R1m Investing Challenge – Viljoen widens gap, possible Lollapalooza awaits

Three years into the shootout between local and offshore investing, Re:CM's Piet Viljoen is well ahead of his rival Magnus Heystek of Brenhurst. In this third anniversary update, Viljoen reckons that having already outperformed, SA stocks could benefit still further from what he calls a 'Lollapalooza' of good news, while offshore-focused Heystek 'fesses us to a rookie error. They spoke to BizNews editor Alec Hogg..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here..The seventh BizNews Conference, BNC#7, is to be held in Hermanus from March 11 to 13, 2025. The 2025 BizNews Conference is designed to provide an excellent opportunity for members of the BizNews community to interact directly with the keynote speakers, old (and new) friends from previous BNC events – and to interact with members of the BizNews team. Register for BNC#7 here. .Watch here.Listen here.Extended transcript of the interview ___STEADY_PAYWALL___.Alec Hogg (00:04.848)Three years ago, almost exactly, a BizNews tribe member allocated R500,000 to each of you, Piet and Magnus, with a challenge: settle the argument once and for all about offshore versus local investments. "Here's real money, make it work for me," they said. Now, we're three years into this five-year challenge, and it's time for an update..Alec Hogg (00:30.598)Good morning, gentlemen! Nice to see you here, bright and early, and both looking in exceptional health. That's good to see. Now, regarding the portfolios, the tribe member who provided the funds quoted Forrest Gump to me, saying, "Well, they're both in the green, but that's about all I can say.".I think that's a bit unfair on Piet, as you've done very well. Magnus is just in the green. However, the gap has widened. When we last spoke six months ago, at the halfway mark of the competition, Piet's portfolio was sitting at 546,000 rand, while Magnus's was at 507,000 rand. Today, Magnus's portfolio has dipped slightly to 502,000 rand, while Piet has surged ahead to 639,000 rand..This growth is thanks in no small part to the Johannesburg Stock Exchange (JSE) rallying after the elections. The last time we spoke was on the 2nd of May. Meanwhile, Magnus's portfolio has been bumping along. So, this is our third-anniversary update. Let's start with the man in front, Piet. You've had a fabulous last six months with a 28% improvement. Have you done anything differently?.Piet Viljoen (01:57.188)No, we've stuck to our guns. At the start of this competition, I allocated the full 500,000 rand to the Merchant West Investments Value Fund. It started strongly but then went through a flat period of about 18 months. There were technical factors involved, and the market was a bit stagnant during that time..However, about six months ago, just before the election, several stocks in the portfolio began to perform well again. We haven't made significant changes. The portfolio holds the same set of stocks as three years ago. What's happening now is the payoff for holding undervalued assets and sticking with them..One notable factor has been a reduction in the long-term bond yield from 13% to 11.5%, which led to an increase in the present value of future cash flows. While we haven't yet seen substantial economic growth or confidence, these reductions in the discount rate have already added value. If economic growth and confidence materialize alongside further declines in the discount rate, we could see a Lollapalooza effect..Alec Hogg (03:42.524)A Lollapalooza effect?.Piet Viljoen (03:45.784)Yes, a confluence of positive events that create a significant outcome. In this case, it would involve increased confidence, some economic growth, and further decreases in the discount rate, possibly driven by South Africa being removed from the graylist or improving its credit ratings. All of these factors could align to produce a remarkable boost in the valuations of South African businesses..Alec Hogg (04:31.292)For more on the Lollapalooza effect, check out Piet's address at the BizNews Investment Conference (BNIC1) in September, where he explained it in detail..Magnus, turning to you—your portfolio has focused on international markets. We've heard about the "Trump bump" in the U.S., but while some stocks have surged, the overall American market hasn't performed as strongly. It seems that's reflected in your portfolio over the last six months..Magnus Heystek (05:08.11)Yes, looking back to when the competition started, from November until May 2022, Piet's portfolio went up 25%, while mine dropped 25% due to currency fluctuations and global market declines. I had a lot of catching up to do. Some even said it wouldn't be possible. I had a