Time is running out for South Africa

The clouds were hanging low over the skyscrapers in Manhattan as I ran to the United Nations building to cast my vote in South Africa's first democratic election. It was a joyous day for me and millions of people around the word and the honeymoon has begun.

In January 1995 I started working for a small wealth management company, specializing in retirement funds and we made a killing. Why? Because the inevitable rounds of re-distribution of wealth and opportunities have begun. Previously advantaged employees of any state or semi-state institution, or even where the business conducted by a private enterprise involved the government, were retrenched and re-employed on a contract basis for double their previous salary.

People with years of experience and post graduate degrees were replaced by people with no experience and a limited education. This "re-balancing" was inevitable because of the ridiculous situation created by the apartheid regime.

The one question I always asked my clients was "but is your replacement sustainable?" To me it seemed like the new government was building a house of cards. They were recklessly using the state funds and flood of new international financial aid to implement a socialist structure, making good on promises made to friends of the "struggle" and greasing the palms of strategic partners.

My clients always told me that what the government was doing amounted to "window dressing". They were working twice as hard under contract because they had to do the work as well as train the new "employee". What concerned me more was that my clients were all top management. They had to run departments which would have had a devastating effect on the economy, public services and productivity if they were to collapse.

Now, in 2014, 20 years after the joyous day, I can't open a newspaper, listen to the radio or watch the television without being told that another high ranking government official or even minister has been suspended for falsifying his or her CV. That somebody in a management position or a senior member of the ANC executive does not have the doctorate they claim to have. The courts have proven that people running our country have been involved in corruption. The arms deal worth Billions of Rands enriched many people close to or in the government. I shudder to think how much money our leaders are going to pocket for the latest Nuclear Power deal with Russia for Trillions of Rands! Our Public Protector seems to only have a knife in a gunfight.

So it is sad to see the end of the honeymoon. It is clear that just window-dressing will only get you 20 years of joy. Where the political will is not present, the champagne will run out and your guests will return to their own homes, not thinking twice about the mess they have left behind for the host to clean up.

The bottom line is that it is fine to have a president or minister who can't do the job, as long as they listen to their advisers who can! Things can turn around for SA, we just need the political will!

The tide is turning for shares.

When the USA started their quantitative easing program, shares throughout the word started rising at a dizzying pace. To give you an idea, look at the following figures:

• S&P500 index in the USA went up 40% in $ terms over the last 20 months
• All Share index in South Africa went up 32% in Rand terms over the last 20 months

And this is only over the last 20 months! Before that we had a good 2009, 2010 and 2012. In short we have been enjoying a 5 year party as far as equity returns go and it was all funded by low interest rates.

Now the tide is turning and interest rates in the USA will start going up in the not too distant future and many emerging economies like South Africa have already started increasing interest rates. If you have ever wondered what the trigger will be for the party to come to an end, then this is it!

For the USA the effect will be that share prices will come under pressure as free money find its way to interest bearing products or even just to reduce debt and in South Africa the effect will be even worse with international investors selling their SA shares, converting the Rands into US$ to take back home which will put further pressure on the Rand to weaken.

So what do we do?

Firstly, if you haven't invested in equities over the last 5 years then sorry, you have missed the boat. Secondly, investing in passive equity products like index trackers might be the wrong thing to do. In a world where the trend is down, you have to apply your mind and analyze the individual companies to determine the value at the current price.

For South African investors the benefit of investing in companies that earn the majority of its income abroad will be the Rand hedge quality of the share (as the Rand depreciates).

To sum up:

• The party is over, you will have to work for your return.
• Cash is king over short term but poison over 5 years plus term. You can not time the market!
• Don't be shy to invest offshore or in CHEAP Rand hedge shares if you are a South African investor.
• If you have participated in the stellar returns of equities over the lat 5 years and your short term funds have been depleted, re-balance your portfolio by taking some profits and building up your cash buffer.

I can see a carefully selected equity portfolio outperforming cash and beating inflation over the next 5 years but what about the next 2 years? I don't know but DON'T BE GREEDY!!

How did the "lessons in buying shares" work out?

