The fate of South African furniture maker Steinhoff is a classic example
Investing in a single asset class is always a risky game
It was an unpleasant way to start the holiday season: in early December, Cape Town pensioner Jeanne Ernestine woke up to a €3,000 (US$3,666) hole in her portfolio. There is almost no chance of getting her money back.
"It was this one company, Steinhoff" Ms Ernestine says. "I hadn't really paid attention to it - my portfolio manager had always included it in my holdings because it was supposed to be so reliable. Then the company had some trouble and now those shares are almost completely valueless."
Steinhoff is, or was until recently, the world's second largest furniture maker. Only Ikea was bigger but Steinhoff's strategy of rapid growth made it appear inevitable that it would eventually overtake its Swedish rival. Listed in Frankfurt, Germany, the company began life as a small manufacturer in the 1960s before moving to South Africa (where it is also listed), before expanding to become a worldwide presence.
In August last year Steinhoff reported €15 billion (Dh67.32bn) in revenues from its 40 different chains worldwide and more than 10,000 stores. Its assets included the US's biggest mattress retailer Mattress Firm, African textile discounter Pepkor and big furniture chains such as Conforama in France, POCO in Germany and Leiner Immobilien in Austria.
At its height in 2016 Steinhoff shares were trading above €6, and most fund managers had it as a buy or hold. Trouble is, Steinhoff's income appears to have been based on lies.
The first inkling of problems came last year when German authorities began a low key investigation into the company. Then, late November auditors Deloitte refused to sign off on the latest set of quarterly result, saying they “had not yet finalised their review of certain matters and circumstances, most of which were raised by the criminal and tax investigation in Germany".”
In other words, Deloitte could not vouch for the figures in Steinhoff's books - accountant-speak for fraud. Analysts now suspect the company's ex-chief executive Markus Jooste falsified Steinhoff's income to make it appear it was earning a lot more than it was. That €15 billion in 2017 revenue may be nothing more than a mirage. Mr Jooste resigned last month and has gone to ground.
Unsurprisingly investors fled within hours of Deloitte's announcement and the share price collapsed. Steinhoff is still trading in Frankfurt, but now below €0.50 - a long way down from the about €3,50 it was trading at through November.
Luckily for Ms Ernestine her €3,000 loss is only a small percentage of her overall portfolio. Hers, like most well managed investments consists of stocks, bonds, and cash. The stocks themselves are across sectors ranging from commodities to telecommunications. No one asset dominates, no matter how alluring it appears on paper. Diversification therefore is key.
Others were not so fortunate. Christo Wiese for instance was, until the Steinhoff collapse, one of Africa's richest men, with a net worth of US$5,6 billion according to Forbes. As Steinhoff chairman and the largest shareholder, a large portion of Mr Wiese's wealth was tied up in the company.
Within a week of the scandal unfolding he had lost the net worth of 13 African states put together. Today Mr Wiese is barely a billionaire with his wealth now sagging to just over $1 billion according to various estimates.
Mr Wiese is a perfect example of why you never hold all your investments in one asset in a bid to make high returns.
"We live in an age of instant gratification," says Sean Peche Portfolio Manager at Ranmore Fund Management in London. "People use Amazon Prime because you get your product delivered within 24 hours. The older generations used to save up to buy something, now we buy it today and pay off credit card debts afterwards. So, it’s no surprise that people want to get rich quickly. But, unfortunately wealth creation is about compounding over long periods of time and so that goes against the grain of how we live today."
Warren Buffet is perhaps the world's greatest investor with a fortune of around $72bn, most of it built over decades of investing, Mr Peche notes. Similarly, the sovereign wealth funds that house the accumulated value of the oil riches produced by Gulf States such as the UAE build portfolios designed to last for long after the last drop of crude has been drilled.
For many though, getting in early on the next bitcoin or Tesla stock and retiring in their 30s is just too tempting.
Mr Peche says even if investors get lucky, the chances are that eventually an investment will go bad risking the destruction of an entire portfolio.
Christo Wiese is a stark illustration of this. He has had to sell billions of euros in good assets to pay off banks that have called in loans he raised against his Steinhoff holdings.
Mr Wiese himself is not directly implicated in the company's nefarious accounting. Instead, analysts point to his protégé' Mr Jooste. Mr Wiese, it seems, left the running of the company to Mr Jooste, while he himself focused on growing his fortune beyond the confines of South Africa.
Mr Wiese will not be seeking accommodation at a homeless shelter anytime soon, but a lifetime of work and wealth building is now erased in a few short weeks.
This applies equally to other fashionable get-rich schemes such as cryptocurrency. "If you don’t diversify and suffer an unexpected event, it doesn’t matter how many times you have “won” previously, you will lose everything," Mr Peche says. "If regulators demand their banks stop accepting deposits from bitcoin exchanges because of money laundering concerns, bitcoin is worth $0 and I think that’s a real possibility."
This is why even steel-plated blue-chip shares such as tech giant Apple, the largest constituent in the MSCI World Index has a current weighting of only 2.2 per cent (this is the average size of a fund's exposure to Apple.) Another tech titan, Chinese firm Tencent has a MSCI World All Country Index weighting of only 0.64 per cent. "In global equity funds a 5 per cent position would generally be considered a significant position size," Mr Peche noted.
Still, if there is one safe bet out there, investors will always chase investments that will make them quick returns. Already social media is buzzing with amateur traders looking to get into Steinhoff on the gamble that it will somehow recover its losses.
This is a very bad idea, says Wayne McCurrie, a fund manager at Ashburton Investments in Johannesburg.
"Steinhoff will not survive in its current format – If it survives at all. There is a chance that it is worth nothing."
This is not to say investors should not be looking for opportunities to buy - just recognise the difference between a share that has fallen on hard times, and a standalone disaster.
Mr McCurrie says stocks such as mining, oil and gas had a hard run during the commodities super cycle of 2000 to 2014 . Then these sectors took a blow as commodities fell out of favour, which hurt the share price of many producers.
Looking for good value in these conditions does make sense provided the underlying share is basically sound. However, a share with a glaring self-inflicted wound is something else entirely.
"The Steinhoff “hard times” are of their own making and in this instance basically fraud," Mr McCurrie says. "There is something very wrong in the company. It would be very risky to buy Steinhoff now – you may make a good return; but you may also lose all your money."
For shareholders caught up in a black swan event such as Steinhoff – there are really only two options at this point. Either sell and lose 95 per cent or so of your money, but at least free up the remainder to reinvest; or, simply hang on and hope for some recovery.
"Whatever happens – you have lost most of your money and are very, very unlikely to get back the majority of these losses," Mr McCurrie says.
His firm Ashburton will sell off its Steinhoff holdings in tranches, because the chances of it eventually becoming worthless are high. There may well be some recovery as more information becomes available in coming months.
"But you are not going to make back most of your losses, even in the most optimistic scenario," adds Mr McCurrie.