great run when Japan performed well earlier this year, and six or seven months ago, we were almost neck-and-neck..Since then, however, the local market has surged, the rand has strengthened, and Japan has softened. I also had limited exposure—around 10%—to technology stocks via Anthony Ginsberg's fund. Over the past year, if you weren't heavily invested in the U.S. and particularly in the "Magnificent Seven" stocks, you likely underperformed..I'll admit I made a mistake. During the market downturn, I panicked and moved some assets to cash. Timing the market is tough—you have to be right twice: when exiting and re-entering. I wasn't, and it cost me. Piet's advantage was his consistency..Alec Hogg (09:16.668)That brings up an interesting question. Warren Buffett often advises sticking with companies and not trying to predict big moves like political events. Does the prospect of a government of national unity, for example, factor into your decisions?.Piet Viljoen (09:41.984)Not at all. When we started this competition, we didn't know a government of national unity would even be on the table. These events are unpredictable. Trying to time the market based on them is a losing game—you have to get it right twice. Instead, you play the hand you're dealt..Right now, South Africa's market is undervalued and has potential. But there are risks, like political instability. That's why diversification remains essential. Even if South African stocks look promising, you shouldn't bet everything on one outcome..Alec Hogg (11:42.568)What I find fascinating is the unique stocks in your portfolio, Piet—companies like Lewis, Sabvest, and Argent. These aren't on the radar of larger funds like Allan Gray or Coronation. Magnus, is this what excites you about Sean Pesch's approach globally?.Magnus Heystek (12:46.018)Yes, absolutely. Coming from an advisory background, I look for fund managers who complement each other. Sean, like Piet, focuses on niches that larger funds often overlook. Big funds need substantial market cap stocks, which creates opportunities for smaller players to outperform with lesser-known companies..Ultimately, blending styles and approaches provides the best outcomes. Betting everything on one strategy or macro theme is risky. Success often involves finding complementary investment strategies that work together over time..Alec Hogg (14:51.282)Well, it's relevant because the investor—the guy who allocated the million rand—asked in his email (and by the way, he's clearly doing well in life because he's currently in the Amazon, the real Amazon, not Jeff Bezos' Amazon). He asked, "Shouldn't retail investors just put their money into index funds?" He said, "Magnus, if I'd taken my money and put it into the S&P 500, I'd have way outperformed you." Of course, you've explained that you were underweight in the US and overweight in Japan, which worked well for a while but not indefinitely..So, that was his question. Shouldn't he just put his money into index funds or the Top 40 (which has done almost as well as the S&P 500 and even better than you, Magnus)?.Magnus Heystek (15:37.006)What I want to know is: which index fund? Is it South African? Is it overseas? Is it emerging markets? Is it technology? People often say, "Okay, let's pick the S&P 500," because it has done very well. But as I mentioned three years ago, the S&P 500 went down over a six-month period by about 35% (off the top of my head), because you have both the rand and the markets coming down..Now, that's where most amateur investors—like me—tend to bail out, take their money, and run. They say, "No, no, no, I'm putting it in cash." That's why that argument is not entirely applicable—it doesn't recognize human nature. When markets go down, people do funny things. They don't react like that when markets are going up. It's when the markets decline that issues arise, as Warren Buffett and so many top fund managers often highlight..It's during downturns that you need a strong stomach and guidance. Yes, in hindsight, just picking one or two index funds may seem like the right move. But again, which ones? You could have picked China three to four years ago, and now you're down 60%. You could have picked Europe, but there hasn't been much growth there either. So, you need to follow markets on a much broader scale..Alec Hogg (16:58.029)Good point, Piet..Piet Viljoen (17:00.484)Yeah, look, I'll focus on South Africa first and then touch on global markets. In the South African environment, there are quite a few large fund managers who have no choice but to buy the top 15 or 20 stocks because those are the only ones big enough for them to allocate to. In this environment, those fund managers are largely underperforming the