The day I lost all my money

I was deep in the Himalayas in Northern Nepal on the 10th day of a 15 day hike. The altitude was just over 4000 meters and the clouds were rolling in so I decided to stop at a small refuge in the mountains. The rooms were very basic and unsecured so I decided to break my 25 year backpacking rule of diversification.

Usually I would split my travel money into 3 sections: The first batch consisting of my daily allowance will go into my shirt pocket with my credit card and passport. The second batch consisting of my hard currency ($, Euro etc) and 50% of my local currency would go into my wallet/money-belt and the last batch would be the other half of my local currency which I would hide in my backpack.

I was keen to do an acclimatisation hike up the mountain to a small monastery before sunset and in my haste decided to put all my money into my wallet and take it with me. I forgot all about it and that evening I joined the 6 or so other guests round the little Yak dung stove in the dimly lit dining room to escape the bitter cold.

When I woke the following morning I did what I always do, I re-packed my backpack to make sure that I had everything. My final check was to sort out my money diversification strategy. After going through all my pockets I realized that my wallet was missing. At first I thought nothing of it and unpacked everything in order to locate it. As I checked every pocket I started to get that cold, clammy uneasy feeling.

I calmly walked down to the place where we sat the previous night and looked under all the tables and chairs. I then went back to my room and, being in full denial, re-checked everything. At that moment the gravity of my situation started to dawn on me. I had 5 days of tough hiking to get off the mountain and back to civilization. Without money to pay for food and shelter I was completely dependent on the charity of other people for my survival.

In a full panic I rushed back down to the lounge in the hope of a miracle, and I encountered one. The Sherpa guide of one of the other guests saw my frantic search and asked if I was looking for my money belt. I actually became dizzy with relieve when I realized that I was going to be okay.

Now you can ask me, what is the moral of the story? And my answer is DIVERSIFICATION!!

If you go through life and start building up a portfolio of assets through diligent and responsible investing, the most unnecessary and gutted feeling you will ever encounter will be the permanent loss of all your savings due to betting everything on one single asset.

And remember! The "safest" place might not be that safe!

Avoid Probate on Offshore Investments

While we are waiting for Greece to exit the EU, we might as well discuss something important regarding your death. Did you know that, if you've got investments Offshore (as a South African), the executor of your estate will have to request an authorized person in the country your investment is registered in, to release the investment to the estate. This is called Probate.

This can take months, if not years to happen and the fees will be sky high. Now imagine the nightmare if you have got 10 different investments in 10 different countries! Property in the UK, shares in the USA, Unit Trusts in Guernsey etc. The easy solution is to invest in products where you can nominate a beneficiary or where you can nominate a joint owner. In such a case probate will be avoided.

One product that can actually do all the probate avoidance tricks as well as consolidate a portfolio consisting of a number of different assets like bank account, shares, unit trusts etc, is the new Old Mutual International Investment Portfolio. This product not only allows the sophisticated investor with the means to invest in a range of assets under one admin roof, but also allows for tax free returns (no Capital Gains Tax, no tax on Dividends or Interest, nothing).

The only drawback is that the minimum investment is $150 000.


As a South African, investing in a country outside the political grasp of the SA government, investing in a market offering products and services not offered in SA, investing in countries where the assets are cheap compared to similar assets in SA, one has no choice but to do it, if not for your own wealth diversification, then for your children and grandchildren's.

Clarity on previous post about Greece

I mentioned the trading range on the Top 40 and the return day traders (speculators) make as 15%. This is the "geared" return due to instruments they use being options,warrants etc. If for example I buy the index using a warrant (TopDWC) which is 9 times geared at the current moment, I will receive a return of 30% if the Top 40 moves from 29 500 points to 30 500 points (3.39% x 9). Usually you don't get the full participation and you average up or down and I halved the return to illustrate the point.

Still very risky when the range is broken!

If Greece should exit the EU

This is not for a long term, monthly investors. This post is aimed at those investors who sit on a pile of cash and want to make a quick buck. Be warned, if your timing is out and you invest into equities before a Greek default or even exit from the EU, you will see a 10% to 15% loss of capital.

