Veteran fund manager Walter Aylett – Insights on Capitec, WeBuyCars, Tesla; plus overvalued stocks
In an insightful interview, investment expert Walter Aylett warns against the dangers of inflated tech stock valuations, spotlighting companies like Tesla. With nearly two decades in the industry, Aylett calls for a return to integrity in investing, urging investors to prioritize sustainable growth over fleeting hype. His thought-provoking insights challenge conventional wisdom and advocate for a more principled approach to navigating today's complex financial landscape. Aylett spoke to BizNews editor Alec Hogg.
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Highlights from the interview
In a compelling interview, investment expert Walter Aylett shares his perspectives on the current state of tech stock valuations, particularly focusing on the challenges posed by companies like Tesla. Drawing on nearly two decades of experience in the finance sector, Aylett emphasizes that many tech stocks are significantly overvalued, driven more by hype than by sustainable business practices. He argues that this speculative bubble could have dire consequences for investors, especially if the expected growth fails to materialize.
Aylett advocates for a more disciplined approach to investing, urging investors to prioritize integrity and long-term viability over short-term gains. He believes that a shift in focus is necessary to restore confidence in the market, encouraging stakeholders to conduct thorough due diligence before making investment decisions. His insights challenge the prevailing trend of blind optimism in the tech sector, highlighting the importance of sound fundamentals and ethical considerations in financial practices.
Overall, Aylett's candid observations serve as a cautionary tale for investors navigating an increasingly volatile market, advocating for a return to the core principles of responsible investing as a means to foster a healthier financial ecosystem.
Edited transcripts of the interview ___STEADY_PAYWALL___
00:00:08:09 – 00:00:30:14
Alec Hogg
Well, the BizNews briefing is now into its third, nearly the end of its third week. And one of the great things about this is I've been able to reconnect with old friends from, sure, that radio show that ended, well, more than a dozen years ago. And one of them is Walter Aylett, who is one of South Africa's top fund managers.
00:00:30:16 – 00:00:48:17
Alec Hogg
He, some time back, started his own group called Aylett & Co. And it's going from strength to strength. We'll get Walter's insights today on how he's reading the markets.
00:00:48:19 – 00:01:07:00
Alec Hogg
Well, it's good to be talking with you, so delighted to see that your son Kimon is in the business as well. And I know that because I recently read his book on Warren Buffett. So you're clearly instilling the right kind of principles into not just your family, but anyone who's around you.
00:01:07:01 – 00:01:32:11
Walter Aylett
Yeah, you know, it's interesting. While you were doing that introduction, yesterday it was 19 years to the day that we started managing money for Aylett & Co. After 19 years, with zero assets under management at the beginning, we now, as I say, think in dollars — we're over $1 billion now. And it's all because of time, and time flies.
00:01:32:11 – 00:01:43:05
Walter Aylett
But I don't think that, in the investment world, they give time enough attention. Time is a valuable tool in investments. It really makes the difference.
00:01:43:07 – 00:02:01:04
Alec Hogg
And I guess that comes from your own grounding, your own founding. We're going to talk about the markets, but I'd love for people who don't know you to get a little bit more of a sense of where you come from. We met so many years ago, and I think it was in the days of Syfrets Asset Management.
00:02:01:05 – 00:02:24:18
Walter Aylett
I think it was 1995, and we started speaking on the radio. I worked as an analyst with Tim Allsop, and then four years later, I went to Coronation in the early, early founding years. I was the first external appointment. I was there for eight years, and then I decided to go on my own in 2005.
00:02:24:20 – 00:02:45:13
Walter Aylett
And, yeah, it's been a wonderful experience. The rewards have been different from what I expected. I thought I was going to do my own thing, but the real reward is working with the greatest people in the business. I have been very fortunate to work with very, very good people who have been with me from day one.
00:02:45:15 – 00:03:04:17
Walter Aylett
With the exception of one individual, out of the 16 of us, only one was recruited through an agency. The rest came to us and said, "I want to work with you." And I think there's something in that, there's something in that longevity — you know, choosing the right people. I think Kimon's book is about that.
00:03:04:19 – 00:03:31:17
Alec Hogg
Yeah, there's so much in Kimon's book that I could see reflected your values, and of course, the values of Warren Buffett and Charlie Munger as well. You couldn't ask for a better North Star than those two people. But what if you were giving advice now to would-be entrepreneurial asset managers, or guys looking to leave the big corporates and go off to do their own thing?
00:03:31:19 – 00:03:37:02
Alec Hogg
Would you recommend anything they should think about first before doing so?
