South Africa’s ‘Enron moment’ changes things

Firstly, a happy New Year to both regular and new readers. May the new year be filled with happiness, and dividends of course.

2017 ended on a scary and at the same time fascinating note in South Africa. We have witnessed the implosion of one of our biggest companies, Steinhoff, due to accounting fraud it would seem. They had been acquiring companies at a dizzy pace for a number of years, not just in South Africa, but also companies like Conforama in France and Poundland in the UK. I will not get into the technicals, but it would seem debt and fancy accounting (fraud) are at the root of the problem.

Now this company was one of the golden companies, the CEO was the golden boy of South African business, he had the midas touch.  Fortunately Dividend Tycoon HQ was not exposed to this company as I was always a little doubtful, although did not think this would happen to be honest.

However, what an incidence like this does do, should you escape unscathed, is send a chill down your spine and make you look again at your portfolio with fresh eyes. Have I been complacent in reading annual reports too quickly and skimming over the difficult to read sections? How much debt do the companies in  my portfolio have? Are my position sizes too big?

How my views have changed

1. Understand the company

I must understand the company. I think I can give myself a pat on the back on this score, I have studied all my portfolio companies in detail – annual reports/AGM’s/interviews/twitter searches…anything to get an edge in understanding not just the numbers but also the DNA of the company. I need to be able to tell you exactly what the company does. In this regard I have tended to invest in smaller companies with easy to understand business models and easy to understand accounts.

This saga reinforces this strategy in my mind. I simply cannot get my head around large insurance companies or banks for example. I do not know the extent of their liabilities or whether they are accurately portrayed.  So why would I invest in such a company if there are easier to understand companies.

Same go’s for a company like Steinhoff. They had acquired so many companies that their accounts became a nightmare to understand. There was goodwill aplenty, lots of debt and it was difficult to compare to prior years because each year was muddled up due to new acquisitions.

One of the best things about the investing business is that one never, as Warren Buffett likes to say, has to swing the bat. So if something is too hard to understand, leave it alone. There are thousands of other companies to invest in, so you are never forced to do anything

2. Watch the debt

This is partly the same as point one. However if there is one thing that has to be very carefully understood it is the debt levels. Debt is the biggest danger most companies face. A debt free balance sheet for example allows you to sleep well at night, whereas a highly leveraged balance sheet can give you nightmares. Some debt is usually inevitable, but keep an eye on it.

3. Position sizing

Of the three points, this is the one where I have perhaps erred. I have a few very large positions in terms of their percentage in the portfolio. Steinhoff has shown that should you get a position wrong, and it is a large part of your portfolio, it can be very negative.

Due to the fact that I believe I have been diligent on points one and two I am not too concerned at the moment. My big holdings are easy to understand and have strong balance sheets. However, going forward I may adjust the portfolio sizes downwards as I make new investments and perhaps trim large positions where they look fairly valued or overvalued.


It has been quite startling to see how quickly fortunes can diminish, how quickly reputations can be left in tatters. It makes one realize that investing is a serious business, and complacency is deadly to your survival in this game. Besides the quickening pace of business disruption, political events and macro events, one has to be on top of your investments and watch them like a hawk.

I have committed to upping my game by reviewing all investments thoroughly and being far more circumspect when making new investments.

Take care and please also try your best to avoid any ‘Enron moments’ in 2018.