Investing is something that takes time and patience. As I mentioned in my "lessons" posts it helps to look at what the established Fund Managers buy and to then evaluate the shares on a set of Fundamental criteria. If I look at my share "BUY" recommendations the following happened since the posts:

• March 4th:     Capitec went from R183 to R226. This is a 23% increase
• Feb 14th:       Standard Bank went from R115 to R139. This is a 21% increase

So both these buy recommendations worked very well and in a very short period of time. This is not the norm and we could easily see them drop back but that is not the point. The POINT is that these are solid companies that were offering VALUE at the point of evaluation.

Would I buy them at current levels? No, I would wait for them to drop back. There are probably other shares that offer BETTER value at the current moment.

Would I SELL them and take profit? No, this is an investment and these companies are still as good as they were when we bought them, they are just more expensive for now.

Let's look at the company I mentioned as my least favorite in my Feb14th post:

• Naspers went from R1138 to R1033. That is a 9% drop.

But Naspers did go up to close to R1300 before it came down! It is not a bad company, just very expensive.

In one of my recent posts I also wrote about my feelings towards an Index tracker like SATRIX DIVI. I mentioned that I prefer to select the companies I invest in based on some Fundamental evaluation and not to be stuck in a company just because it has some other characteristic i.e. size or historic dividend.

Out of all the SATRIX funds the one with some fundamental evaluation criteria is SATRIX RAFI and I would rather be in it than the others. This does not mean that I believe the whole SATRIX range offer bad value, I only prefer to be more selective in the companies I invest in. We can see DIVI bounce nicely from the under performance over the last 2 years but the risk adjusted return over time pushes me to an actively managed investment.

Basics of buying shares: Lesson 4

In lesson 3 I looked at the share choices shared by more than one Fund Manager. This lesson I look at some of the shares in the top 10 but not shared by more than 1 Fund manager. Just to re-cap why I go about selecting shares using this process:

• The top 10 pics of reputable fund managers give fundamental validity to the selected shares
• I can start building a WATCH LIST. It gives you a target, nothing more.
• The watch list will focus your attention towards any news about the company, building a cumulative knowledge database about the shares.

I recently listened to an interview with Warren Buffett and his 2 lieutenants. They read average 500 pages per week relating to news on companies on their watch list. I usually read the Business Day newspaper cover to cover, scanning for the names of the companies on my watch list. One of the things that I wait for is news of company directors share dealings in their own company which they have to make public, and more importantly the news of the shares that reputable fund managers buy.

For example, yesterday Coronation increased their stake in Tygerbrands. Tygerbrands has fallen from R300 to R243 in a very short period but offer a good Divi and fair P/E. They will battle with the rising interest rate cycle but it is a solid company. I have been buying the share for a while and 5 years from now it will trade at a higher price, plus it will continue paying me the dividend. With Coronation also buying more at this level provide a lot of confidence.

Some of the other shares in the fund managers top 10 as mentioned in the beginning are:

• Steinhoff, Capitec, Exxaro, Remgro, Impala, Adcorp, Clover, Omnia, Glencore, Aspen, Reinet, Mondi, Nedbank, Intu

You will see that a lot of them have performed very well over the last year and are expensive to buy now. I have chosen 5 of these shares and performed the same analysis as I did the first time:

	Price	F P/E	D/Y	1 yr	30day
Steinhoff	52	13	1.56%	98%	12%
Capitec	183	11	3.33%	-2%	-3%
Exxaro	146	10	2.65%	-14%	-3%
Remgro	184	14	1.87%	9%	0%
Impala	115	23	0.52%	-13%	-1%
	52 High	52 Low	Median	Fall
Steinhoff	52	23	37	-28%
Capitec	222	179	201	10%
Exxaro	179	137	158	8%
Remgro	211	171	191	4%
Impala	139	86	113	-2%

Looking at this list I will buy Capitec now and wait for a small drop in Exxaro and Remgro before I buy them. Capitec is trading at 10% below its median price, offer a 3.33% dividend and is negative on a 1jr and 30 day price.

There are many ways to skin a cat but this process will get you involved in looking and listening at certain shares. Never rush into buying a share. Watch it for a while until you are comfortable and then commit for the longer term. Even if the price falls the day after you have bought it, just forget about it. I usually buy 1/2 the amount of the share I identified as offering value immediately and then if it falls a bit more, I will buy the other 1/2.