00:03:37:04 – 00:03:56:06
Walter Aylett
You know, last night we had a recruitment dinner for students from UCT, and the talent out there is incredible. That question keeps coming up — "How do I do what you do?" And I think it's a lot harder because the market has shrunk. I'm going to a reunion at the end of the year of all the old-timers from 20, 30 years ago, and almost none of them are left. There are just a few of us, so it's a very difficult market to start on your own.
00:03:56:06 – 00:04:18:06
Walter Aylett
My advice is to find someone that, I think Buffett actually said this, you know, look for people that you admire and join them, hang on to their coattails. In a sense, I did that with Tim. Tim was really good; I spent four years with him, and he taught me the game. John Pickard was very close to Tim, and I think that's the secret: find someone you look up to, and then jump on the coattails and hang on for dear life.
00:04:18:07 – 00:04:36:01
Walter Aylett
Work hard and love what you do, and follow those wonderful principles. But the truth is, you need a little bit of luck as well, and don't give up. Don't give up on your dream.
00:04:36:03 – 00:04:45:07
Alec Hogg
And that advice applies not just to managing people's money, but pretty much anywhere in life.
00:04:45:09 – 00:05:09:08
Walter Aylett
It's everything. I mean, look at what you've done, it's the same thing, you know? I'm not telling you anything new. Many people speak like this, and it's like doing the Charlie Munger thing, where you work out what you shouldn't do, and then you leave that behavior to the side.
00:05:09:10 – 00:05:28:17
Walter Aylett
The one thing that stands out by far is integrity. You won't talk about it enough, but it's more than just ethics. It's you as an individual, how you behave. And it's very tough to do that, very tough to stay true to your North Star, as you call it — to clear the windscreen every year and reset the compass. That's very hard.
00:05:28:17 – 00:05:30:02
Alec Hogg
Integrity is interesting. And it occurred to me recently when reading about it, maybe in Kimon's book, that it's not just honesty but also trustworthiness and reliability. I see so much unreliability — people saying, "I'll phone you back," and you never hear from them again…
00:05:54:03 – 00:06:14:10
Walter Aylett
You've hit the nail on the head. The other thing is, you know, Charlie was asked how to be successful, and the fourth point was to be unreliable. And I assure you, you will be unsuccessful. There's just so much of it around, resentment and envy and all the wrong things. So you're absolutely right: be reliable.
00:06:14:10 – 00:06:30:11
Walter Aylett
Shut up. You've got to shut up, stop complaining, or shut up. But get up there, put your head down, and go and do it, and it will happen. It happens in business, it happens in sports clubs. I mean, a rugby team is a good example.
00:06:30:15 – 00:06:40:11
Alec Hogg
Integrity is a cornerstone of what life should be, but some people don't even understand what it means. But moving on.
00:06:40:13 – 00:06:41:22
Walter Aylett
Right.
00:06:42:00 – 00:06:52:15
Alec Hogg
At the BizNews investment conference—and we're going to get you to one of those soon, I hope—Cy Jacobs was saying that…
00:06:52:15 – 00:06:55:15
Walter Aylett
If you ask us to pay, we won't go.
00:06:55:17 – 00:06:59:17
Alec Hogg
No, seriously, that drives me mad.
00:06:59:18 – 00:07:07:04
Walter Aylett
I don't get that. I love talking, and I love educating LPs. But when people ask me to pay to tell my story, I don't get that.
00:07:07:06 – 00:07:28:16
Alec Hogg
Yeah, no, I can assure you that doesn't happen with us. But getting back to the BizNews conference, Cy Jacobs… and yeah, I don't think Cy would pay for anything like that. He was saying his big short is Tesla. Tesla's results have just come out, and I know you've just got back from overseas.
00:07:28:16 – 00:07:49:03
Alec Hogg
So, you may not even follow the company at all, but he reckons that this thing is way overpriced and overvalued. There's a lot of interest from South African investors in Tesla, not just because Elon Musk comes from this country. Do you have a view on it overall?
00:07:49:05 – 00:08:12:20
Walter Aylett
Not specifically. I mean, we do have a view on Tesla, particularly regarding the demand for electricity and energy, and we have a very keen interest in that environment. But I think what's probably highlighted more than just Tesla is that money has no value at the moment, and it hasn't had any value for probably since, I think, 1999…
00:07:49:05 – 00:08:12:20
Walter Aylett
Not specifically. I mean, we do have a view on Tesla, particularly regarding the demand for electricity and energy, and we have a very keen interest in that environment. But I think what's probably highlighted more than just Tesla is that money has no value at the moment, and it hasn't had any value for probably since, I think, 1999, you know, when long-term capital started. When Greenspan came in and flooded the markets, the central bank governance, in my opinion, has been hijacked by politicians all over the world.
