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Who are we?
Baobab Global Fund is a private investment fund. Both Baobab and its management company, Cherubim
Ventures (Pty.) Ltd, are incorporated in Botswana and both are licensed to operate in Botswana's
International Financial Services Centre (IFSC) and we have been afforded certain exemptions from Section 3 of the Banking Act, 1995.
The Chief Investment Officer, Mr. Martin van
Blerk, started investing at an early age and has been managing Baobab and its predecessor, the Cherubim friends and family fund since April 1997.
Baobab was established as a private fund because it is the cheapest investment structure. The directors are
the largest investors in the fund and are therefore not prepared to waste money on an intricate or convoluted investment
structure.
Although Baobab operates as a fund, the approach of the founders has always been
that of a private partnership. 'Partners' provide the capital and the job of the fund is to earn an above-average return on that
capital.
Before one considers investing the first thing to determine is whether the people making the investment decisions are people
you respect and admire. Establish whether those people are passionate about their work and whether they are
intelligent, hard working individuals with loads of integrity. Of the aforementioned characteristics, integrity is the most
important – in its absence passion, intelligence and hard work will steal you blind.
Why Botswana?
Although the directors of Cherubim understand Baobab and the companies that it owns, they feel like a fish out of water when it comes to macroeconomics. To explain a number of things about Botswana that are not common knowledge it is best to call in the help of the Economist magazine , Moody's and Standard & Poor's.
A 27 May 2002 article in the Economist (print edition or online, but subscription only), titled The African Exception starts as follows;
'Experience in one sub-Saharan country shows that overseas aid is not the only prerequisite for growth. Which country has had the fastest growth in income per person over the past 35 years? A few hints: it's not an East Asian "tiger", such as South Korea or Singapore, nor an oil-rich Gulf state, nor China or the United States. The answer is Botswana, a landlocked former British colony [BAOBAB correction: actually it was a protectorate] in a region marked by poverty.'
The article concludes with 'One lesson from Botswana is that history shapes countries. Another is that good management is at the centre of growth, and that the rule of law is as important as are the laws of economics.'
Not many people know that Botswana has a higher credit rating than Japan. Moody's has the following to say about Botswana in their August 2006 report;
' Botswana's country ceilings for foreign currency debt and bank deposits are A2/Prime-1, and the government's domestic currency rating is A1. These ratings reflect external debt and liquidity positions vastly superior to that of comparably rated sovereigns. Careful utilization of diamond export earnings has led to a rapid advancement of infrastructure and living standards since independence in 1966. The government budget has averaged annual surpluses of 5.5% of GDP during the 1990s, keeping the public debt at a minimal level. These strengths are partly mitigated by a relative lack of economic diversification and the devastating socio-economic impact of the HIV/AIDS pandemic. In addition, wide income inequalities and high unemployment persist, primarily the product of educational and skills shortages that have yet to be overcome fully.'
Standard & Poor's pretty much said the same thing in their December 2005 report;
In June 2002 the Japanese paper, Mainichi Daily News reported in their article Japan's sagging credit rating, as follows;
'Moody's Investors Service downgraded the credit rating on Japanese government bonds by two notches from Aa3 to A2, citing delays in fiscal reform, and the fact that the Japanese government's general indebtedness is approaching levels unprecedented among the advanced industrialized nations in the postwar era.
The downgrading saddles Japan with the lowest credit rating among the Group of Seven nations, worse than that of Chile, Hungary, and Botswana, and in the same league as South Africa and Poland.'
How do we think about investment?
There is very basic thinking behind our investment strategy.
We subscribe to the following principles.
Warren Buffett
'If principles can become dated, they're not principles'
'Diversification is a protection against ignorance. (It) makes very little sense for those who know what they're doing'
'I'd be a bum on the street with a tin cup if the markets were always efficient'
'You're lucky in life if you have the right heroes. I advise all of you, to the extent that you can, pick out a few heroes. There's nothing like the right ones'
'An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative'
'Investment is most intelligent, when it is most business like.'
'Valuing the market has nothing to do with where it's going to go next week or next month or next year, a line of thought we never get into. The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts . . . The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors'
'In the old legend the wise men finally boiled down the history of mortal affairs into the single pharase, "This too will pass." Confronted with a like challenge to distil the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.
Early in my investment career I used to go to brokers for advice but I stopped doing that very quickly, since I found their advice had little substance. I also found it strange that, although they were adamant that their advice was sound, they frequently did not own the shares in question themselves. Additionally, they were not willing to subscribe to my proposal that they only charge a commission or fee when (if!) I made a profit.
None of the so-called experts was willing to walk in the shoes of their clients, but they were all too eager to take commission on trades!
The investment industry is retail-based and makes money out of frictional costs. Every time money moves, is transferred or invested the industry takes a small percentage somewhere.
Growth and the investor's profits never come into the equation.
To top this, only 18% of U.S. fund managers outperformed the S&P 500 over the 20 years ending in 2001 (Wall Street Journal, Index Funds: 25 Years in Pursuit of the Average 9 April 2001). This happened to be the biggest bull market in history.
Although it does not relate to exactly the same period, John Bogle noted the following in his book, Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor: 85% of professional fund managers do not outperform the market average. Of the 15% that do outperform, only 0.5% (that’s right only 1⁄2 %) outperform the index by more than 3%.
