Episode Transcript
The Finance Ghost: Welcome to episode 226 of Magic Markets. And we've had a few shows in a row now where Moe, we've done a pretty decent job I like to think, of covering what's topical in the US market and locally for that matter, and just some of what we're seeing among company news and this whole macroeconomic environment and inflation and all the chaos.
We've had some nice feedback from our listeners and we always welcome that. So please do keep that coming.
This week we are doing something a bit different because we had quite a cool situation where a listener reached out to us and said: hey guys, cool podcast, I might have some interesting insights to share. And here we are. We have Muofhe Kwinda on the podcast and we'll introduce him shortly. We also have Moe, as usual, all the way from Canada. So Moe, hello and welcome.
Mohammed Nalla: Indeed Ghost, I'm just a little nervous because last week we were telling our listeners that if you don't like what we're doing on Magic Markets, you’ve got to tell us. And then Muofhe reached out to us and actually said, hey guys, I'd like to come on the podcast. So I'm hoping Muofhe has some kind words for Magic Markets. But that's not really what we're talking about this week
I think Muofhe, your journey's been so interesting, because you're someone who comes with a finance background. You've been an equity analyst, you've worked the notable kind of “dream job” in finance. We'll get into some of that shortly.
And then you moved, you transitioned from that into a much more entrepreneurial approach. And so there's a lot for us to actually unpack on this week's show because we want to know a bit about that journey. We want to know how you actually get the insights you gleaned from the finance industry to work for you in the more business-orientated, entrepreneurial Industry. And I'm not gonna steal that thunder because we've got a lot to go through. I think it's a slightly different flavour to what we've done recently on Magic Markets. And again, that's fantastic because we are all about learning from different areas out there in the market. Learning from you, from our listeners as well. So Muofhe with that as the background, welcome onto the Magic Markets podcast.
Muofhe Kwinda: Yeah, thanks, gents. Welcome to the listeners and you know, great to be here. I've been following you guys for a while. Spoke to Ghost last week and just mentioned how even in my journey as an equity analyst it was easy to just follow his work and have digestible insights into real life analyst problems that we had. So thanks!
The Finance Ghost: Thank you. Shame. Nothing nice to say about you, Mo. Just me. I got all the love there. Not a single - I like you, Moe.
Mohammed Nalla: We know that you are the brains of the operation, not the looks. That's why we hide you behind a purple ghost. But Muofhe, let's jump in…
The Finance Ghost: Play to our strengths here.
Mohammed Nalla: Play to our strengths, right? I've got a face for radio. That's what someone once told me. I'm not going to say who.
But Muofhe, with that as the background - I mean, it's not something that a lot of people do often, right? A lot of people get into the finance stream. As I say, they kind of see that as the dream job - everyone wants to be in finance. Everyone wants to be an equity analyst or a trader. And you went from that into this transition into what we really like to call the real world.
So maybe tell us a little bit about that. Tell us a bit about your background. Firstly as an equity analyst, what you enjoyed and then what led you to stop doing that and to actually make this move into entrepreneurship. Because both Ghost and I know that move into entrepreneurship is not an easy journey. But let's maybe use that as a starting off point - what was some of your rationale behind the move that you made?
Muofhe Kwinda: Okay, cool. So just some background. My name is more Muofhe Kwinda. I started out as a buy side analyst. I was deep in the numbers and narratives of the JSE. And I agree Moe, it's certainly a job that is particularly a dream job for a lot of people in finance. I'm quite blessed to have found myself in that position. It's a job that if you have a passion for finance, it really helps you unlock that. And this is something I particularly enjoyed about equity analysis is just your ability to continue learning on a daily basis.
I tell my wife, it makes you a better person because you know more, but I guess that's up to debate on what makes you a better person, right?
The Finance Ghost: Sounds like a strongly biased view of a finance professional there, but I'm willing to adopt that view as well. We'll go with it. Moe - we are better people because we read annual reports. This is it. We're going to tell our friends. No, I'm kidding.
But it is true - reading widely is part of the job and it does actually really improve your knowledge of the world around you. It absolutely does. The fact that it's an investment lens is only one part of it.
Muofhe Kwinda: Correct, yeah. And sorry, just to speak to what Moe was asking me earlier. Ultimately it was my passion and I've learned a lot from there, but I found myself in a position where I was trying to build something real, something tangible, something for myself. And I was blessed to be afforded an opportunity in the mining space which allowed me to transition and become my own entrepreneur. It's been a helluva journey, because even now as I'm working in the mining space, I have a business that I'm looking to scale up in the industrial hemp space. And it really - I believe my experience as an analyst, and that's why I said makes you a better person, better investor, has really pushed me or guided me to understand some of the dynamics behind entrepreneurship, taking some of the lessons learned over the years.
