🔒 PREMIUM: Rational perspective: Deon Gouws on Steinhoff, Bitcoin and Corbynomics. Brilliant.

LONDON — Money managers often talk about the need to swim against popular opinion. But saying so and actually following such ideals requires the confidence that only stems from obsessive research with an open mind. Credo’s chief investment officer Deon Gouws applies these attributes to great effect, sharing his rational perspective on outliers of the consequences of the investment devils of fear (Steinhoff) and greed (Bitcoin) – and for good measure telling us what keeps him awake at night (the threat of Corbynomics). Brilliant. – Alec Hogg

It’s been awhile since Deon Gouws and I (my birthday brother) have had a chance to catch up, but the timing of this interview couldn’t have been better – with Bitcoin surging and Steinhoff collapsing. With kicked off with a question on how Credo’s Chief Investment Officer interprets what’s going on at Steinhoff……..

Alec, I’ll give one or two general comments but I don’t claim to be an expert on Steinhoff or, for that matter, any other shares in SA. I’ve been out of that market now for the last number of years. In terms of our own investment universe over here that we look at, it’s very much focused on global equities. Now, I know you can argue that Steinhoff is a global equity, being listed in Frankfurt, but it’s not something that’s ever been on our radar screen that we’ve ever looked at or we’ve certainly never owned it.

Deon Gouws, Chief Investment Officer, Credo Wealth

The share price is one of SA’s top-5 shares and it’s lost R100bn. What’s going on in the minds of the traders in a case like this?

I’ve seen a few reports crossing my desk today and a lot of people are exiting simply because they’re looking at the news flow over the last 24 hours and there’s been a build-up over the last few months but, certainly, with Jooste himself leaving the group after something like 30 years, having built it up from scratch, effectively. I think people are simply focusing on that and saying, ‘this can’t be good news.’ They’re fearing the worst and they are selling at any price. Whether they’ll be proven right to sell at these levels or not, time will tell. Some people are looking at it and saying, maybe I can pick it up at the bottom today and quickly make money on it but I think until we have further information, that feels like a brave call to make. I got a note from an asset manager in SA personally, who was on the distribution list and they have a large possession (I won’t disclose the name): They’re simply saying that they’re waiting for additional information before doing anything. They’re not buying more. They already own a lot but they’re not selling either. I guess that’s their response but then I know a lot of other people who are clearly selling and that’s clearly what’s driving the share price. If it is true that there is fraud, as is being alleged, and if it is true that there’s more to come out, then there’s possibly a further downside but time will tell.

Deloitte will be joining KPMG on the hit list and that can’t be good for them too, given what happened today. Just as a general sentiment: When you invest you’re supposed to be rational, you’re supposed to hold your head when all others lose theirs. Many people are losing their head on Steinhoff right now.

Yes, that’s possible. As I say, in terms of giving a call about whether people selling today are losing their heads or not – we’ll only be able to judge that in the fullness of time. I’m not going to comment on that today because, as I said, I’m not that close to it and I think if there is more to come out then maybe selling it at this price would have been a bargain. I’m not taking that position and, fortunately, I’m not in the position that I need to make a call on it. I guess I am personally affected to a small extent because I’ve still got some pension fund money in SA that’s locked up there in terms of structures, and no doubt I’ve got exposure to that if you look at some of the underlying. I’m also 1% poorer today, in terms of my SA retirement pot but in the fullness of time we’ll know. You mentioned Deloitte – it can’t be good for them. I’m saddened by that at a personal level. I’m a Deloitte alumni myself and I did look at it earlier, who were the auditors so, I’m hoping for their sake that there was no monkey business, that it’s not anything that they missed, maybe over the years even – I don’t know.

It just seems really strange though that you’ve got an audit firm like Deloitte who will refuse to sign-off on the results. Maybe there’s a bit of a KPMG factor in it. Maybe the fact that what happened with KPMG and its shenanigans has now made all auditing firms dot their I’s and cross their T’s even more vociferously.

One of the many reasons, Alec, why I’m very happy to no longer be an auditor. I’m happy that I’ve got the qualification and I think it’s a good background, in terms of business, but I think it’s a tough environment to operate in. Especially in today’s world where there’s so many forces at play, technological innovation, the extent of technological and related risks and everything that goes with it so, yes, there maybe some fallout as well, as you suggest.

Okay, so, let’s not worry too much about Steinhoff now – it will come through in the fullness of time. But something we need to worry about, or maybe not, is this phenomenon called Bitcoin. Have you bought Bitcoin? Are you one of these big winners whose changed your address as a result of this thing?

