Jean Pierre Verster made his name with two of the best counter-calls in South African market history: shorting African Bank and Steinhoff.
So, to learn that the founder of Protea Capital Management has bet against gold this year – in the face of its unrelenting march past $4,000 an ounce – is an eye-opener.
Has one of the cleverest people Currency ever met really got it this wrong?
“Yes,” he says drily. “But we have still generated a double-digit return.” And his hedge fund is still short of the precious metal miners.
“These are typically cyclical companies and, when we look at all the commodities and precious metals, and the reasons proffered by other people about why gold has done so well, we are [still] cautious on the gold price itself,” says Verster.
What’s more, he argues, even if the gold price can be sustained at a high level, gold miners cannot similarly keep up their profits. “So we are negative because of what the beast is.”
Nonetheless, this has hurt. Protea’s local hedge fund is now trailing the overall market, which has risen 55% this year (in US dollars) thanks to gold stocks like Harmony, Sibanye, Gold Fields and AngloGold. Then there’s the angst of seeing others make hay while you nurse what appears to be a dreadful misstep.
But Verster has a strategy to mitigate moments like this.
“The easiest defence against being wrong on a short is position sizing: keeping your shorts – measured on an individual basis – small. You can have a short double, and double again on you and still be okay. And we are okay. So, diversification is the best defence against ignorance.”
On a psychological level, he says that “because I don’t put too much weight on being right, and it doesn’t feed my ego if I’m right, it doesn’t detract from my ego when I’m wrong”.
Sure, but you’d be only human to indulge in a few moments of self-flagellation. Asked if there have been some harsh words uttered to the mirror, Verster says he isn’t too hard on himself.
“If I go back a year or two, I ask: what would make me buy gold miners at that point in time? Can I objectively say that everything I knew at that point could lead me to buying gold miners? And through our process, everything points to saying ‘no’,” he says.
Of course, if gold goes up another 50% from here to beyond $6,000 an ounce – as analysts from JPMorgan have said is possible – then Protea will have to concede defeat and cover its short positions. At that point, Verster says, it’s no longer a matter of returns, but risk (to the whole portfolio).
To be fair, not many saw the gold rush coming. And it’s probably not nearly as bad as being a bitcoin treasury evangelist right now, as crypto-hoarders like MicroStrategy are taking an absolute savaging in what the Financial Times calls a $1-trillion cryptocurrency rout.
Verster, in fact, has long been a bitcoin sceptic. Has he changed his views?
Not at all, he says. It’s a brave call, especially given how crypto has made others spectacularly wealthy over the past decade.
“It is 100% okay to ignore any asset you cannot understand or are not comfortable investing in,” he says. “Just because something exists, doesn’t mean you need to own it.”
His central argument is that crypto has limited utility – other than for those who live under oppressive regimes, who want to transfer money out of a country when the traditional finance sector has blocked them from doing so.
“I do not believe it has the utility for a payment method, and therefore I don’t see a reason to own it, because I cannot value it. I do not know if a bitcoin should be worth $1, $10,000, $100,000 or $1m – and I don’t believe the price of bitcoin actually affects the utility,” he says.
For other crypto sceptics, it is mighty comforting to hear this from one of the savviest investors around. Ask anyone who watched BusinessDayTV’s Stock Watch in the past 15 years, and they’ll tell you that Verster was the one person who could give a lucid explanation on almost any share you wanted to know more about.
Big shorts
With a market that continues to defy gravity, any short position is notable.
Most notably, American investor Michael Burry said in recent weeks that he will close his fund, Scion Asset Management, after it revealed that it has taken a short position in the high-flying AI chip company Nvidia.
This would appear to be a high-risk position, since Nvidia’s stock has soared 1,241% over the past five years, making it the most valuable company in the world. Nor, in fact, do its recent results suggest any slowdown in demand for its graphics processing units.
Burry is one of the best-known short sellers in history, having bet against the subprime mortgage mania that gripped the world ahead of its implosion in 2008. His story was made famous by author Michael Lewis, whose book, The Big Short, became a Hollywood blockbuster.
While his own bets against African Bank and Steinhoff are what Verster is best known for, it is his long calls that have made his investors the most money over the years.
“A company that goes down 50% or more in its share price is quite rare,” he says. “A share can only go down 100% by definition, while if you buy a good share, it can go up multiple times of 100% and you can really make enormous wealth.”
That is why investors should rather channel their energy into the more optimistic pursuit of looking for companies with great prospects which the market hasn’t fully identified, he says.
So what is Protea the most optimistic about? This year’s winning long positions, Verster says, include a clutch of semi-conductor equipment-manufacturing companies and European banks.
Its international fund is up more than 40% in US dollars on these investments, though, like Burry, Verster sees “pockets” of overvaluation led by the AI-craze.
“The one benefit of a bubble is, if you held the shares before the bubble and ride the bubble, you can do very well – it’s just a tricky strategy to be repeatably good at because now you’re not necessarily forecasting the business performance of the company, you are forecasting people’s reactions to the business performance,” he says.
Getting into business
It is perhaps no surprise that Verster was something of a child prodigy. For his matric year, he took 13 subjects and scored distinctions in 12. The sole B he received was for electronics. Back in 1999, this was a record achievement.