00:08:12:21 – 00:08:40:22
Walter Aylett
And at the moment, we have a generation of investors—the unreliable ones—that are used to easy, easy money. And I mean, I can show you eight or nine companies like Tesla that don't warrant their valuation. So, we as long-term investors are being tested. It reminds me of the old days of 1999. The value investors really struggled. If you remember, Orbis and Allan Gray were down, and they really suffered. But they came back. And I think Cy is correct in that respect—there's too much easy money, and it's a generational thing.
00:08:40:22 – 00:09:05:12
Walter Aylett
But how long it takes to unwind, I don't know—it's very hard. We've run a global fund for three years now, and we don't own tech stocks. We might look a bit stupid, but that's fine. It's people's money that we're looking after, and if they feel we're being conservative with it, so be it. Shorting is another thing that, you know, we don't do as a house.
00:09:05:12 – 00:09:33:10
Walter Aylett
I had two colleagues that were allowed to short in their own name because we didn't allow staff to invest in their own names unless they invested through the firm. But I gave them permission to short Tesla, and they got killed. They learned their lesson, and they'll never short again. So Cy could be right, but we could all go back to being wrong until we get proven wrong.
00:09:33:12 – 00:09:55:02
Walter Aylett
Yeah, he's right—it's definitely overpriced.
00:09:55:04 – 00:09:57:01
Alec Hogg
That saying goes, "The market can stay irrational longer than you can stay solvent."
00:09:57:02 – 00:10:06:08
Walter Aylett
That's right. Lord Keynes said that, didn't he?
00:10:06:10 – 00:10:11:04
Alec Hogg
Okay. Well, the other big story at the moment is in China, where there's been massive stimulus and a big uplift in the share prices—25% roughly in two weeks. Have you been paying attention to that story?
00:10:11:04 – 00:10:56:20
Walter Aylett
Yes. Let's acknowledge what the Chinese government has done, but we've been buying all the way down for the last two to three years, particularly casino stocks. We were quite big in China many years ago—15% of our portfolios were in Hong Kong stocks and commodity-led stocks. When the premier got re-elected for the second term, we didn't like the noise that came out of Beijing in terms of being not very investor-friendly.
00:10:56:22 – 00:11:21:19
Walter Aylett
So we really only had a very small exposure, mainly on the casino stocks. But then, it was ridiculous—everyone was just selling these Chinese stocks, and it was very hard to keep buying all the way down. So we've been very pleased with the performance at the moment, but I think that's all about stimulus and not really about earnings.
00:11:21:19 – 00:11:47:08
Walter Aylett
Ultimately, it's the earnings that have to come through. I think China is going through a very, very difficult time, much more difficult than anyone says, and it's not hard to understand. You know, I think when they joined the WTO in 2002, we said it would take 20 years for this boom to come to an end, and they achieved that goal of moving 20 million people to the cities every year.
00:11:47:10 – 00:12:11:20
Walter Aylett
That's now come to an end, and now we're seeing the problem. They have to go through some tough medicine to sort themselves out. I don't know how it will play out. What I do know is when I see a cheap asset, I have to buy it. I think the casino stocks were just simply too cheap—we're up about 45% in two weeks on those stocks.
00:12:11:22 – 00:12:28:12
Walter Aylett
It's all stimulus and nothing else. They can fall back 30–40%, but I think long term, you'll do very well out of those types of investments. So, if I were an emerging market investor, I would have been loading up on China for the last year.
00:12:28:14 – 00:12:31:07
Alec Hogg
And now, even after the recent rally?
00:12:31:09 – 00:12:49:16
Walter Aylett
I think it's very dangerous to talk about entire countries, you know, because we're not experts on every country, except maybe South Africa. So when you talk to me about China, I can discuss 3 or 4 businesses that I like, where the government is on my side. I think the casino stocks are highly regulated.
00:12:49:16 – 00:13:10:14
Walter Aylett
I know exactly where I stand. There are only six players, and the figures come out every month. It's all about cash flow. So, I'd rather play China that way. If you tell me about something else, sure, I'll look at it, but I can't make a call on it. My gut tells me that over the next 20 years, you want to be in China.
00:13:10:16 – 00:13:15:13
Alec Hogg
It's coming back. Back home over the next 20 years, do you want to be in Capitec?
00:13:15:17 – 00:13:39:05
Walter Aylett
You know, what a great company. And, you know, you talk about mistakes. It's really errors of omission that kill us as fund managers. The bad ones are errors of commission, and we don't really commit to those. But there's a wonderful, wonderful story of a great business. I met the CFO of Bank of America, who is a South African, in New York.
00:13:39:05 – 00:14:06:08
Walter Aylett
And all he could do was ask about Capitec, and that was about five years ago. The respect it commanded from him was remarkable. I think it's a good example that even in your own backyard, you can find a brilliant investment. Capitec doesn't have the legacy issues that the big banks have. The danger is they might create a legacy within the life insurance business with Discovery, as they are competitors in a lot of legal seats.