Alec, I did buy Bitcoin a while ago but not much. In hindsight, of course, it will never be enough. I put my small toe in the water as recently as a few months ago. In fact, let me go back a step. I was introduced to the whole Bitcoin story a few years ago by one of our contacts in London, an entrepreneur. He made a lot of money – he had an exit event and he came to our offices four years ago and he said that a big part of his family’s balance sheet he had converted into Bitcoin. At the time the price was, I think $300 or something like that – that’s three or four years ago. We had a long conversation. He had peaked my interest and I started reading then and since then I’ve read a lot about it. For about three to four years I’ve read what I can about it so, I think I know a little bit about it and the more I read, the more I know how little I know. It’s one of those kinds of topics.

I then, following our conversation, tried to buy some and at the time the options for a normal man in the street like me were not very user friendly. They were few and far between. The systems that you logged onto on the internet were simply not accommodating, and I eventually gave up. I then tried again a second time about a year or 18 months ago and to cut a long story short, I had the same experience so, I gave up again. Then this year in the Northern Hemisphere summer, I read an interesting article by a guy called Josh Brown. Now, you may have come across him. He calls himself the reformed broker on Twitter. He’s got about a million followers. I’ve met him once or twice and he writes very well. He writes essentially, a daily blog about the markets.

He wrote an article in, I think in June or July this year, and he said, ‘I bought my first Bitcoin.’ He went through a thinking process there that I shared with the readers and he also said, where he bought it. So, when he communicated with his million followers that he had opened an account at Coinbase, I thought that if it’s good enough for Josh and it’s been read by a million people. He’s done his due diligence on them in New York, and I went to Coinbase and it was a relatively user-friendly process this time around so, I registered and it still took me a week with KYC, etc. You can’t open it instantaneously and just transfer money. In the week that I had tried to open an account, at the beginning of August, the share price went up 6%, and that explains why I bought 0.94 of Bitcoin as opposed to 1 Bitcoin. I wanted to buy 1 Bitcoin. I thought if there’s going to be 21 million Bitcoins in the world and 7 billion people, if I have 1 of the 21, I’m overweight Bitcoin and that should be okay. As I say, in the few days it took me to open the account I only got 0.94 of Bitcoin. From the beginning I saw it as a lottery ticket. I said to myself, buying 1 Bitcoin at a time, if it goes to zero it’s not going to kill me. I won’t lose that much money. If it goes $1m, as some people are saying, well that will be the easiest $1m that I’ve ever made and it will be very nice, thank you very much.

It is the only investment I’ve made probably in the last 15 to 20 years that I admit, I bought for lottery ticket reasons. It’s a well-known phenomenon in the markets, this lottery ticket effect so, I do see it as a lottery ticket. Since I’ve bought it, the price has trebled roughly. So, my lottery ticket is worth three times as much, but I feel no compulsion to try and take profits because I haven’t made enough profit yet. If it goes to hundreds of thousands of Dollars then, yes, I will start looking at it differently. I’m not as bearish as some very esteemed commentators. Some of my best friends in SA, some of the smartest people I know are calling it a bubble. I’m involved in debates on WhatsApp groups and elsewhere about this. My response to whether it’s a bubble or not, is a few bullet points and if you don’t mind, I’ll share it. I’ll try and summarise it in three or four points.

Firstly, I think the whole world of crypto, not only Bitcoin but cryptocurrencies, Blockchain etc: We are today is where we were with the internet 20 years ago, which means that we’re at the beginning stages and it’s going to change a lot of things in the business world and in the financial world in ways which are unknowable at this point in time. The internet 20 years ago, people were excited about it but we didn’t know how much it was going to change things. That’s my first point.

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My second point is, is there a bubble? In crypto, yes. The fact that Paris Hilton can launch her own coin and there’s a thousand others. I think 99% of them are probably going to zero at some point in time so, there is a bubble. Whether the bubble is in Bitcoin or not that’s a different question. Point three, the future winners – if my analogy about the internet 20 years ago is correct then I think the future winners, the real winners, the handful or the few handfuls of winners that there will be are probably unknowable today. Bitcoin maybe one of them and it’s behaving like it’s already a winner but maybe not. Maybe Bitcoin does go to zero and my lottery ticket ends up worthless, time will tell but I do think that in the same way that 20 years ago we thought the world of ‘search’ – Yahoo was the dominant player, Google didn’t even exist 20 years ago so, the future winner in ‘search’ 20 years ago was unknowable because it hadn’t been invented yet. Lastly, if you get the winners right, whether it’s Bitcoin or the next one, in theory – the next one that hasn’t started yet. If you can get the winners right you will be able to make a huge amount of money, multiples of where the prices are today. So, I think my analogy of the internet 20 years ago. That’s the way I think about it.