After that, he describes his entry into the investment world as “relatively traditional”: he studied BCom accounting with the idea that he would become a chartered accountant and “get into business”.
It almost didn’t happen; for a brainiac, Verster failed his third-year accounting exams thanks to the fun he was having as a radio DJ at the University of Pretoria.
“I had my mid-life crisis at the age of 20 and got a bit of a skrik,” he says. He retook the exams and says he “did quite well”.
A contract with Deloitte to become an auditor followed, but he found the vacation work stultifying. Nonetheless Verster maintains that accounting, as the language of business, is a prerequisite to becoming a successful analyst.
Switching to articles at Standard Bank, Verster ended up at its niche asset manager, Melville Douglas, which he liked, so he stayed on as a portfolio manager. Three years later he was poached by Cy Jacobs’ outfit, 36ONE Asset Management, which he ultimately left in 2016 to set up his own firm. After a joint venture with Fairtree, he then started Protea as a standalone business in 2019.
But it was during his time at 36ONE that Verster figured that trouble was brewing at African Bank under its charismatic CEO, Leon Kirkinis. Crediting his natural tendency for scepticism, he says while many people studied the financials, they didn’t necessarily see that anything was wrong.
It was the same with payments group Net1, and then with Steinhoff, which Verster went short on some time in 2017 before that fateful December when CEO Markus Jooste pulled the rug out from thousands of believers, shooting a torpedo through the South African investment community.
These are high-profile success stories, but Verster points out that he doesn’t get all his calls right – far from it, in fact.
“On a one-year basis, generally I’ve been right 55%-60% of the time in my career. It does mean I’m wrong 40%-45% of the time, which doesn’t get written about that often,” he says. But, he says, “if you’re right just slightly more than you’re wrong, with a diversified approach, you can make money.”
X-factor
Yet successful investments can also hinge on a know-how that isn’t always tangible.
“You can’t explain it, but you get a feeling when you analyse a company that something is not right. Or the opposite: you think, ‘this thing is going to be a winner’. It’s that X factor,” says Verster.
It is this sort of gut feel that will become increasingly important for fund managers in a world dominated by AI, where programmes like ChatGPT or Gemini can do all the technical analysis.
“It is the one element, I believe, where AI will not be able to supplant humans. Because that factor is, to some extent, about the anticipation of how the future might pan out [where] there is a break between the past patterns and the future direction.”
A fundamental principle of AI is to take as many data points as possible to plot the most probable next step. But if you do that in investment markets, Verster says, you’ll often be wrong. Perhaps – but you can’t help but wonder whether being really, really ridiculously clever, to paraphrase Zoolander, is also a hindrance, especially if you think you’ve got it right, and the market is wrong.
“In the markets, if you are arrogant, you will very, very quickly be humbled. Overconfidence is a very expensive trait to have, but the good news is that you’ll quickly learn that,” he says.
But confidence is also key in having the courage to go against the grain – as both Verster and Burry did when betting against the herd. So how do you walk that tightrope?
The trick, Verster believes, lies in the aphorism that one should have strong opinions, but loosely held.
“I’m continually looking for disconfirming information: I want to see if I can be proven wrong because I want to be proven wrong as quickly as possible before I incur a loss,” he says.
Resisting cynicism
There is also a fine line between remaining sceptical, and eschewing raging cynicism. “There’s a difference between being sceptical, which is healthy, and being cynical, which I think is unhealthy,” he says.
Cynics, Verster says, tend to see everything as a conspiracy, where everything is overvalued. Many short sellers end up in this place.
It is this cynicism, he believes, that was behind another market-rattling episode in 2018, when short seller Viceroy published a report into banking group Capitec. In the report, titled “Capitec: A Wolf in Sheep’s Clothing”, Viceroy claimed that Capitec’s loan book was “massively overstated” and should be impaired by R11bn.
Coming so soon after Steinhoff – which Viceroy had also come out against in December 2017 – Capitec’s shares slumped more than 20%, wiping out R25bn from its market value in a single day.
At the time, Verster sat on Capitec’s board, which disputed Viceroy’s findings.
In the end, Viceroy was fined by the Financial Sector Conduct Authority for publishing false or misleading forecasts about Capitec which it “ought to have reasonably known” were not true.
Verster says there is a lesson here. “When you are confronted with the facts, and the facts say that you are wrong, then you need to change course and admit it, and take it on the chin – and Viceroy didn’t.”
But even if Viceroy had been right, you can bet that Capitec would still have responded furiously to the criticism. As it is, many short sellers are loath to make their positions public, as executives, who are incentivised to ensure a company’s stock rises, typically respond badly.
“In their mind, they think that because someone is short, that in itself causes pressure on the share price. So the conclusion is: you are decreasing my wealth. But a share will not sustainably move lower just because someone shouts ‘Fire!’ in a crowded theatre. There needs actually to be some smoke,” he says.
Verster and his five colleagues scour global markets for investment ideas; their universe is the 10,000 companies with a market value above $1bn.
Asked if there are any ragingly obvious buys or sells at this point, the answer is vintage Verster: “Nothing is a sitter, nothing is a screaming buy or a screaming sell. The future has a tendency to surprise one, and I have been surprised many, many times.”
Top image: supplied.
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