🔒 Alec Hogg: “Why South Africa is a fat pitch for long-term investors.”

On August 16, Isipingo-based shoemaking entrepreneur Rajeev Pattundeen turned 50. As part of the celebrations, he invited 70 friends, family and business associates for lunch – and asked Biznews founder Alec Hogg to join them at a restaurant in Durban to explain why, at a time when gloom is pervasive, he is so positive about South Africa’s future. Here’s the recording of Hogg’s address, one based on underlying realities facts lost in the noise dominating discourse in the young democracy.

Address by Alec Hogg, founder of Biznews.com, in Durban on 16 August 2019
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My message today is not Pollyanna. It is based on reality. Allow me to begin with a personal example.

When I was growing up in Newcastle (then a small town in KZN) we really were behind the curve. We used to have a movie house called the Plaza which would get shows after they’d done the circuit in Durban, then Pietermaritzburg, then Ladysmith, they would finally come to us.

To give you an understanding of what used to happen, the censors in this country back then were enthusiastic and used their banning power often. So a movie called The Rocky Horror Picture Show which got rave reviews among school friends in Durban and Pietermaritzburg, was banned before we got it.

This was a lesson for me in later life. A reminder that there are trends. We in South Africa are very privileged in this respect because we can climb into an aeroplane headed for Silicon Valley in the United States and see what is going to hit us in three to four years’ time. That same trend tends to occur in the rest of the United States two years before it finally gets to us, the UK maybe 18 months.

As sure as God made little green apples, what is happening elsewhere does get to us in time. But I’m not here to talk to you about Newcastle, except as a reminder how in a global sense, South Africa is like the town I grew up in. That’s worth remembering if you want to have a glimpse into the future.

My purpose today is to share my perspectives of what’s going on in our country. The reality, not the story we’re told so often.

Again, allow me to explain. I’m in the media business and sometimes what we as a nation are fed by my industry drives me mad. Human beings have the propensity to pay nine times more attention to the negative than positive. Nobel Prize winner Daniel Kahneman, in his amazing book called Thinking Fast and Slow says it’s hardwired into our system. When our forefathers were running around being chased by sabre tooth tigers and whatever else was life threatening those days, regarded a rustle in the reeds as existential danger. They just ran away, not stopping to wonder whether it might be food.

So what does that mean for us today?

It means when you look at something, when you hear something, when you talk about something, nine times more often you pay attention to the negative rather than the positive. That’s just the way we are made as human beings. Keep that in mind because when you have a look at the news flow, those who generate it appreciate this reality and as they’re interested in getting the most possible attention, their product is tailored to satisfy an audience nine times more interested in the negative than positive.

Most of you brought together in this room by your friend Rajeev are entrepreneurs, and thus somewhat different to the norm. Sociologists tell us probably only one in ten people are instinctive entrepreneurs. They are wired a little differently, are a tad more positive than their fellows.

I play little games with this on a range of issues. Like with emigration. We hear so often about massive emigration from South Africa. Have some fun with me and next time you hear from someone emigrating, ask them what they do. We were talking before lunch about two types of people you have zoo animals and wild animals.

Most of the people in this room, being entrepreneurs, are all wild animals. They put freedom above security. The others in our species, what we might term zoo animals, tend to work for corporations. They trade security over freedom, put up with an employer because they provide guaranteed sustenance – their monthly salary is like the zoo animal getting their food at a certain time.

Corporate animals get benefits, especially when they retire, not having to ever worry too much about where the next meal is coming from because it is given to you. So it’s great in many ways to be a zoo animal. However there’s a cage around you. And after a while it’s impossible to become an entrepreneur. Zoo animals returned to the wild, chances are they aren’t going to last very long.

Then you get the entrepreneurs, the wild animals of our story. They have freedom but by the same token they also have to watch out for lions hanging around which could take them out. Freedom is exhilarating, but it is accompanied by danger.