Basics of buying shares: Lesson 3

Just to recap on what we have done in lesson one and two: We looked at the top unit trust fund managers top 10 share holdings on their equity fund fact sheets and listed those shares that appear on two or more of the fact sheets. The result was a list of 11 shares that two or more of the fund managers rate as being companies with all the fundamentals in place to make them solid investments over the longer term.

So now I know that after the fund managers have spent millions of Rands on analyzing these companies, they consider them to be sound. What I do not know is at what price the managers bought these shares and if they still offer VALUE at the current price!

Now there are many ways to determine the current value of a company and this is why there are always willing Buyers (they believe the share is Undervalued), and willing Sellers (they believe the share is Overvalued).

As I indicated in Lesson 2, there are a couple of things I look at to help me decide, and looking at the list again, I will explain my thought process:

	Price	F P/E	D/Y	1 yr	30day
Anglo American	264	15	2.89%	-3.60%	18.00%
Sasol	530	10	3.57%	36.70%	2.80%
BHP	322	13	3.49%	6.10%	0.50%
SAB	491	20	2.00%	9.80%	-8.00%
BAT	527	16	3.62%	16.30%	-5.10%
Standard	115	11	4.11%	-2.60%	-9.40%
Richemont	106	51	1.04%	46.70%	4.70%
Old Mutual	32	12	3.29%	21.60%	-4.90%
Investec	75	14	3.72%	10.60%	-1.10%
MTN	199	15	4.35%	13.30%	-5.40%
Naspers	1138	45	0.34%	87.80%	3.40%
	52 High	52 Low	Median	Fall
Anglo American	281	185	233	-13%
Sasol	558	369	464	-14%
BHP	338	247	293	-10%
SAB	550	430	490	0%
BAT	571	454	513	-3%
Standard	130	105	118	2%
Richemont	108	67	88	-21%
Old Mutual	35	27	31	-4%
Investec	78	60	69	-8%
MTN	217	158	188	-6%
Naspers	1178	556	867	-31%

The one important thing to remember is that the price you pay today will play a big part in the success of your investment over time. It will always be the best thing to pay less for the share than you think is fair value, but even paying a fair price for a good company is better than paying a great good price for a fair company.

If you follow the investment style of Warren Buffett (and you should!!!), you will see that he always pay more for a share that he likes than the price it trades at the day before he buys it. We call it "paying a premium" for the share. He does this because he believes the share is worth more than it trades at and he wants to make sure it is attractive for the seller to sell.

Returning to our list, based on the current Price of the share and the historic price range, I would put STANDARD BANK as my top choice and NASPERS as my last.

Why Standard Bank: At R115 per share it has a Forward Price Earnings ratio of 11 times, fair for a banking share. It means that you pay today for the next 11 years' worth of current earnings. So if the company can generate the same earnings it is generating today, your investment will be "paid off" in 11 years' time. The next important thing is that the company will pay me a dividend of 4.11% while I wait for the price to go up. In a money market I might get 5% so I almost get what I would get if I invested the money in the bank, PLUS I get the upside potential of the price going up! The price of the share has also gone down over the last year and last 30 days so it got "cheaper". Lastly it is almost halfway between its lowest and highest price over the last 52 weeks. If it was closer to its highest, the fall in price if something should go wrong over the short term would have been worse.

The big NEGATIVE is that banking shares do not like interest rate hikes. We saw the first of a potential wave of interest rate hikes recently and that might keep Standard Bank at the current levels or even lower. For the longer term though, I see good potential. The other silent advantage is that Standard Bank is strong in Africa and that is the future growth market.

Why not Naspers: Because every good point for Standard Bank is a weak point for Naspers. The thing that we have to admit is that Naspers is an exceptional company and will remain so. It is also known as a Growth company, thus the lower dividend and higher PE. So comparing Standard Bank with Naspers is NOT fair! But, just based of which company offer better value going forward I stand by Standard Bank.

The other companies can be analyzed in the same way, you will see that Richemont is also very expensive and Anglo better value.

The next very important thing to master, and that is where TIME and EXPERIENCE play a huge role, is to get a FEEL for where a share should trade. To get this experience you have to get interested! The best way to get and stay interested is to put your money on the table and to buy a share or two! You might lose some money in the short term but we all have to pay school fees! So that is why you start small.