The Finance Ghost: No, absolutely. I always think one of the good things you can do in your career is go from writing and reading about working capital to actually living that. Understanding what it's like to have cash or not, understanding what it's like to chase debtors, being on the other end as a supplier and waiting to get paid and how annoying that can be and becoming someone else's working capital pressure. It's just a silly example, but this is the real world and once you get into it, you get to see this stuff.
I think with that in mind and your particular flavour of what you're doing in the real world as part of the Kwinda Investment Group, which is obviously a nice little investment holding company there as part of what you're doing. But once you dig down below that, then what are you busy with at the moment? You've mentioned mining, you've mentioned a bit of industrial hemp there, which is interesting. So what are you busy doing now?
Muofhe Kwinda: So basically, as you mentioned Ghost, Kwinda Investment Group operates as an investment vehicle that houses two businesses in particular. One business is essentially an earth moving machinery leasing business. So think bulldozers, think front-end loaders, think excavators. I own a small fleet of those that I rent out or lease out rather to my clients who export coal and chrome in the Richards Bay port. So, I'm basically trying to help keep the electricity alive around the world, you know, small dents, but I mean - and then on the industrial hemp side, it's quite a technical business, but essentially we're scaling up a business that is aiming to be Africa's first vertically integrated processor of hemp-based materials. It's a very new industry. I find myself having to teach a lot of the relevant stakeholders and funders essentially what the business is and how it works. And I feel a lot of my clients, or prospective clients don't even understand they need it until we explain it to them. So it's a new realm, interesting realm, but obviously not one without its hurdles.
Mohammed Nalla: I understand the yellow goods leasing. I mean that's something that's again, fantastic niche to operate in if you, if you figured out the right kind of areas to operate in. I know nothing about industrial hemp, so maybe I want to just start off there, tell me, what is industrial hemp? Because you know, when we think hemp, everyone's kind of thinking weed and cannabis shops, all of this stuff. But industrial hemp I'm assuming is completely different. So educate us here because I have absolutely no idea. Speak to me as though I'm like a five-year-old. What is industrial hemp? What's the opportunity set there?
The Finance Ghost: Not completely different, Moe, not completely different. You're on the right track there.
Muofhe Kwinda: Yeah. So just to sort of get into it, Industrial hemp is a crop, an agricultural crop. It comes from the same ancestry as cannabis and has largely been classified as cannabis for many years. So in recent years, the South African government - and even broadly speaking - there's been a move towards the decriminalisation of cannabis as well as industrial hemp. And they've actually put in frameworks to separate legally and commercially industrial hemp from cannabis.
So right now, cannabis is a medicinal product. For one, it's regulated by SAHPRA. Higher regulation, higher red tape. Whereas industrial hemp is more of industrial product, as the name says, it's an agricultural product. There's less - it's actually regulated by the Department of Land Reform and Agriculture, essentially, which falls under a completely different mandate.
And just to kind of simply put it, you get two main outputs from hemp. Hemp is like a plant. You get two main outputs. You get hemp fibre, and you get hemp hurd. Think of it like a banana, right? You get the banana peel, which would be the fibre, and you get the actual banana, which is the hurd on the inside.
And they each have different applications. The key thing about hemp is just that sustainability factor and how it can look to, especially in our case as we look to create fibre for textile markets, we want to replace cotton. We found ourselves in a position where we can make it cost competitive. And like I say, Moe, it's hard with a lot of these guys, with a lot of these clients, because you have to teach them that, hey, this is how you can use hemp in your supply chain. And they kind of come out like, oh, I didn't even know that. Okay, well, now that I know, let's use it. But it’s not as simple as that.
Mohammed Nalla: Just staying on that point, you say replace cotton. A lot of supply chains are well developed in the textile industry, into the cotton industry. How does hemp play in that space? I'm assuming it's a fairly new area, so lots of runway. If you're looking to displace cotton as kind of the standard there, that's one question is, how much runway is there really? What percentage of the markets currently using hemp product and what percentage - what's the scope for growth there?
The second one is, let's say a softer question in that - and pardon the pun here, right? - what's the tactile experience around hemp? Because in my head, I'm picturing hemp. It's a fibre, but it's not like soft like cotton. And I know that's a strange question, but I'm sure it's a question you're getting from a lot of the people you're trying to educate along the use of industrial hemp. So what does that look like?
Muofhe Kwinda: Yeah, so hemp was used historically. It's not really a new industry, but because of the changes in regulation, we consider it new. It. And hemp is essentially like fibre. Fibre is hard, right? So the raw hemp fibre comes out hard and that's what speaks to the strength of fibre versus cotton. I don't want to get too technical about it, but hemp has a higher tensile strength than cotton, so it actually makes sense in terms of industrial applications.