But the internet 20 years ago did have an awful hiding in the dotcom bomb. My own stock that I listed went to R2 on day one. Then after the dotcom bubble burst it was 17-cents so, you’re going to have to have a strong belly to get through that.

I fully agree and that’s my point where I said that we know in hindsight there was bubble in in tech, the famous dotcom bomb. That’s why I also said in one of my points, I think there is a bubble in crypto today. Whether the bubble is in any individual asset, like Bitcoin or something else – I think we’ll know that one day so, I’m not as bullish as saying, I will definitely not advise people to buy Bitcoin, let alone sell something else or bond your house – I hear people are doing that and I think that’s totally irresponsible. It also leads to the question, of course, Alec (because some of our clients may listen to this or may read the transcript), ‘have you bought it for clients?’ And the answer is no. If I admit to buying 0.94 of Bitcoin for myself because of the lottery effect and I admit that, for reasons which I’m trying to share with you, that’s not the way we invest for clients. Our clients have relatively low risk portfolios. We have ‘get rich slowly’ portfolios and not ‘get rich quick’ or ‘stay rich’ portfolios. I don’t think Bitcoin has a place in that until we have more information or until we have more certainty. We don’t buy lottery tickets, it’s as simple as that.

Facebook’s share prices are seen inside the NASDAQ Marketsite in New York, in this May 18, 2012 file photo. REUTERS/Shannon Stapleton/

If it is a bubble and if the bubble bursts, like dotcom, like the NASDAQ burst in March 2000. That would presumably be the time because if you go back to Amazon: If you had bought Amazon at the absolute peak, that was your big winner in the internet. You would have made ten times your money today, but it fell by 90% so, you could have made 90 times, or whatever the multiple exponential effect was so, if your theory works that this is the future and/or the Blockchain is the future, then if you’re prepared to ride the whole thing out, then maybe your lottery ticket will come in. But even if you aren’t prepared to ride it out. If there is to be a massive correction then that’s the time to be looking for an investment.

Yes, possibly. But my only counterpoint to that is that that may never come so, let’s postulate. We don’t know this, we’ll only know in ten years’ time but let’s postulate that Bitcoin ends up being the winner. Let’s postulate that Bitcoin does go to $40 000, like Mike Novogratz says. There may never be a correction. I know if you look at a graph over the last few months and over the last few weeks, or even for the last day. I don’t know if you know how much Bitcoin has gone up since you left Surrey this morning, Alec, but Bitcoin is trading at nearly $13 000 as we speak. It’s up $1 000 overnight, since yesterday. It’s up 9% in the last 24 hours now, by the time this goes on your website, it may be down 20 or 40 and I look like a fool. But the point is, of course it looks like a bubble. Of course, it behaves like a bubble. People show these graphs where they compare it to Tulips and say, this is the biggest, and the quickest and the worst bubble ever. I’m saying that that is possible. We’ll see one day but to go emphatically on record and say, this is definitely a bubble – I think that’s quite brave. Robert Shiller, Jamie Dimon, Stiglitz – all these people are calling it a bubble. I do think, and I’ve said before, I’ve read lots about it and the more I read the more I realise how little I know. I do think a lot of the most esteemed commentators who come out against it have often not really read much about it. I’m not trying to claim to be an expert. As I’ve said, the more I read the less I know.

The best example I’ve got of this actually, isHoward Marks, the founder and CEO/chairman of Oaktree in the States and arguably, one of the cleverest guys in investments in the world today. He’s very experienced and one of the best writers and you probably read his stuff. He writes occasionally, about every six to eight weeks, he brings out a piece. It’s random and it’s not specifically monthly or quarterly. He wrote a piece I think it was dated 26 July this year, people can go and Google it. On the 26th July, if I remember correctly, Howard Marks wrote a 20-page letter to the investors and one of the things he focused on, he basically wrote about how expensive the market is and the risk of the market rolling over and warning against future returns on the market, the S&P, and everything else (all asset classes) and then he got to Bitcoin. He spoke about the Bitcoin bubble, I think he called it a bubble as well. Not a fraud, like Jamie Dimon did, but certainly a bubble. Essentially, he was warning against it and about six or eight weeks later, it was in September (I forget the date), maybe it was more than six or eight weeks but maybe a couple of months later. In September he wrote a follow-up piece commenting, essentially, on all the same topics that he covered in July. He said he had a lot of constructive feedback. He had more time to think about it over the summer and he gave an update on some of his views and some more colour. If you read them together it’s an excellent summary of where we are in the world. Then in the second piece he comes back to Bitcoin as well. He said, ‘since the first piece I’ve had these additional thoughts,’ and he gives a bit of a different opinion about Bitcoin. He doesn’t say, ‘buy it.’ He doesn’t say, ‘I’m bullish about it,’ but he does give a slightly more balanced view about it, let’s put it that way. Then at the end of it, in his last paragraph before he goes to the next topic, he says, ‘I want to thank my colleagues by name,’ and he mentions a few names there, ‘who’ve basically educated me about Bitcoin since I wrote the previous piece.’ For me, that’s a very experienced and honest guy admitting that he made his remarks in the first one without knowing that much about it. He’s now had further education and he’s made some different remarks. So, he put it in writing, but I think to some extent it may be truthful, for a lot of other people that are calling it a bubble. It may be a bubble one day and I’ll look wrong for saying, ‘wait and see’. But I just think it’s brave to call it a bubble because from a technological point of view, it’s ground breaking. It’s changing the world in ways that we will increasingly understand as time passes.