Next time I will look at some of the other shares on the top ten list (but not shared by more than one fund manager) and also discuss some of the other determining factors when creating a "Watch List" for future purchases.

Beware of Satrix Divi!!

I haven't been paying attention to the performance of Satrix Divi. It has cost me a lot of money! Satrix is supposed to be an investment without maintenance. You buy it and lock it away for a long time. Not so! There has always been this debate between active fund managers and passive index trackers. Satrix is a passive index tracker to some extent except the Satrix Rafi where there is an active share selection involved.

Satrix divi is supposed to be 30 companies, selected from the JSE Top 40 and Mid-Cap indices, that are expected to pay the best normal dividends over the forthcoming year. Here are the returns of 3 of the Satrix funds:

Fund	5 years	3 years	2 years	1 year	6 months
Satrix Divi	87%	21%	6%	-7%	0%
Satrix 40	120%	38%	37%	13%	11%
Satrix Rafi	142%	41%	34%	12%	12%

Why did Satrix Divi underperform? Just look at some of the shares in this portfolio:
Abil
Barclays Africa
JD Group
Kumba
Lewis
Foshini
Truworths
Spar
Woolworths
Nampak

They all pay, or used to pay great dividends but what happened to their share price?!!!!

The BIG elephant in the room is Abil. This share is down 56% from it's high some months ago and it used to pay a good dividend, not so now! It constitutes 6.24% of the portfolio, the BIGGEST holding!

So yes......., the interest rates are on their way up which will be bad for all retailers like Spar, Woolies, Foshini etc. Divi has an 23% exposure to this sector (BAD). Resources underperformed over the last 3 years and offer value, Divi only has a 7% exposure (BAD). Divi is supposed to give great dividends. The latest figures show that the Dividend yield on Satrix Divi is 3,57%, compared to Satrix 40 with 2.13% and Satrix Rafi with 2.32% (Rafi do not pay dividends out but roll it up in the fund).

A lot of the companies in Satrix Divi have fallen so much that they might outperform over the next 3 years but I lost my faith in index trackers because there is very little intelligence involved. I am switching to Rafi and some Resources companies. Retailers and Banks will be on my list of purchases later in the interest rate HIKING cycle.

p.s. Now if Abil was to suspend its dividend payouts, Satrix Rafi will be forced to sell out of Abil so IF there is a bounce in the Abil share price and a recovery takes place, Satrix Divi would have taken the 56% haircut and miss the recovery!

Basics of buying shares : Lesson 2

In lesson one I told you that the best place to start looking for shares to buy was the Fund Fact sheets of the best Unit Trust Portfolio Managers in the country. On these Fact Sheets they publish the top 10 shares held in the fund.

Why is this a good place to start? Because there are two very important things to consider before buying a share:

1. Is the company going to be profitable going forward?
2. Is it a good price to pay for the company?

To answer the first question you need to understand the company very well. You have to talk to management to understand where they want to take the company. You have to analyze the financial statements to understand the future potential and the risks involved. To do this you have to spend a lot of time and you have to be bright.

Portfolio managers employ the best analysts to do this job. They spend their days dissecting the companies and then make recommendations to the manager of the fund. The fund manager, with years of experience make the final decision based on his/her fund mandate.

Why would I try to do all of this work with my limited time and skill, if I can just go and get the results from their fact sheets?! So if there is consensus between the top fund managers as to which companies will be profitable going forward, the chances of if happening is pretty good!

The second question is not as easy to answer. By the time you see the shares on the fact sheets, the share price might have gone up already, making it less of a good investment. The price you pay will determine the success of your investment.

To summarize, finding a name of a share on a fact sheet makes it a good share, but not necessarily at the right price. 

Below is a summary of the top 11 shares from my top 5 rated fund managers. Each share appears on the list of at least 2 of the fund managers.