Think of conveyor belts - conveyor belts are knitted. Conveyor belts are essentially a thick knitted sheet, a bunch of sheets knitted upon each other to make a thick layer. And depending on the sort of input material that you use there, it can give you varying strength, so hemp is one of those input factors that give you higher strength but more sustainability. So it actually can help us replace cotton.
You guys are good looking guys. You guys have been to places like Zara, H&M where you can buy nice things, right? You walk into the store and find they have a green line, a sustainable line, where they're trying to essentially replace cotton. That input material that makes that line green is what we're looking to provide them.
The Finance Ghost: Moe was once GQ's best dressed man, to my great ongoing joy all these years later. So that's why he's asking.
But maybe just to - I just don't want to lose that first point Moe made, which is just how far along is hemp in actually displacing cotton in some of these applications? Is it still very early stage or is it getting some decent uptake?
Muofhe Kwinda: Yeah, so it's early stage. What we're finding with a lot of our customers essentially is that they are very interested in its adoption. They just really don't know - because no one's processing it in South Africa, and anyone that has hemp in South Africa is currently importing it. So there's a lot of room for growth in South Africa for this domestic hemp space. But also like I say, import substitution is one thing that we really look at. Trying to basically cut the retailers from importing any hemp material. It's actually going as far in terms of the market opportunity that some of the retailers are not looking at hemp as a niche category of clothing, but kind of looking to see if they can replace a baseline level of cotton in the overall production.
The Finance Ghost: So very much localisation of supply chain, which is something we see a lot out of retailers. I mean, that is an interesting trend.
Maybe this is your investment background coming through, hey? Spotting these future trends and trying to get on top of growth industries as opposed to actually getting into sunset industries. I can kind of see the overlap and how that might have been your thinking. The yellow goods as a good cash flow business and then the hemp as the long-term growth play, right?
Muofhe Kwinda: Correct, correct. And you said it perfectly now Ghost, ultimately you want to be in a position or in an industry that's not really taken off yet, but you want to catch that wave up. And I feel like that's where the hemp industry is now. There’s some uncertainty, but I mean you’ve got to ride through the uncertainty to see what comes out at the end, right?
Mohammed Nalla: I think that's fascinating. My question was actually around textiles because that was my frame of thinking. And I think you introducing the whole industrial element to it, for example conveyor belts, that's excellent because again, people that aren't looking at these micro niches are not going to see the opportunity. And that's really the benefit, I guess, of coming with a formal finance background and then being able to leverage that in terms of spotting opportunities.
And as Ghost has said, what you're doing on the one side is you've de-risked on the yellow good stuff, and then you've kind of got the growth opportunities coming through in the hemp space. Very interesting.
Now I want to maybe segue from that into a look at how real world business is very different from financial markets. When we sit here, we look at screens, we look at company reports. Quite often you've got to look at what the company reports are not telling you. They're very sanitized. And what we want to get out of this discussion, certainly on this next question I want to ask you is what were some of those big lessons that you actually learned while operating in that space? The sanitised, the glossy space, as Ghost likes to call it. And how did you then take those and effectively morph those into real-world business lessons? What are some of those real-world business lessons that you've learned?
And we both know, we've been entrepreneurs, Ghost and myself as well, we know that the real business world is a lot harsher than the finance world which is very sanitized, very processed and formalized. What were some of those things that actually stood out for you - that was an absolute pleasure, just delighted you? And then also what's kind of shocked you, what's caught you by surprise? What are some of the hard lessons that you've learned operating a business on your own that you wouldn't have picked up by being a financial analyst and looking at this very sanitised view of the world?
Muofhe Kwinda: Thanks for that, Moe. I think ultimately my experience as a buy side analyst, while it's a big jump from let's say valuation models to real-life business, there are a lot of fundamentals, or let me say a framework that I was able to build as an equity analyst that I brought into business myself. It's allowed me to basically learn a few lessons and also hone in on certain things.
For one example, just a life lesson that I've learned is cash flow is king. I can't repeat it enough. It's often said, in any course finance course that you take or any textbook that you read, but I feel like as an actual entrepreneur you don't realise how much of a king of the castle cash is, as opposed to - and this is in comparison to equity analysis - as opposed to the paper margins that you do, because you find yourself in a situation as an analyst building out models and you're guided by your model essentially, the valuations that basically come out of this model. But until you really realise the impact of cash flow timing, for example, you realise the impact that net working capital in its own has on the business. Profits, paper profits don't mean anything until cash is realised. And I think that also speaks to businesses in the listed space and why businesses that are good cash generators as well as businesses with strong balance sheet command a premium valuation.
The Finance Ghost: Speaking of models, I must thank you for giving me an opportunity here to go and Google Moe's GQ Best Dressed Man - I'm sorry Moe - back in 2014, Moe was the fifth-best, sorry fourth-best dressed man alongside none other than Mmusi Maimane, illustrious company here, Moe, and Murray Legg who is a very smart guy who was a couple of years ahead of me in high school. Anyway, I do encourage our listeners to go and Google that. Sorry Moe.
