What the market might do..

Those of us that are still breathing after the severe pain we have experienced in the financial markets over the past 15 months might want to sit down for a while and contemplate the future.

The first thing we have to do is get over it! We can't change the past but we should always remember it! We have been here before (1929, 1972, 1979, 2002) but 2008 will go down in history as one of the worst.


Where the share market is going to go from here should be split between short term and longer term expectations. Longer term is easy, it will go UP! Shorter term is very unclear but I will give you my personal view.


My view:

• We have seen the SA All Share Index shoot up 18%, come down 4% and go up 2% again since the beginning of March. I believe that some of these gains will be taken back but what I also believe is that there are more buyers than sellers in the market currently.


• I also believe that these buyers will pile into the market when they sniff any good news and if you aren't in the market already, you will lose out on the first 30% rise.


• I expect the market to stabilise after one of the immanent rallies and fluctuate round the new level for a while. As company earnings are reported for the year ending 31 December 2009, I expect some disappointments and perhaps some selling pressure on the shares.


• The sideways movement will last for a year or two until all the measures that are being put in place to stimulate the world economies kick in. We will then see shares rising again in their usual Bull trend.

If we look at the behaviour of the markets after the previous meltdowns, we see the following:

• US market down 82% (1929-1931), up 90% in 1933.
• US market down 54% (1972-1974), up 48% soon after.
• SA market doubled only twice over a one year period. In 1997 during oil crash and 1933, during great depression.

If we accept that people will still have to exist in future, we can with a great deal of confidence say that they will have to buy services and goods which will ensure that well managed companies will make money which will reflect in their share price.

I can only say this, invest as you would normally invest. Short term money you keep in cash, longer term money you invest in shares. Don't try to pick the bottom of the market, you will not succeed!

You have to dig in!

Warren Buffett, the richest man in the USA through investing over the last 42 years, started with $100 of his own money and is now worth $50 000 000 000.

How did he do it? He sucked up information like a Hoover. He never tried to keep up with "Mr and Mrs Jones". Every time he had to pay for something that got close to not being a necessity he considered the opportunity cost, for example: If he had to pay for a holiday that cost $1 000, for him it felt like paying $10 000 because he knew that if he invested the $1 000, it would grow to $10 000 in a couple of years.

That might sound like somebody that is as tight fisted as Mr Scrooge, but in the current financial turmoil, that is what I would recommend!

Cash is King, but only for now. No matter how much money you have, the first thing you have to do is ensure your monthly income. What do I mean?

I recently consulted a guy that sold his company for R40mil. He depends on the return on the R40mil to cover his cost of living. So let's say he spends R100 000 per month to pay for his normal day to day expenses. That will be R1.2mil per year. He has to ensure that he receives a guaranteed R1.2mil tax free, after cost return on his investments.

So, if he invests the money in the bank and earns interest, he has to invest at least R20mil at an interest rate of 10% and a 40% tax rate to get R1.2mil after tax at the end of the year.

With the remaining R20mil, he has to start investing in shares because in a couple of year's time, cash will still give him 10% return but shares will give him 20%!

Now let's break this example down to something you and I can relate to. If you have R500 000 cash on hand. You spend R15 000 per month to cover your day today expenses (NB: I assume you have no debt because you should pay that off first!). If you can earn 10% interest on the R500 000 and pay tax at 30%, your after tax return will be R35 000 per year. If you earn a salary of R12 000 per month after tax, you short R3 000 per month so you have to use some of your investment income to supplement your salary.

At the end of the day you will have to keep the R500 000 in cash because you can't afford not to receive a guaranteed R3 000 per month from it!

If however you earn R18 000 per month after tax, and you are very sure that you will not lose your job, you have to start investing the R500 000 into shares over the next 6-12 months.

Moral of the story, your number one priority now is to ensure your basic day to day expenses and cut that to the bone. Any excess money you can and should start investing in shares.

And remember that every R1 000 you spend on something stupid now could have given you R10 000 in a couple of years!