A few years ago, I read a memorable quote that all hyper-active investors should pin above their computer screens. It said, "Don't do something, just sit there."
If you are a private investor who, unlike a fund manager, is free from the pressures of monthly and quarterly performance surveys, doing nothing is a luxury that you should savour and appreciate from time to time. In fact, it should be more than a luxury; it is a good habit that all investors should acquire.
It may come as a surprise to many investors that in 1963, Douglas Bellemore, the author of The Strategic Investor, put patience at the top of his list of the key characteristics of the successful aggressive investor. This is far from being a contradiction in terms. Patience is essential for achieving aggressive returns, because large investment gains often necessitate discovering an under-valued share early and then sitting it out until the market recognises the opportunity. This can take many years, and, as I have mentioned before in this column, selling a share just because the price is "doing nothing" is not a valid reason at all.
Remgro is a good example of a share with little obvious excitement attached to it. You could argue that there is no point in buying the shares of a company where someone else invests half the portfolio in listed shares and the other half in the politically incorrect tobacco industry, which is fraught with litigation issues. Many of the listed shares in Remgro's portfolio, such as Firstrand, Absa and Implats, are tradable, so you could have bought them directly in the market.
So why, despite these apparent negatives, did Remgro's share price hit R100 this week and why has it doubled over the past two years, delighting investors with bumper dividends along the way?
I would classify Remgro as a cross between a slow-growing share and an "asset play".
Most of its larger holdings are in companies that operate in fairly mature industries, so exciting growth prospects are unlikely.
In his book One Up On Wall Street, investment guru Peter Lynch describes an asset play as a company that is holding valuable assets that you know about, but which the market has overlooked.
An asset play is a share that you believe is under-valued relative to the assets the company holds. Specifically, the net value of the company's assets are higher than the company's market capitalisation.
Trading at a discount
Remgro's asset-play characteristics are a result of its portfolio of assets that trade at a discount. Listed companies that essentially represent a series of holdings in other investments often trade at a discount, mainly because investors may not like all the holdings and therefore demand a discount.
The two main attractions of an asset-play stock are the value of the assets themselves and the discount at which the assets are trading.
The discount is only a plus if you are confident that the assets are going to be revalued at some point. An analogy is buying a designer jacket on sale, but in the wrong size. Although you bought the jacket cheaply, you won't get any wear out of it because it does not fit you.
In the case of Remgro, there have been four key attractions for the investor. They are:
- The tobacco business generates a lot of cash, and Remgro management has elected to use this cash to pay good dividends over the years.
- Many of the company's investments have shown solid growth, and the overall portfolio has benefited from the rising stock market.
- From time to time, Remgro's portfolio has traded at a discount of some 20 percent to a realistic valuation of its underlying assets.
- The offer by Barclays for Absa has given that part of the portfolio a nice boost and also made it more likely that Remgro will declare another special dividend.
As a Remgro investor, the dip in the share price in 2003 presented an opportunity for you to add to your holding for less than R60 a share, but you could also have waited patiently for the price to appreciate and higher dividends to come your way.
Real value eventually gets discovered. Sometimes it is best for investors to just sit there and do nothing, especially if you are receiving a steady stream of dividends.