Although the markets price shares on a forward looking basis, the actualization of an anticipated event will give journalists something to exaggerate about and blow the event out of all proportion, giving rise to an investor over reaction! Not only does the speculator sell (or buy on good news) regardless of the fundamentals, but the automated institutional trading desks get a "sell" or "buy" trigger and PRESTO!


The uncertainty in the markets, fuelled by the comments financial commentators and journalists have been making over the last 5 months, have kept the JSE Top 40 index in a trading range of  between 29 500 and 30 500 points, that is a 15% difference and for day traders this is heaven because when the TOP 40 gets to 29 500 points, they buy the index, and after a day or two, when it gets back to 30 500, they sell the index and buy a "Put" (sell the market using a warrant or other derivative instrument), and enjoy the ride back down, making 15% on their capital every couple of days.

I know this because I have been doing it myself (with a very small amount of money). The problem is that at some point the cycle will be broken and the market will re-rate out of the trading range, either up or down, and then the day trader (speculator) will lose big.

So, the morale of the story is either invest properly, over the longer term and forget about the short term volatility, or wait for a major correction and hope you don't miss the boat.

JUST remember, we live in dangerous times for making predictions. If you are sure about something, you are probably wrong!

Satrix RESI, time to buy?

The Satrix RESI is an exchange traded fund (ETF), providing the investor in one fell swoop with exposure to 10 of South Africa's biggest Resources companies. Naturally Anglo American, BHP Billiton and Sasol make up 75% of the fund so a person investing directly on the JSE might as well buy those 3 shares instead of the ETF.

The Question that needs answering is:  Do we invest in SA resource companies or not?


I am going to keep this short and to the point.

Pros:

• Satrix Resi is trading at the same price it has traded 5 years ago.
• Satrix Resi pays you 2.23% dividend yield.
• Over the last 12months resources has underperformed the JSE All Share index by 18% and the Financial/Industrial index by 30%!!
• Over the last 5 years Resources has underperformed the All Share by 27% and the Industrials by 65%!!!
• Anglo American is trading on a PE ratio of 8, Billiton on 7.9 and Sasol on 8.3 (cheap!)
• Commodity prices (Copper, Silver, Platinum) have come down substantially.
• World growth expectations are very low (sentiment is negative).

Cons:

• Growth in China is slowing down.
• EU is falling apart, hampering growth which supports commodity prices and demand.
• Most of our mines are unproductive due to high costs (labour, electricity).
• Mines might be nationalized in 10 years time.

So what to do!?

Everything has a price. If something becomes cheap enough, somebody will see value and start buying. I believe we will see some growth returning to the world over the next 5 years and demand for resources improves.

It might take 7 years or 3 years, the point is we have had spectacular returns from Industrial and Financial companies over the last 5 years and nothing from Resource companies. I punted Satrix Divi and Satrix Rafi over the last 3 years and am happy with the results. I will also not sell out of them but what I will do is start buying resources as part of my portfolio for the longer term recovery.

Alternative to buying the ETF or Shares

For the sophisticated investor who wants to participate in the potential upswing in commodities without buying the company with the operational problems, there is always the pure exposure to Platinum, Silver or Gold that can be bought using the SA listed Exchange Traded Notes on the JSE. You then effectively get the exposure to the metal and not the company.

Conclusion: Satrix Resi might become cheaper but for the patient investor with a monthly amount to invest, this asset class might produce lovely, succulent returns over the next decade.

Virtues of leading a simple life

Nepal

Contemplating the meaning of life in the thin air at 4000m above sea level in the high Himalayas of Nepal is not something I do every year, but it surely gives one perspective. 31% of people living in Nepal lives below the national poverty line (23% for South Africa).The Gross National Income per Capita is US$490 (SA is $6 090)

In the 21 days I spent trekking through the rural countryside and up into the mountains I have seen no luxury, not even in Kathmandu (the capital). Food consists mainly of starches like rice, noodles and potatoes with some vegetables in the mix, very little meat. In Kathmandu you get electricity for 3hours in the morning and again in the evening. For 18 hours of the day you have to generate your own or go without.

