WORLDVIEW: When value investing fails – case against platinum and now JSE Limited

I've also been a long-time supporter of the value philosophy, strongly influenced by the buy-cheap, hold-forever approach of Berkshire Hathaway's chairman Warren Buffett. While value investing usually works well, in periods of radical change its reversion-to-the-mean approach can be found wanting. Witness newspaper companies, whose precipitous decline over the past decade has maimed many who tried to grab the falling knives..Hindsight suggests the demise of a previously impregnable newspaper business model was rather obvious as the Internet age dawned. But not all disruptive signals are equally clear. In many sectors the Fourth Industrial Revolution hasn't yet hit. And like Hemingway's description of bankruptcy, major disruption usually occurs gradually – then suddenly..One area where value investors are being suckered is platinum. They have been buying aggressively for five years already, attracted by share prices at 25% of the level reached during the last boom. Each mini rally is heralded as justification for their faith. Wrongly so..___STEADY_PAYWALL___.Each year 40% of total demand for the metal goes into manufacturing autocatalysts – platinum-heavy converters installed in vehicle exhausts which transform pollutants into harmless gases. Platinum is especially successful for diesel-driven engines..All calculations about platinum stocks being undervalued are based on reversion-to-the-mean. But in the real world there has been a massive swing towards electric vehicles from internal combustion-driven engines. This is the motor industry's equivalent of newspapers. This is the trend against which any thought of a platinum recovery must actually be judged..Now a similar development is playing out for the JSE Limited. In the past year, there has been a 25% drop in the share price of SA's monopolist exchange for equities and bonds. Value investors are being sucked in by this apparently "cheap" rating. As with platinum shares, following them is a big mistake..The Financial Services Board has thus far granted two new exchange licences. ZARX, which got its licence first and has thus attracted most of media attention, offers little real danger to the JSE as it will focus on the over-the-counter market. But it is the second new licensee, A2X, which poses the real threat to the R11bn incumbent..Yesterday, A2X announced the appointment of Brett Kotze as its new Head of Post Trade Services. This is an important step as Kotze was previously the JSE's Head of Operations, and for the past 17 years its general manager for clearing and settlements. His switch comes on the heels of the new exchange overcoming its final hurdle. After the licence was formally granted on April 6th, rivals had 30 days in which to launch an appeal. The JSE officially informed the FSB that it will not be raising an objection. So A2X now has the green light..The new A2X business is driven by successful financial market entrepreneurs Kevin Brady (CEO), Sean Melnick (chairman) and Ashley Mendelowitz (director). Unlike ZARX, it will be going head-to-head with the JSE. Given the absence of legacy systems and a highly disruptive business strategy, A2X is sure to slice deeply into the JSE's profit margins..We'll know soon enough how big the threat will be. A2X said yesterday it is targeting October 6th to "Go Live". Those invested in JSE Limited shares shouldn't wait that long to rebalance their positions..PS Don't forget to join us at 12:30 for today's webinar on our SA Champions portfolio. You are entitled to a seat but need to register beforehand. Do so by clicking here.

WORLDVIEW: When value investing fails – case against platinum and now JSE Limited

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