Morgan Barnard
2 minute read
5 Mar 2015
8:00 am

No pain, no possible gain

Morgan Barnard

Continuing our theme from yesterday – that you learn more from your mistakes than your successes – two more trading veterans share moments of hard-won clarity.


Karl Gevels, an investment manager and head of research at Benguela Global, learnt an early lesson.

“First lesson: When I was a student I did not have enough money to invest in stocks, so I traded warrants (‘the big thing’ at the time). Gold stocks especially were very volatile, so warrants would swing by massive amounts every day. I quickly doubled my money (operating out of the university library). But as volatility dried up, I held on to some warrants too long, with time decay destroying any value.”

Lessons learnt:

1. There is no quick way to make a buck … and derivatives are speculative and dangerous!

2. If you lose 50% of your capital, you need to make 100% to get back to the original level.

“Second lesson: Some personal investments on the JSE that went bad are Transhex, BSI Steel and Chemspec. … They were all small, low-quality businesses with management trying and promising to turn the business around.”

Lesson Learnt:

1. Cigar-butt investing has a high risk of destroying capital, because these businesses are generally cheap for a reason.

2. Rather focus on businesses with strong competitive advantages – ie: higher quality businesses.

3. Turnaround situations have a high risk of never materialising, or they take longer.

4. Lack of liquidity is a significant risk when trying to exit.

“I now focus on investing more capital in high-quality businesses that might have less upside than some deep value situations, but are able to continuously generate returns.”

Garth Mackenzie from Traders Corner shared this gem learned while trading for a different firm:

“(We were sold a story) of how undervalued Zimbabwean assets were under President Robert Mugabe and that the country was likely to see a brighter future after his reign.

“Dawn Properties holds some of Zimbabwe’s finest tourism property assets … The insurance replacement value of the assets was nearly double the market capitalisation. Hence I was buying the business well below true value.

“So I invested R500 000 and fastened my seatbelt (for a lift off that never arrived).

“My investment in Dawn Properties has been illiquid and difficult to trade out of, but I have finally managed to exit the entire investment in the past week with a loss of R233 000 – or 47% over seven years.

“What annoys me about the 2007 decision is it was essentially a punt, a gamble if you will, that has failed to pay off.

“But what is really hard to swallow is the opportunity cost of this investment. Imagine if I’d instead invested in Woolworths at R23.00 per share (up 250% since then), or Aspen at R37 per share (up 800% since then).”