The roads are nonexistent. Eating and drinking is like playing dice with your health. Proper sanitation is just not in the top half of the daily grind list (I got violently ill twice). Kathmandu is so polluted that most people wear those surgical masks to prevent developing a horrible cough.

And after all the negatives there is one grand positive, the people get along just fine. 

I have spoken to many of the locals and they all tell me that the problem is with the government playing politics all day and not helping with the upliftment of the country's infrastructure and managing the huge potential tourism offers. 

And at the end of the day the thing that kept coming back to my mind was that people are very adaptable. We can forgo our creature comforts if we have to without too much tears. We can adjust our lifestyle (up or down) without too much fuss. But there is one thing that we have to guard against with much vigil, dropping below the minimum level of comfort to the level of suffering.

Many people earn just enough to cover their expenses from month to month and have nothing to save for a rainy day. The best they can do is making sure they keep their job by doing it exceptionally well. For those of us who do have a couple of coins left over at the end of the month, please consider saving it instead of spending it on something useless. 

There is no shame in having very little money, but having some helps in desperate times.

I have great admiration for people living a simple life, taking pride in what they do.

Comments on Satrix

I have received plenty of comments regarding Satrix posts. You can have a look at my 10 Jan 2012 post for some of these comments. In short my reply to any questions regarding investing in Satrix at the moment would be:

• Be selective, I prefer Satrix Divi and Satrix Resi at the moment.
• If you have a lump sum to invest, phase it in over the next 6 months.
• I prefer active unit trust fund managers at the moment like Coronation Top 20 or Foord Equity Fund.
• Always remember the 5 year + time frame for these investments.

In general I prefer increasing my direct offshore exposure at the moment especially if you do not have any. This will serve as an investment diversification strategy, protecting you and your children from any unforeseen changes in South Africa.

Retirement Annuities: The sting in the tail!

There are many risks to consider when investing, one of them is the Political risk of the country you invest in. South African investors saw the risk of investing in South Africa as VERY high in 1994 and some of them built bunkers and stocked up on canned food and bottled water.

Well, those who predicted SA to crash and burn were SO WRONG!

R10 000 invested in South African shares for the last 10years gave you back R33 000. The same amount invested in Foreign shares returned only R10 900! But Political Risk is very real and one only needs to look at a country like Zimbabwe to realise how devastating it can be. The Arab Spring also highlighted the risk of investing in a specific country or region.

What has this got to do with investing in a Retirement Annuity then!?

Consider the following. A Retirement Annuity (R/A), like other Pension instruments, are governed by the laws of the country which are drafted by the government in power. The benefit of investing in a R/A is that you can deduct some of your contributions from your taxable income and in the 2012 Budget the Minister declared that no tax on Dividends or Capital Gains will be paid in R/A's while at the same time INCREASED those two taxes for investments in shares outside of a R/A and other Pension instruments!

In short what he did was to make it very favourable for you as a SA citizen to increase your savings towards an R/A, and decrease your savings towards "discretionary" instruments.

The downside of the R/A investment is that when you retire out of the R/A from age 55 onwards, you may only withdraw 1/3 of the capital and with the remaining 2/3 you have to buy another Pension (regulated by the Government off course).

So if you believe in Political risk, you will start thinking about what will happen to your R/A investment if the Government decides in 15 years to CHANGE the legislation and force the manager of your funds in the R/A to buy Government Bonds at some ridiculous valuation? Or, changes the tax law and tax you at a rate of 50% on all the withdrawals you make from your Pension?

Remember, money will flow from the rich to the poor. In a country where only the "rich" have R/A's, what will a government do to maintain the popular vote?

At the end we might have another decade of fabulous returns in South Africa. Just make sure you can decide how you want to access and invest your savings when things change. I would still make use of the great benefits an R/A offers, but carry on investing in discretionary funds as well!

Retirement: The race between death and bankruptcy

For a lot of people this can be a reality! What can you do to avoid it? Well, at least know your enemy, INFLATION and CASH investments.

Ponder this:
A car costing R10 000 in 1999 costs R150 000 today and will cost R360 000 in 2030. At a rate of 6% inflation the cost of something today will double in 12 years.