	Price	F P/E	D/Y	1 yr	30day
Anglo American	264	15	2.89%	-3.60%	18.00%
Sasol	530	10	3.57%	36.70%	2.80%
BHP	322	13	3.49%	6.10%	0.50%
SAB	491	20	2.00%	9.80%	-8.00%
BAT	527	16	3.62%	16.30%	-5.10%
Standard	115	11	4.11%	-2.60%	-9.40%
Richemont	106	51	1.04%	46.70%	4.70%
Old Mutual	32	12	3.29%	21.60%	-4.90%
Investec	75	14	3.72%	10.60%	-1.10%
MTN	199	15	4.35%	13.30%	-5.40%
Naspers	1138	45	0.34%	87.80%	3.40%
	52 High	52 Low	Median	Fall
Anglo American	281	185	233	-13%
Sasol	558	369	464	-14%
BHP	338	247	293	-10%
SAB	550	430	490	0%
BAT	571	454	513	-3%
Standard	130	105	118	2%
Richemont	108	67	88	-21%
Old Mutual	35	27	31	-4%
Investec	78	60	69	-8%
MTN	217	158	188	-6%
Naspers	1178	556	867	-31%

From this list I can make the following assumptions:

• They are all quality companies
• They will still be around 10 years from now

The next question is "do they still offer value at the current price?"

To answer this question I look at the information provided next to each one of the shares. I got the information from my online trading platform. Most of the stockbrokers with online trading facilities like Nedbank Online Trading, PSG online, Sanlam I-Trade etc. will provide you with this basic info.

Look at the list. Do you also have these shares on your list? Which of these shares do you think offer value? Would you buy them now? That is what you have to do before I get to the Third lesson. To explain the different columns:

• Price: The current trading price
• F P/E: the forward Price Earnings ratio
• D/Y: Dividend Yield
• 1yr: the price movement over the last 12 months
• 30 days: the price movement over the last 30 days
• 52 High: the highest price over the last 52 weeks
• 52 Low: the lowest price over the last 52 weeks
• Median: the price between the high and the low
• Fall: the percentage the current price can fall to get to the median price

I will tell you which of these shares I would buy today and why in Lesson 3.

Basics of buying shares: lesson 1

How do I begin????? This is a question that gets asked a lot and should be music to the ears of a parent of a young child. I will tell you how I began building my share portfolio and you can use it and improve on it.

The most important thing is to remember that it is like taking up any new challenge. It takes time and commitment! You will feel clumsy at first but the learning curve is steep and pretty soon you will have the basics figured out. Here are the steps:

• Select 20 shares you want to watch. You DO NOT buy them yet!
• Research the chosen shares. (will take weeks if not months)
• Open an account with an Online Stockbroker.
• Run a dummy portfolio for a month.
• Start buying the shares you are sure offer good value.

Things to remember

• Some of your shares will go down before they go up.
• Never get emotional about gains or losses.
• Invest in shares that you want to be a part owner of for the longer term, do not speculate.
• Do not buy and sell often, do not try and time the market. When you believe that a solid company can be bought at a good price, buy it and never sell it. (for now)
• Do not borrow money to invest in shares. This is a long term commitment and you should NEVER be forced to sell.
• Building your own share portfolio keeps you updated with world finance in general. It becomes a hobby that will not only be something you can carry on doing till the day you die, but also something that can become your main source of income and something you can do anywhere in the world with almost no capital outlay!

Think back on something that you wanted to take up 20 years ago but never did. If you did, how good at it would you have been by now?! I always wanted to play guitar and took it up twice but never persevered. If I did I would have been able to play by now and would have been able to do something that would have added a lot of value to my life. 

...........a lot of "would haves"!!!!!

I will take you through the process over the coming weeks and months but to get the show on the road the following homework:

• Download the Equity fund fact sheets of the top 5 unit trust fund managers (called "mutual funds" in the USA) from their web pages and create a spreadsheet of their top 10 share holdings that they have to list on the fact sheet. In SA the fund managers that I rate are Allan Gray, Foord, Coronation, PSG and Prudential.
• Make sure it is the Equity Fund and not the balanced, income, bond, flex etc. (Prudential calls the one I like the Dividend Maximiser Fund).
• Also ensure it is the local equity fund. If you live in SA then go to the "LOCAL EQUITY" section.

This is the first step, go for it!!

Thinking about passive income

When I was in 5th grade I had my first introduction to the stock market. One of my talented friends entered a competition where he had to write a song for the provincial Rugby team and won. He got some money and then did something nobody understood, he bought shares!