You also put us onto the boat people and the tree people, and that’s a very interesting debate that’s going on right now. We’re seeing the tree people in the UK, who voted for Brexit and who are apparently in the ascendency. When you look at the politics here in this country, in the UK and the difficulty that Theresa May is having in getting a Brexit deal through, and the Labour Party and the economic policies that they might be bringing in. How are you feeling about all of this?

I wish you wouldn’t have asked me this question, Alec, because I frankly think that (and if I can call it by name, if I can get away with this) but I think the Corbyn risk to what I do and to my own personal well-being, from a financial point of view – is arguably the biggest risk there is. If you were to ask me a slightly different question, which is what keeps you up at night? It may be that and it’s not about my politics versus the next person’s politics but… Ultimately, I’m in the financial markets and I look after other people’s’ money – I look after old people’s’ money — that’s my job. To the extent that some of that money clearly is exposed to this country, to this economy, to this currency, to this market – I just don’t see a scenario where there’s upside for the market and for the currency if Corbyn does come into power.

brexit european union britain uk europe

Of course, at the moment, if there was a snap election being called (which I don’t think is going to happen overnight), but let’s just say that, hypothetically, he’s leading the polls and I think he’s likely to be the winner. Now that may change because it will not be within days. It will be within months, or maybe in a few years’ time only and there’s a lot of ebb and flow in politics and as we know, a week is a long time in politics. So, who knows what it will be like by the time that it arrives. What does worry me though is that I think there’s a lot of the inequality debate, which we’ve seen rearing its head over the last few years and it was brought very much into picture with Piketty’s book. I think it’s the combination of the inequality, which is rife in this country, London is a different country. If you go anywhere North of the M25 it looks different to what it looks like in London. So, you combine inequality with the difficulty that May has on a daily basis, in terms of managing her own party. The momentum certainly is still in Jeremy Corbyn’s favour and that does worry me, from a financial market point of view. Forget about my political views but from a financial market point of view it does worry me.

We saw an analysis, was it by Morgan Stanley where they said the same kind of thing, and Corbyn was vociferous in attacking what they had to say about it. In fact, he got quite a lot of political capital out of what the big banks in the city were alleging or were suggesting would happen under his rule.

Jeremy Corbyn holds a copy of his party’s manifesto on May 16, 2017. Photographer: Chris Ratcliffe/Bloomberg

Yes, but I think if you look at some of the things that is on record and more, in particular, the shadow secretary, McDonald. It just reeks of people that at best, they’re not in touch with markets. At worse, they are and they’re actually being malicious and they’re ignoring financial and economic reality in terms of things that they propose and in terms of policy points that they’re promising the people. Things like free tuition and nationalising this, that, and the other. If you’re going to pay market price for it that’s one thing. If you’re just going to take it away that will hurt business confidence. It will hurt the Pound. It will really be an extremely slippery slope for this country.

I was at a debate a few weeks ago and I met a gentleman who’s about 70 years old, and he came to me afterwards and we were chatting about this. He said, he was old enough to remember the 70s in the UK and how badly it went under the then Labour regime, which eventually handed over to Thatcher. His thinking is that we could slip back to that so, I just don’t see any positive scenarios as far as that’s concerned. Hopefully, sanity will prevail amongst the electorate and it won’t happen. If you look at the last Labour Government they were probably more Tory than the Tories themselves. I’m not scared of Labour as such but I’m scared of this hard-left Labour. This communist-socialist Labour – I’m scared of that Labour. I’m not scared of the Blair and Brown version of Labour but sadly, they’ve gone and the momentum is elsewhere now. As I’ve said, I think it’s partly driven by this inequality kind of divide.