Mohammed Nalla: That's the wrong kind of models we're talking about, we're talking financial models.
The Finance Ghost: Look, you know, anyone who's worked in finance knows you can make the model say whatever you want. So this is not a financial model, I can't make Moe say whatever I want - definitely not and vice versa, but I can certainly go and appreciate that time in our life, Moe.
But back to serious matters and I think we probably have time for one more question Muofhe - I just want to really get this view from you because I think one of the big differences when you're running money or giving advice to people who are running money or even just putting analysis into them as a sell-side analyst, or buy-side for that matter, is diversification is pretty much a feature of any portfolio. People are looking to spread their money.
But I think when you're an entrepreneur, if you're overly-diversified, you run a real risk of losing focus, not being on top of where your money is, and actually doing worse for diversification as opposed to doing better.
So concentration risk is a feature of being an entrepreneur. And I'm just wondering what your experience has been as someone who's been around people who are very focused on diversification and then going into your own businesses. Yes, you do have two different income streams, which is interesting. But what are your views on risk? Do you think that it's changed a bit going into this private market effectively?
Muofhe Kwinda: Certainly. I think real-world risk is different, definitely from analysis risk that we considered. I mean, I can give you a personal example where I found myself in my yellow machinery business servicing a client and I had a breakdown mid-contract, then obviously that has a range of effects that leads to cash flow timing and these things.
And these are not - this is not something that you consider. No amount of beta or downside volatility can prepare you for that sort of disruption, and I feel like, especially in the entrepreneurship space, conviction is earned, it's not really assumed. And what I mean by that essentially is that like I was alluding to before, as an analyst, you are guided by your model and your conviction is reflected in your financial model. Whereas in real-world analysis, conviction comes from being right on your thesis, but also putting it down practically.
I think it's quite strong and something can be said for entrepreneurs who are able to stress-test their own vision and still stick by it. You feel a bit more detached as an analyst looking at things from a higher level. I think in terms of just risk perception that I've actually gained myself, it's been great because now going into entrepreneurship, some of the skills that I've learned as an equity analyst have definitely given me an edge, I believe, in terms of how I do business, in terms of how I structure businesses, in terms of how I speak to clients and various stakeholders.
Just understanding the jargon, which can be underestimated, depending on who you're speaking to.
The Finance Ghost: Yeah, I think it's a really well-rounded experience. You learn a lot going into business. You learn how to sell, you learn how to manage these difficult situations. So well done on making the leap. And it would be interesting actually to get feedback from our listeners on how many have gone from that investment angle into entrepreneurship and vice versa.
People who are great entrepreneurs often come out the other side and they think of themselves as great investors. And sometimes they are and sometimes they actually learn some really hard lessons about just how different investing is to running your own business. And often I think concentration risk is the differentiator there. So thank you, Muofhe, this has been really interesting. It's been nice to have you on the show.
Muofhe Kwinda: Yeah, for sure. Thanks guys. I appreciate the time and looking forward to more episodes. Not of myself but of everyone else as well. So thank you guys for that.
Mohammed Nalla: Muofhe thank you so much. It's been insightful and quite often these journeys are what we learn from because the learnings you take from being in business, the learnings from the real economy, you can actually play through into your investment journey and vice versa. I don't think it's one way traffic, I don't think it's - I was a financial analyst, this makes me good at being a business person. I think they flow both ways.
Some of the best, most valuable conversations I've had have been with real business owners. And one of the frustrations, I guess when you operate in the market, is that a lot of these entrepreneurs can just generate these massively superior returns in their own businesses. They're generating ROEs in the solid double-digits as a result. They don't really look at financial markets to the same degree. We know, for example, your average equity returns are on 15% per annum - most entrepreneurs can generate that on every turn of capital that they put in their business!
And so that's why it's just so interesting to look at that. And here on Magic Markets we've covered listed markets, we've covered unlisted markets - there's a lot of activity happening in the private credit and the private equity space. And so that is why this discussion with you Muofhe has been really insightful.
I've solidly enjoyed it. I hope our listeners have enjoyed it as well.
Unfortunately, that's all we've got time for this week. That's where we're going to have to leave it. Muofhe, thanks for being on the show. For our regular listeners, go and find us on social media, it's @MagicMarketsPod, @FinanceGhost and @MohammedNalla all on X. Or go and find us on LinkedIn. Pop us a note on there.
We hope you've enjoyed the show. Until next week, same time, same place. Thanks and cheers.
Muofhe Kwinda: Cheers, Ghost. Cheers, Moe.
The Finance Ghost: Ciao.
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