So ask the next person who’s emigrating from South Africa what do they do for a living? I’ll bet you that nine times out of ten, you’re going to find out that they are the human equivalent of zoo animals. But their zoo is changing and they’re actually battling to come to terms with it. So they think maybe somewhere else in the world will be easier. That’s not so, however, because transformation is happening everywhere. The world of work is very different today to what it was in our parents’ time. And will change even more in the decades ahead. Zoo animals everywhere are being forced to return to the wild.

I spent the last three three years until May this year in the UK, so got a close-up perspective of this. Our business has a significant exposure to hard currency. And when you live in a South Africa with currency turbulence, one expects in any emerging market country, it’s a priority to ensure your organisation can survive the financial volatility – particularly when a big chunk of your business is hard currency.

So we went to London to establish a hard currency revenue stream. We thought it would take a year. We ended up staying for three. For us, it was always a temporary assignment. As an entrepreneur, the opportunities available in South Africa are very exciting, I don’t really have to tell you. But we need to remember this, Because the news flow is coming at us from a very different direction.

Let’s explore something else to ponder.

In the year 1889, Charles Dow, a farm boy who became a journalist, started a newspaper in the United States called The Wall Street Journal. We believe it is the greatest newspaper on earth, and it’s our partner at Biznews. So if you’re a member of our Premium section on Biznews you also get The Wall Street Journal as part of the package.

But back to Charles Dow, the founder of this publication, whose name lives on more than a century later – you’ve heard of the Dow Jones Industrial Average in the New York Stock Exchange, of course.

Eleven years after he founded the newspaper, in the year 1900 Charles Dow published a series of articles based on a theory that came from research he did into the way markets move. It holds true today. He came to understand that markets work in cycles. He defined different market cycles, discovering that they work in six phases.

The cycles begin with what is called the Accumulation phase, that’s where the smart money buys what is then cheap assets – the property, shares and so on. After the Accumulation phase has ended the second phase begins, where the not-so-smart money starts jumping onto the same bus. That’s what Dow called the Big Move.

When the Big Move has run its course, next comes Excess, the third and most dangerous phase. I’ve had the privilege of seeing two major Excess markets in the South African stock market. The first was in 1987 when subscribers to a newsletter my employer owned would pay R1,000 for what was effectively a weekly tip sheet on what stocks to buy for a quick profit.

We even had a phone line that subscribers would phone into for access to a recorded message telling them what the technical signals suggested would be the best shares to buy that day. Extraordinary/But that was 1987. Massive Excess.

Then, in October, came the huge crash. The cycle was repeated 10 years later – an almost exact replica. That’s what happens in the period of excess. Every man and his dog becomes an enthusiastic share investor. When Excess happens – when hairdressers and taxi drivers start tipping you shares – we know for certain that it’s going to blow off.

Which brings us to the next phase, called Distribution. This begins when the smart money starts selling their shares, and is quickly followed by the not-so-smart money which always takes a lot longer to appreciate that the Excess was only temporary, that the world really hasn’t changed. This is the phase when there’s mass selling of shares and prices drop, often sharply.

After Distribution we get the bear market version of the Big Move which is a long-term depressed market where prices just keep falling because of a lack of investment interest. All news is interpreted as bad news and depression sets in. A few hardy souls still hang on or even nibble at some of the assets, but as prices are falling, most people stay away.

After the Big Move down we finally come to the sixth and final stage of every market cycle – Despair. This is the time when a fraction of the smart money begins buying again, but where most people throw away their assets at ridiculous prices because they simply cannot see the clouds ever lifting. There is doom and gloom everywhere and anyone suggesting the nightmare will end is laughed out the room.

South Africa right now is in Phase Six.

With the privilege of having had three years of distance from the local noise together with the opportunity to talk to people from a different mindset,  I’ve been blessed with a different perspective. And barely a day passes without something happening to raise my level of excitement.

