you have to be an expert on dozens of motor stocks to decide if the one you want is the out and out global winner.
Now I know the response. In the above example we don't have a single motor company we can invest in. Our Tech stocks are frankly wildly boring and disappointing, Naspers (JSE code: NPN) the exception, a lucky exception. Our market is small in more than just number of stocks, it is also small in terms of industries. But we can buy a tech ETF, and yes we can't buy a motor company ETF. But I am comfortable with that because frankly the risk is I buy the wrong motor company anyway.
Am I being lazy? Maybe. Or maybe I am being realistic abut my abilities and time available to become an expert.
These days I get offshore exposure via dual listed and global companies and locally listed offshore ETFs, keeping it nice and simple.
Another issue with offshore is costs, it is a lot cheaper investing offshore then it has ever been for South Africans. But it is still not cheap and with offshore assets you now also need a second will in the country in which those assets are held. More costs and more complexity.
Here's a random stat to show how little we know. Google (Alphabet) and Dominos Pizza both listed in 2004. Which has a better return since listing?
Two revolutionary companies went public in the summer of 2004. These are their returns...
Google (Alphabet): +2,020%
Domino's Pizza: +3,607% pic.twitter.com/SOtqOHjM4a— Charlie Bilello (@charliebilello) May 29, 2018
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Curro AGM; titbit. At 53% current capacity utilisation COH made 49cps in FY17. With NO NEW SPEND CEO says if it was at 90% utilisation FY17 earnings would have been 201cps showing how growing into latent built capacity can now power Curro's earnings growth ahead
— Small Talk Daily (@SmallTalkDaily) June 4, 2018
In a recent Fat Wallet podcast Kristia commented again how her investments have done pretty much nothing over the last few years.
Now there is only one reason we buy any share, ETF or even derivative - too make money. But what happens if we don't make money or worse the price falls and we're losing money.
Now it depends in part what we bought. A derivative trader will stop out and indidiual share buyer may hold as they consider it quality and in time it will start moving while an ETF should in theory not worry about the short term and just continue holding. That's the theory.
But we get a phenomenon called stake bulls, especially with individual shares.
Lets take Aspen (JSE code: APN) as an example. It hit a price of almost R450 in January 2015 after trading at R100 for the first time just three years earlier and 1000c was hit for the first time in 2003. If you missed the initial run from 2003 you'd have felt aggrieved at missing out and you may have jumped in at R100. But many would have said no they'll wait for the pull back, a pull back that never really happened. Then after a price of almost R450 there is a serious pull back to almost R250 and many jumped in during that pull back. That was followed by another rally but only to R350 and now we're back at R250.
So having watched Aspen be one of the best stocks on the JSE you're now holding it and your price is under water. You're not happy and frankly you want shot of the share - but ideally at as small a loss as possible - you're a stale bull.
So now every time it rallies the stale bulls are ready to sell essentially capping the price.
We see this with a number of local shares and to a lesser degree with ETFs (lesser here as we're too small to really influence an entire index).
So what do we do?
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