How would Warren Buffett react if he had trade union shares in AYO?
Opinion / 21 February 2019, 2:30pm / Dennis George
JOHANNESBURG – Over the past months, AYO Technology Solutions has become a household name in South Africa. AYO was listed on the Johannesburg Stock Exchange (JSE) on December 21, 2017, with more than 75 percent black ownership of which, more than 35 percent are black women. AYO’s empowerment is one of its many key competitive advantages and the company positions itself well for major acquisitions of larger multinational customers.
However, Moneyweb argued that 2018 was a very rough year for the South African stock market. The JSE index was 16 percent down since 2008. According to the financial data compiled by Bloomberg, returns in dollar terms looked even worse, with the measurement having lost 26 percent, the fourth worst performing bourse when compared to global peers. During this period, evidence shows that foreigners sold about $3.3 billion (R47 billion) in stocks on the JSE.
However, on November 7, 2018, the board of directors of AYO approved the annual financial statements in terms of the Companies Act of South Africa, the International Financial Reporting Standards (IFRS), which are issued by the International Accounting Standards Board (IASB), and furthermore, the Financial Reporting Guide as issued by the South African Institute of Chartered Accountants (SAICA) Accounting Practice Committee. The Financial Pronouncements are issued by the Financial Reporting Standards Council, the JSE Listing Requirements and the requirements of the Companies Act, as amended.
The financial highlights illustrate that even in very difficult trading conditions, AYO performed very well:
Revenue increased by 33% from R479m to R639m,
Profit before tax increased by 390% from R40m to R196m,
Earnings per share increased from 7.86 cents to 47.20 cents,
Total assets increased from R292m to R4 671m,
Net asset value increased from R67m to R4 469m, and
Net cash generated from operating activities increased by 243% from R40m to R137m.
Workers can learn important lessons concerning long term investments from the Oracle of Omaha, Warren Buffett, and his mentor and lecturer Benjamin Graham that workers, pensioners and you can implement in your own investment strategy during volatile markets.
Firstly, the stock market is unpredictable – all the time. Buffett wrote a letter to Berkshire Hathaway shareholders stating that the years ahead would occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur.
Secondly, over the long term, there’s only one direction the market will go, and that successful investing takes time, discipline and patience. Buffett argued that since 1965, the S&P 500 has produced annualised total returns of 9.9 percent, for example, and this includes the dot-com bust, Black Monday in 1987, and the Great Recession. Therefore, even the worst crashes are rather meaningless when it comes to long-term returns.
Thirdly, a correction or crash is not a bad thing for long-term investors, although quite obviously, no long-term investor enjoys watching the value of their shares go down. Buffett said he still looks back on 2008 as a particularly traumatic period, and in full honesty, there were times when he considered throwing in the towel when it came to the stock market.
Fourthly, when stocks start to fall, you’ll want some financial flexibility. Buffett argued that the most important part of the investment strategy is to have cash funds available. Buffett loves to keep $20 billion to $30 billion in cash at all times on Berkshire’s balance sheet, 5 percent of a total portfolio in cash for the specific purpose of taking advantage of opportunities would be in order.
Lastly, avoid a herd mentality. Many studies found that when stocks are going through the roof, investors see everyone else making money, get greedy, and decide to buy as much money as possible of those shares or stocks. When a correction or crash occurs, the same investors figure that they will be better off selling while they still have some of their investment left. Too many investors buy high and sell low – the exact opposite of the primary goal of investing. Buffett says it is important to keep your eye on the long-term returns, short-term noise is a dangerous distraction.
So how does this apply to AYO? AYO has a strong and transparent board under chairpersonship of Dr Wallace Mgoqi and an experienced executive team under the leadership of Howard Plaatjes. They will not be easily panicked by the rumblings in the media that are currently affecting the share price. Warren Buffett would smile at AYO for the issuing of shares to trade unions and workers on a discounted rate for being part of the B-BBEE Consortium prior to its listing and including them in the economy. AYO is a long-term investment that will pay off for all its shareholders.
While checks and balances and governance issues may be under the spotlight and require some tightening, in actual fact, the Government Employers Pension Fund (GEPF) and the Public Investment Corporation (PIC) should be congratulated for supporting B-BBEE in the country. There is a critical imperative for inclusive economic growth, employment creation and human capital development to ready the youth for the fourth industrial revolution required in South Africa, and long term investments using vehicles such as the stock market will reap long term rewards.
Dr Dennis George is Fedusa Secretary-General but writes in his personal capacity. The views expressed here are his own.