When I engage with people in business, admittedly primarily with zoo animals, they keep telling me the country is too far gone and can never recover. They cite corruption and incompetence as impossible to eliminate. Even talking to Estate Agents – usually the most bullish of us all, they keep explaining how their clients are emigrating so what are we doing back from the UK?

If you consider your own career and your own life and you own your own journey, nine times out of ten you’ll remember that the time of greatest opportunity, the time my hero Warren Buffett calls “The Fat Pitch”, came along when everybody else wasn’t looking.

Warren Buffett is the greatest investor on earth and one of the most sensible, logical and rational examples of our species. He built a company called Berkshire Hathaway which is a company listed on the New York Stock Exchange from scratch about 60 years ago into the fifth most valuable public company on earth.

Buffett has done this through some very simple processes – mostly doing his buying when everybody else is selling. And then taking the occasional huge swing when what he recognises as a “fat pitch” comes along. The term “fat pitch” comes from American baseball when, once in a blue moon, a professional pitcher messes up. And what Buffet teaches us is that when a fat pitch arrives, you swing at it with all your might.

He says there was times that he would invest more than 50% of his portfolio on a single bet because it was a fat pitch. What we’re going through right now here in South Africa. But there’s so much noise that most are not seeing it. Then again, if  everyone did see the opportunity, it obviously couldn’t be a fat pitch.

So let’s dwell on a few factual things that support the fat pitch thesis.

The first thing to realise, though, is decisions taken have a time variance that’s dependent on the seniority of individual making them. For instance, if you’re a supermarket teller and a grumpy client starts arguing, the way you address that will determine whether they pay or storm out. There’s an immediate reaction.

On the other hand, if you’re the president of a country the impact of your decisions made today will take years to filter down.

We’re sitting inside a South Africa that has experienced nine of the most misgoverned years we would ever imagine. A bunch of self-serving crooks were running the place as we know only too well from testimony presented in various Commissions of Inquiry. But yet, as a nation we celebrate getting rid of the bad guys but then expect things to change immediately. It can’t.

We’ve got to understand SA is not even two years into the new administration. But just like Newcastle used to get movies from Durban, just like South Africans can go to Silicon Valley and see what’s coming down the road, if we open our eyes to the impact of decisions being taken since December 2017 and the watershed ANC elective conference, we can see what the next move is going to look like.

What have these decisions been? The National Development Plan, which was compiled by a top rank group chaired by Trevor Manuel (with current president Cyril Ramaphosa as his deputy) and concluded in 2012, has spent most of the last seven years gathering dust. That superb document has recently been dusted off and it’s now starting to come back into use in South Africa.

The National Development Plan – without getting into all the details – is the most brutally honest assessment of this country’s economy you can imagine. I urge you to read it. You’ll see that those running the show know very well, for instance, that education is a mess. They know precisely where the nation’s problems lie. this NDP is the blueprint to this country’s future. It’s been re-adopted.

For example, the national health insurance plan is core to this. All we read about it is negative – that it’s going to cost two percentage points more in VAT or whatever. But, again, go back to my hero Warren Buffett who tells us the most valuable investment you could make is in yourself because that is unleashing human potential – the most powerful force on earth.

Today I saw unleashing of human potential in Rajeev’s factory that was very exciting to witness. Imagine what would happen if we could unleash the human potential in this country. we’ve only had a little taste of it since 1994. Bit imagine the latent power that with a little support is sure to work its magic on this nation.

We have many examples of what is possible. Consider South African Revenue Services, which was built during democracy – by your Home Boy Pravin Gordhan – from a decrepit organisation into one of the very best on earth with one of the smallest tax gaps and among the most efficient tax collection agencies. When Team Gordhan was taken out, 200 of the top managers, by the thoroughly discredited Tom Moyane, we know what happened.