During his articles at an accounting firm he met a wealthy businessman and they started a property development company with a market cap of R11,5 billion Rand as I write this.

Why do I share this flashback with you? Because when he won the money, every single one of his friends (aged 10) could only think of the pocket knife he promised to buy every one of us. The way we think about life determines how we participate in it.

There are 4 main ways to participate in the income generating part of life and they are:

• Go work for somebody else (employee)
• Start your own business (employer)
• Buy an established business (owner)
• Buy a share in a business (investor)

Without making things to complex I want to put forward that the last one is the best one. The following reasons can be given:

• I do not have to work according to the rules of my boss.
• I do not have to worry about getting fired.
• I do not have to worry about the problems of my employees.
• I do not have to be at work 24/7 to ensure that nobody destroys my business.
• All my money is not tied up in one venture.
• I make money as I sleep.
• I can do my work from anywhere in the world.
• I do not have to worry about the politics of the country my business is in.
• I do not have to go through a lengthy process of selling my business or looking for another job.

The list goes on and on and on........

The beauty of buying a share in a business (buying a share on the stock market), is that you make friends with two very powerful forces:

• Passive income (dividends)
• Power of compounding growth

On top of that you can choose the best managers in the world in businesses that have proven themselves over decades!

I bought my first share when I was about 16 years old. It was a stock tip from a friend and it was a Gold Mining company called Jules. I made what seemed like a mountain of money on that share but for some reason the investment bug didn't bite. It was only when my love affair with working 12 hour days for somebody else faded that I "discovered" investing again.

What I am getting at is that anybody can start investing. You do not need to make it your job but it will provide you with the ability to generate the best returns with the money that you do generate from doing whatever you love doing and at the end of the day it can start taking care of you.

There are two very important things to remember when it comes to investing:

• The younger you start the better. The biggest secret to investing is to understand what you are investing in. It takes a long time to understand a company. To know what a good price is to buy it at and when it should be sold. You have to read all the news and listen to all the comments about it. You have to watch it for a long time before you commit to it.
• Only buy a share in a company if it is a company that you would like to be a part owner of for a long time. Sometimes it takes a long time for value to unlock. Speculating is fun but nothing else.

When I was growing up the mantra was "get educated so you can at least fall back on something, even if you don't like it". Unfortunately this is the truth, and for the majority of people the way it will be. The lucky ones are the ones that have a passion for something and can make a living from doing it. 

I say that if you can develop an interest in investing, you will never have to worry about living too long. Your passive income and the knowledge of investing in the right shares will provide you with financial independence or at least provide a healthy supplement to your normal income.

Beware!!!! Once you leave home and start buying those nice lifestyle assets, you might just never get out of the debt trap and having spare cash to invest becomes impossible! You have to get going with your pocket money while you still live at home! Like Warren Buffett said, very early on he realized that for every Dollar he spent, he could have made ten if he invested it!

TIP: get your children to read his books or read it to them. It is easy and very entertaining.

What to do with new money?

It was a spectacular 2013 and I need not say more on that. The year before, 2012 was even better so I cannot see SA equities delivering the same results in 2014 although some counters (Resources) had a dismal 2013 and could bounce if China starts growing again. The USA had a 27% (in $) return, also following a good 2012 and with the Rand depreciating 23% in 2013 SA investors smiled all the way to the bank.

Bonds will remain under pressure with interest rates going up rather than down so to answer the question of where to invest additional funds in 2014, I will say 50% in International Equities and 50% in SA equities for longer term.

Reason: Even if we get a very low 2014 for equities, I prefer not to time the market and regarding the international side, Developed markets still offer better value for money than SA and even though the Rand should strengthen against the $, there are no guarantees.

If my gut feeling is right, any Equity investment made by a SA investor will not perform much better than cash in 2014 but I have been wrong too many times to trust my own short term predictions and would rather just follow sound investment principals and get the money into the right place for the longer term growth prospects.

Some very unpredictable things can happen in 2014:

• The reaction to election results in South Africa
• The striking miners in South Africa
• The US tapering and debt ceiling handling
• China growth?
• Europe back into recession?

The good thing is that the US seems to be recovering well. That should at least stabilise many of the potential surprises.