index, especially after costs..Too few investors in South Africa invest in the index. The correct strategy for South African equity exposure is to have some index exposure and then, as Magnus points out, complement it with something different. For example, if I can promote my fund—the Merchant Investments Value Fund—it is very different from the index and, by the way, outperforms the index. There are a couple of other fund managers like that as well..So, having a core index and complementary funds around it is, to me, a sensible strategy. Too many of the large institutions in South Africa are invested with big fund managers when they should rather be invested in the index. That would be a much better and cheaper outcome..Globally, again, I agree 100% with Magnus. Which index do you choose? The business community member mentioned the S&P 500. Yes, looking in the rear-view mirror, that was the right choice three, five, or even 10 years ago. But who knows if it's the correct choice today? Five years from now, you may look back and find it wasn't..So, again, diversification is essential. You probably want some US exposure, some European exposure, or perhaps something like the MSCI World Index..Alec Hogg (18:27.592)Hmm..Piet Viljoen (18:52.798)Over the past five years, the MSCI World Index has underperformed the US market, but that doesn't make it a bad outcome. Index exposure, especially for South African investors, is underutilized. Pair that with niche or differentiated fund managers, and that's the strategy I'd promote. Of course, I'm promoting myself, so take that into account..Alec Hogg (19:18.778)Okay, so let's look ahead. We're now into the final two years of the challenge. Magnus, are you planning any changes based on what you've learned?.Magnus Heystek (19:33.282)If I make a change, it will be for the right reasons—market-driven and performance-driven. Right now, I'm not making any changes because the "Magnificent Seven" stocks are having an incredible run. This is normally not the time to chase extra returns. That's an amateur mistake: trying to join the party just as the music stops..Markets are high right now, and index followers might put money into the index at precisely the wrong time. You have to look at valuations, and currently, valuations are high—in some cases, extremely high. So, I won't be chasing these hot stocks. There might be some undervalued plays in Europe, but that's the kind of decision one needs to consider carefully..As an advisor, my focus is on understanding the client—their risk tolerance and objectives. Once you've chosen the right fund managers, let them do their job. Give them time to work their magic. That's probably the biggest lesson of this challenge: advisors should stick to advising, and fund managers should stick to managing funds..Alec Hogg (21:11.142)Piet, are you doing anything differently?.Piet Viljoen (21:13.336)No, exactly the same strategy. The Value Fund still holds long-standing stocks like Lewis and Clientèle Life—the same ones I've been talking about for two, three, or even four years. Since the first Business News Investment Conference in the Drakensberg, Lewis has been one of the stocks I mentioned, and it's still one of the top 10 holdings in the fund..We don't move the portfolio around a lot. We own what we know, what we like, and what we believe has good potential based on valuations. And given the macro setup, I think there's still a chance of a "Lollapalooza" outcome—a confluence of events that creates significant opportunity. That potential still lies ahead of us. So, we're sticking to our guns. No changes. We believe the next two years will reveal whether that outcome materializes or not..Alec Hogg (22:08.104)I've got to ask you something on behalf of the business community. We experienced a Lollapalooza outcome with Palantir. We bought it at $8, and now it's sitting at $60 in less than two years. That came from insights I gained when I met the CEO at the World Economic Forum..However, when I ran the numbers recently and assumed a 30% annualized growth rate from today—which is very difficult to achieve—it would still take 21 and a half years for the company to generate enough profit to justify its current market capitalization. In other words, today's valuation seems almost impossible to support. Yet the share price keeps rising because it's been included in the NASDAQ 100, and of course, there's the Peter Thiel and Donald Trump connection..You're excellent at separating narrative from reality. You often say, "Don't buy the story, buy the reality." I tried to do that with Palantir. We have a portfolio update coming next week. If I were to put on my "Piet Viljoen hat," what would you advise?.Piet Viljoen (23:22.244)It's