But that’s in the past. Gordhan’s former right hand at SARS, Ed Kieswetter, is in the hot seat. He’s busy rebuilding capacity. He knows exactly what is needed. There’s lots of  work to be done, But SARS is back on the right path.

By the same token, cynics point to Eskom as a disaster. What we need to remember is that those running the nation know if you don’t have electricity you don’t have an economy, So they have prioritised the stabilisation and recovery of Eskom. It will cost us all. But we’re back on the right path as we see in a very practical way from the absence of load shedding for some months. Just imagine for a moment if Brian Molefe was still in charge…

For perspective, remember where we come from. Think about where we were. Realise that where we’re going to. But remember, too, that anything worthwhile takes time.

Two years ago in Davos at the World Economic Forum when Cyril Ramaphosa had become ANC president but was not year head of state, I was present at an after dinner speech where he spoke about the priorities being attacking corruption, fixing the State owned enterprises, and providing policy certainty for investors. Despite all the noise since then, now President Ramaphosa has not deviated from his strategy to focus on these three areas.

Must read: Ramaphosa goes off-piste in Davos – no script, no bluster, just straight talk

Read his June State of the Nation address and you’ll see what I mean. Of course other issues have also risen on the agenda – like the plan to double tourism by 2030. And we see action on all these fronts – like, with tourism, last month’s move to make Saudi Arabia, New Zealand, UAE and a whole bunch of other countries removed from the need to have a visa before visiting SA.

Then there was Ramaphosa’s Investment Conference last year where foreigners pledged $300bn, around three quarters of which is now being implemented or is in the final planning stages. Just because it’s not on the front pages doesn’t mean it isn’t happening. This is good news,, remember, the stuff to which one ninth of the attention is paid. We’ve got another Investment Conference coming in early November where further commitments can be anticipated.

But the one thing I really wanted to talk to you about before we open up for a bit of questions is the Public Private Growth Initiative – the PPGI. It was sparked by Johan van Zyl, the former head of Toyota South Africa who was promoted to running Toyota Europe, one of the biggest jobs in the massive motor manufacturing multinational.

Also read: Now for some good news. PPGI shows Business and Govt CAN pull together

After listening to Ramaphosa’s famous “Thuma Mina” State of the Nation speech in 2018, Van Zyl said ideas and hope is all very well but unless there is practical application, nothing will come of it. So he proposed to former politician Roelf Meyer and former GIBS dean Nick Binedell that they convince government to copy the Japanese plan which was the reason for its spectacular recovery from a nuclear wasteland after World War Two.

The result is the PPGI which might be under the radar, but is ploughing forward relentlessly. There are 19 sectors of the economy involved in working groups where the most senior executives from the private sector and their counterparts in government (minister and director generals) meet regularly to discuss ideas and implement plans for economic recovery.

Often, those in the private sector consider those in government as a bunch of paper pushers who don’t know what they’re doing and sit around in meetings drinking tea. And many in government see the private sector as predators who are only interested in making the most money in the shortest possible time. Of course neither of those caricatures are correct. We’re somewhere in between.

But the fact that we’re all living in South Africa, have children and grandchildren here, means we all want better for the country. And we see this in the PPGI where the private sector’s investment commitments now exceed R850bn into 43 projects, which for context is around 75% of the total tax collected annually in South Africa.

I’m hoping that we’ll start seeing a change in the narrative of this country. When you travel and see what’s happening elsewhere in the world, it becomes obvious that there is an extraordinary potential in South Africa. We’ve always known that. But we’ve talked ourselves into a downward spiral, one consistent with the nine-to-one negative wiring of our species.

Sometimes I feel all it will take is a little self-confidence, a little win here or there that lets South Africans remember that anything is possible in this country. Given the role the Japanese template is playing in the recovery of the South African economy, I cannot think of any more appropriate spark for the nation than our beloved Springboks bringing back the Rugby World Cup – from Japan of course. Here’s hoping.

Thank you.

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