The above paragraph is worth reading again, because it’s a fact!
In light of the above, the following anecdote can be appreciated:'I've come to the conclusion that using a financial professional to help you invest is like getting open-heart surgery from a starving lion' - Scott Adams, Unleashed Greed
However, the real experts do know a lot about investing and there is only one yardstick that’s worth using - long-term track record. Warren Buffett is the best to be found with a US dollar track record of 23.6% compounded over 36 years. It helped him amass a personal fortune in excess of $30 Billion. The Sage of Omaha, as Buffet is known, turned each initial $50,000 investment into $15.2 million over that time.
The real experts (most are value investors) are people like Warren Buffett, Benjamin Graham, Phil Fischer, John Templeton, Charlie Munger (19.8% over 13 years), Walter Schloss (21.3% over 28 years), Tom Knapp and Ed Anderson (20% over 15 years), Bill Ruane of the Sequoia Fund (17.2% over 14 years), Rick Geurin (32.9% over 19 years) and Stan Perlmeter (23% over 22 years). The comparisons are not totally fair, because they do not run over the same time periods, but they are enough to convince anyone. Over the years, Martin van Blerk has studied all the available material on these investors and they are his role models. The following comment in Supermoney (1972) by Adam Smith refers to Walter Schloss, and also describes the character and modus operandi of the value investors mentioned in the previous paragraph. These are also the values that we aspire to at Baobab:
He has no connections or access to useful information. Practically no one in Wall Street knows him and he is not fed any ideas. He looks up the numbers in the manuals and sends for the annual reports, and that’s about it.
In introducing me to [Schloss] Warren [Buffett] had also, to my mind, described himself. “He never forgets that he is handling other people’s money and this reinforces his normal strong aversion to loss.” He has total integrity and a realistic picture of himself. Money is real to him and stocks [shares] are real.
By adopting the teachings of these sages and by following their principles a MARGIN OF SAGETY is obtained. We firmly believe that this is the main reason for the portfolio’s performance in excess of 20% per year over 7 years. It will be hard to sustain such a record, but we have no intention of being outperformed by the market.
Readers must please observe caution when seeing the use of other people’s names (e.g. Warren Buffett, Benjamin Graham, Phil Fischer, etc) in this text. The frequent mentioning of the most successful value investors is not an attempt to capitalise on their reputations. It is simply impossible to explain Baobab’s investment philosophy and not frequently bring up their names, mainly because there is very little worthwhile investment knowledge that has not been covered by them. However, when it comes to the investment philosophy of Baobab it all boils down to the old adage - judge it on its walk not on its talk.
In essence, the only way to profit from investment in companies is to invest by the following rules:
1. Don’t lose money.
2. Never forget rule no.1
Every investment decision at Baobab is made only after considering the above.
Investments must not be thought of as shares, but rather as companies - living and breathing entities with their own peculiar traits, just like any human being. Baobab aims to buy the future cash flows of a company at a reasonable discount. In addition, these cash flows must be highly predictable. The mantra of ‘we will make money, some day’ from the Amazon.coms and Enrons of this world does not grab our attention or appeal to us.
Baobab makes long-term investments in companies with a proven track record that are selling at a discount to their intrinsic value. The companies must:
1. Be simple and understandable
2. Earn an above average return on shareholders equity
3. Not utilize excessive debt
4. Have a consistent operating history
5. Have favourable long-term prospects
6. Not earn significant revenue in a country of which the currency is unstable over the long-term
7. Have an owner-orientated management that we trust and admire
8. Have management that owns a significant stake in the company
At Baobab, we concentrate on these basic elements and try to practice them well, rather than try to work wonders. The trick is to get the basics right and to avoid serious mistakes.
Discounting the future FREE cash flows of a business at an appropriate rate gives the intrinsic value of that company. Points 1-8 above are used to estimate the certainty that the projected cash flows will actually materialize. In fact, at Baobab we seek a margin of safety - additional “breathing space” in which things can to go wrong. In light of this requirement, it is understandable that we do not invest in Information Technology (IT), Technology, Media, Telecommunications (TMT) or Biotechnology companies. The reason is that most of them have no positive cash flow and none, that we could find has any margin of safety.
Baobab also does not invest in countries like Argentina, Mozambique, Indonesia or other developing countries that have an unstable or depreciating currency because we hate surprises and prefer to swim with the tide rather than against it.
A very important business principle we have come to cherish at Baobab is that one must always align your interests with those of the people you’re doing business with. This means that everyone in a business venture must necessarily be in the same lifeboat together – they either all sink or all make it to safety together. The situation where some can make it to safety, while others are thrown overboard is highly undesirable and one we seek to avoid at all costs. At Baobab we think of our fellow investors as partners and treat them in the same way. The investors provide the capital and Baobab allocates it.
So how do investors know that Baobab’s interests are aligned with their own?
This problem is dealt with in a simple way. The Chief Investment Officer, as the principal allocator of capital, is required to have at least 80% of his net worth invested in Baobab at all times. Also, everybody at Baobab gets a cut of the profits and if there are no profits we all go hungry together. The Chief Investment Officer suffers the most if poor investment decisions are made and no commission is earned. At Baobab it’s simple: we eat our own cooking - which is fair, don't you think?
If you need any information then you can e-mail us at info@baobabglobalfund.com