an interesting question, Alec. As Michael Mauboussin often says, you need to take the "outside view." In other words, how many companies in history have grown at 30% per year for 20 years? The answer is very few—probably fewer than you can count on one hand..What I'm saying is that the odds are against any company achieving such sustained growth over an extended period. Yes, Palantir might be the exception, just like Amazon was an exception 20 years ago when it traded at a P/E of 100 and still turned out to be a good investment. But such cases are rare..The reason most people don't sell stocks like Palantir is the fear of missing out (FOMO). Personally, I prefer to build a portfolio of stocks where, if things go against you, you lose a little money, but if things go well, you make a lot. That's the value investing approach..Palantir, for me, is in the "too hard" pile. I can't get to grips with it, and it doesn't feel like a strong hand in poker. The odds are against you. Very few companies can sustain the kind of growth that Palantir's valuation implies..Alec Hogg (24:48.443)That's fair..Piet Viljoen (24:48.792)Of course, it could be the exception. But I don't work with hope; I work with what's in front of me..Alec Hogg (24:54.428)That's why Warren Buffett learned at a very early age that you've got to play the odds. One of his first ventures was a tip sheet for the horse races in Omaha, where he realized the importance of playing the odds. Magnus, your thoughts?.Magnus Heystek (25:18.638)From an advisory perspective, I'd say allocate 90% of your portfolio to fund managers like Piet and reserve 10% for speculative stocks. That 10% is your "play money" for stocks like Palantir..You can afford to lose that portion or ride it out, and if you're lucky, it might turn into something like Capitec, Naspers, Amazon, or Nvidia. It all depends on your tolerance for risk. But for most investors, 90% should be in stable, managed funds, and 10% can be allocated to higher-risk opportunities..Piet Viljoen (25:57.796)That's a very sensible approach..Alec Hogg (25:57.852)I agree. Risk tolerance is critical. As Buffett says, you need to invest in a way that allows you to sleep well at night. If you have too much exposure to high-risk assets, you won't rest easy..Just to wrap things up: this is a five-year journey. Piet, your portfolio seems positioned for a potential "Lollapalooza" outcome. But if it doesn't happen—if the government of national unity (GNU) breaks up—what impact will that have on your portfolio and your track record over the past three years?.Piet Viljoen (27:00.612)It's all about valuations. The stocks we own in the fund are currently trading at P/E ratios of 6, 7, or 8, implying equity yields of around 15%..If the GNU were to fall apart and South Africa entered another prolonged period of economic decline, the companies we own have already proven their resilience. Over the past five years of economic stagnation, these businesses survived, maintained solid balance sheets, and didn't go bankrupt..If the GNU collapses, we probably won't lose much money. We may not make a lot, but we'll hold steady. On the other hand, if the Lollapalooza event occurs—a confluence of positive events—we stand to make substantial gains. Those are the odds I'm playing with..Alec Hogg (28:12.680)And Magnus, how do you see things playing out over the next two years?.Magnus Heystek (28:24.972)If the GNU holds, we'll likely see gradual improvements, which I've highlighted before. If it breaks down, funds like Piet's will likely be less affected than larger funds..A significant sell-off by foreign investors would target large-cap stocks, which Piet's fund doesn't own. So, there won't be much overhang. The currency, however, would take a hit—potentially falling from 17 to 19 or 20 to the dollar—which would benefit offshore investments..Strangely, Piet's current positioning in value funds is a smart, defensive strategy for both scenarios. It's also worth increasing such allocations in retirement or living annuities. These funds have a defensive nature and are well-suited even if the GNU breaks apart..Alec Hogg (29:37.768)Magnus Heystek and Piet Viljoen, bringing us up to date in the Million Rand Challenge. Three years in, Magnus has a healthy lead, but who knows what tomorrow will bring?.I'm Alec Hogg from BizNews.com..Read also:.Local v Offshore R1m Challenge: Magnus's jockey back on, Piet still has handy leadR1m Local v Offshore Challenge: Rivals agree SA stocks are now super-cheapR1m Local v Offshore Challenge: One year in, Piet is cruising, but don't count out Magnus

R1m Investing Challenge – Viljoen widens gap, possible Lollapalooza awaits

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