00:14:06:10 – 00:14:34:06
Walter Aylett
But I can't say anything bad about Capitec, other than it's still in the process. I think it's easier to buy some other stocks. For example, we're very big on WeBuyCars because I think that could be the next Capitec in this country. The only thing that could hold back WeBuyCars is the size of the market, since it's a 500,000 plus brand-new car market per year, and the consumer isn't getting richer.
00:14:34:08 – 00:14:43:16
Walter Aylett
But, you know, there are these sexy suits, and I think it's a great company. Great, great, great experience. Easy to understand.
00:14:43:18 – 00:15:03:14
Alec Hogg
I'm curious about WeBuyCars. I know the players there quite well. In fact, Faan and Dirk are going to be presenting at our business conference next year as an example of entrepreneurship. But, for you to give them the thumbs up is quite an endorsement. What is it about them that excites you?
00:15:03:20 – 00:15:31:10
Walter Aylett
Well, we stumbled onto it by chance. We were very big in Transaction Capital, and we did really, really well. We bought it when Mr. Lamberti left, and we rode it all the way up to R50. One of the investments in Transaction Capital was WeBuyCars. Unfortunately for us, they were a leveraged business, and SA Taxi was one of the other businesses in Transaction Capital.
00:15:31:12 – 00:15:54:04
Walter Aylett
I mean, you know the story there. So, we probably should have left it. It's always this debate—do you sell your winners, or do you polarize and leave the weeds behind? Nevertheless, when we got to understand WeBuyCars, we spent a lot of time with them, probably two years before we invested, when they were still unlisted.
00:15:54:06 – 00:16:15:00
Walter Aylett
And, you know, it was at a time when South Africa was probably at its real low, and the listing was forced upon them. I don't think they wanted to list at that time, you know, Transaction Capital. So, we bought as much as we could. I think we own more than Forbes. You know, WeBuyCars today—it was ridiculously cheap, and we couldn't get enough. We're not that big into other asset managers, but we did pretty well in getting stock that we wanted.
00:16:15:02 – 00:16:34:17
Walter Aylett
We sold at R23; that was the right price to buy it. We got out at R18.75, which was a very, very good price. Looking forward, I think, if they can achieve what they want to achieve, which is to target selling cars more than once a year, it becomes a totally different business. It's not a distributor or a dealership; imagine going every year and just changing your car.
00:16:34:17 – 00:16:55:13
Walter Aylett
I just sold a car to them. It was the most awesome experience. I tried the competitors, and it was abysmal. I'm speaking from my experience, but I did try to sell through the competitors, and it was terrible. The professionalism and ease are there with WeBuyCars. Of course, there will always be challenges in that industry.
00:16:55:13 – 00:17:20:01
Walter Aylett
Buying a car that's 7 or 8 years old from them will come with problems, and there's always reputational risk that we think about. You don't want them to be the dominant player in the market and attract negative attention. So, we have to be cautious.
00:17:20:03 – 00:17:37:19
Alec Hogg
There were a couple of other small companies that reported in the past week. Sorry, I said earlier Capitec didn't report today—it reported earlier in the week. York Timbers, Lesaka, I don't know if either of those ring any bells with you, but are you looking at the small- and medium-company space in South Africa, which Piet Viljoen has been telling us is very cheap right now?
00:17:37:21 – 00:18:03:13
Walter Aylett
Well, Piet's very right about that. We are very much in the mid-cap markets, but that's not to say we don't look at small caps, particularly for some of our very small funds. I like small caps, and I own a few. The packaging companies are a good example; they're ridiculously cheap. When you buy an owner-managed business that's trading at a multiple of five, they buy back shares at the right price.
00:18:03:15 – 00:18:34:17
Walter Aylett
They're doing smart acquisitions. You just need to be patient and let the management work for you. You'll be amazed. We own two shares: Transpaco and Bowler Metcalf. We've been shareholders there for 19 years. It's a tough industry, but will the PE ever be re-rated? I don't care. I care about them returning cash to me or spending it wisely. And they do that rationally.
00:18:34:17 – 00:19:00:08
Walter Aylett
What's interesting with small caps is the risk of getting into a value trap. An interesting example is Caxton. Is it a value trap? It's ridiculously cheap, and I can do the numbers. But how do you unlock the value? I don't know. There are a few like that, and unless you go hostile—which you would have to do in Europe or something like that, which I don't like doing—you need management on your side and permanent capital.
00:19:00:10 – 00:19:25:02
Alec Hogg
Walter, it's been fascinating talking with you. Looking forward to the next time. Walter Aylett is the founder of Aylett & Co. I'm Alec Hogg from BizNews.com.
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