Now if you want to fight inflation with cash investments, you are bringing a knife to a gunfight. Consider the following:
You are retired and earn 5.5% interest on your cash investment of R10 000. You spend R10000 per year on groceries and the inflation rate is 6%. After one year you withdraw your investment in cash which is worth R10 550 (10 000 + 5.5%) and hurry to the Mall to buy your annual groceries. You buy exactly what you buy every year and at the till the cashier tells you that you have to pay R10 600 (10 000 + 6% inflation). You are R50 short!

So what do you do? You eat less or cheaper food! You have to put something back because the bank will not lend you money and nobody else gives a dam. Just imagine the effect if inflation is 8% and SARS deduct some tax on your interest earned!

What can you do?
Your only friend in this fight is inflation beating returns. Your investments have to generate more than inflation eats away. Your best weapons are assets like equities and listed property and the power of compounding (earning returns on returns).

Once you retire and stop generating an income, it is very difficult to take the risk of investing large amounts of your savings in risky equity investments. The catch is that you have to take that risk because cash returns will not beat inflation and you might run out of money before you die!

The best solution is to START SAVING EARLY into quality shares where even if the shares fall for a couple of years, you can just wait for it to bounce back and provide you with a return over TIME which will beat inflation like it has been doing for the past 100 years!

You have to take the calculated risk of investing in a diverse number of quality shares while you work via Unit Trusts, Retirement Annuities or any other means, to help you build up a reserve for those later years when you have to put most of your money into cash.

If you are still in your income producing years (between 20 and 70), you have to invest in shares and other inflation beating investments. Between 20 and 50, go 100% SHARES etc and forget about it! Let your Fund Manager handle it.

You eat an Elephant one mouth full at a time, living costs after retirement (voluntary or forced), is one Mother of an Elephant. Start eating now.

And to really drive it home, consider earning 30% less on your Pension or Salary like the Greeks! If you lived on credit and cash reserves, depending on future Salary increases or a nice Pension, stop dreaming!

If you are going to be responsible and save some money every month, at least give your investments a chance and choose equities and not cash.

Investing in 2012

Okay, the 2011 results are in. The winner was a South African investing in the USA using the Rand. Why? because the Rand depreciated against the US$ by 18% and the Dow Jones grew 8.4% in $ terms. So, if you listened to everybody when they said you must take your Rands when it was trading at R6.80 to the US$ and invest it in Multi-National companies trading on single digit PE's in the US, you would have made close to 26% in Rand terms. Compare that to the 2.6% you got on the South African JSE.

Results

• SA Equities 2.6%
• SA Bonds 8.8%
• SA listed property 9%
• SA Cash 5.8%
• Dow Jones 8.4% in $
• MSCI World -5% in $
• MSCI Emerging markets -18% in $
• China -18% in $
• Europe -17% in $

We can see that nothing went well except the devaluation of Emerging Market currencies against the Dollar. Looking at 2012 I see a lot of volatility in equity markets and if we are lucky, mid single digit returns but I think that Europe will drag the bulls back every time they start buying shares.

The way to invest in 2012:

• Equities: phase money into the market over 6 month period if you have a lump sum or via a monthly debit order if you have a monthly surplus for the longer term.
• Cash: Interest rates will remain low but don't commit short term cash for volatile equity investments.
• Listed Property: Had a good run but I don't see value.
• Bonds: Rising interest rates will impact bonds negatively so do not over commit.
• Rand: We saw the Rand go from R6.70 to R8.90. Where it will go from here I don't know but it should stay at around R8 for the time being.
• International: Always important to diversify over the world. If you are a SA citizen, invest some money in the US and Europe. If you are a US citizen, invest some money in SA and other Emerging Markets.

I will be happy if 2012 is a boring year with moderate, yet consistent growth in equity returns. If we can consolidate worldwide to create a solid and trusted platform for better growth in 2013 I will be happy. I do however get a feeling that we are going to see another up and down year.

To end: Never stop investing. Trust your fund manager to select solid companies. Don't be greedy. Don't be fearful. Be patient, don't buy and sell too often. Never become emotional about your investment. Never retire, keep on earning something!

Good luck for 2012!