Making money, 2 ways to do it!

Three if you combine the two. The first one is to sweat your time, the other is to sweat your assets. All of us know the first one. This is when you get up in the morning and get paid for your time. This method can also be called the "active" way. Then there is the other one. I prefer the other one because with this one you do not have to get up in the morning. It is also called the "passive" way.

Usually one has to start with the one where you get up in the mornings for a couple of years and get paid for every hour you spend at the office. Eventually you will have enough money to buy a car, a house and some personal goods. Hopefully after doing this for a decade or two you will have no more debt and your house, car and other stuff will be all yours.

This is the time where you can start "sweating" your assets. What I mean by this is that you make money by using your "productive" assets. There are more than one way to do this and the most popular way is to use your house as collateral to borrow money from the bank. You can then use the money to buy some other property and rent it out, As long as your rental income after costs and taxes is more than the interest you pay the bank, you have created a "passive" income which you would not have had if you just lived in your house.

Another way is also becoming very popular and that is to rent out a portion of your existing house. This will usually entail converting an extra garage into a flatlet or adding a small kitchen and bathroom to a large bedroom/lounge area.

Let's say for argument sake that I have saved up R300 000. So in the bank I will get about 5% interest on this saving. If I have a single story house and decide to build an additional room onto my double garage, the new area will be 36m2. Now 36m2 is a very comfortable size for a studio apartment and building costs in SA is currently around R7 000 per m2. So the cost of construction will be R252 000.

Now it is important that you live in an area where there is a need for cheap accommodation. In my area a self-contained studio will go for R2 500pm at least. So your rental income will be       R30 000 per year. If you convert that to a percentage return on investment you get to 11.90% which is more than double what you would have earned if you kept your cash in the bank!

If you swing the above example around where you move into the flatlet and rent out the rest of your house, the return on investment can increase a lot because for the same cost you can earn a lot more. If you can get R10 000pm for your house, the return on the R252 000 investment would be 46.62%. The drawback is that you move from a large space into a small space. Perhaps the way to go is to ask R5000pm but rent the house as a "shared" space where you can still access the garden, kitchen etc but you have you own private studio. The return on investment is then 23.8%.

Play around with the numbers. Just make sure that you do not overcapitalize. If you have to sell your house one day you still need to be in the market range for similar properties.

Confusion

There is an inherent need in people to know what is going to happen. We love the suspense but struggle to get on with life until we know the ending. And then, when we know, we exhale and start breathing again.

So, in 2016 we have many such uncertainties. Think about the Brexit vote, Trump or Hillary, Inflation or deflation in Europe, Zuma or Pravin in South Africa, Downgrade or Downgrade in South Africa :-), rate hike in USA (when)?

And what do we do when we have these uncertainties? We pull back into our safe zone and protect what we have got. I see more people doing alterations to their homes than going out and buying a new one, I see more banks refusing to lend to consumers and more investors refusing to lend to the State Owned Enterprises (SOE's).

The good news is that we will get certainty about most of these worries soon. But what will happen then? I can only speculate but consider this:

Trump/Hillary: I can still not comprehend that the best this mighty, innovative USA can do is come up with these two people to lead them. To think that one of them will be such a powerful person in a few months. Anyway, if Trump becomes president it will cause an upset in international relations and infighting in the US. I think everything in the world will take a step back like when the Brexit got the vote.

Inflation/Deflation: This will have a stronger and longer impact on world markets. If we see deflation in the USA and Europe, shares will drop and central banks will have no more ammunition to stimulate the economies. It might be a long downwards spiral.

Zuma/Pravin: We all know that if Pravin goes, so will the Rand, our credit rating and lots of international and local investors.

SA downgrade: I think this is unavoidable but miracles do happen.

USA rate hike: The USA is recovering nicely and a normalization of the interest rate is expected. This will support the strong Dollar and it will become more difficult for the Rand to strengthen.

For a South African investor it will be difficult to see the Rand strengthen much more, it will be important to invest in shares selectively and remained focused on the longer term. There are some shares I like at current levels because they are international income earners with fantastic management teams like Brait and Steinhoff. Although the property sector in SA is very crowded and consumers are under pressure, I still see Attacq as undervalued in the longer term. The only difficulty with Attacq is that they do not pay a dividend so you get nothing while you wait for them to re-rate.

To be transparent, I own all the shares mentioned above.

Investing in international, multinational shares is paramount. If you are an investor and do not own Apple, Google (Alphabet), Facebook or Amazon shares, it is like not investing in Leonardo da Vinci in the early 1500's. Unfortunately they are rather expensive now but if something should happen and they become cheaper, I would recommend you buy some.

Politics, Currencies and Commodities

In my newsletter to clients at the beginning of the year I stated two uncertainties for the 2016 investment year:

• As a South African investor, do I convert my Rand into Dollar at R15.55/$ and invest offshore?
• Do I start buying the heavily oversold commodity shares like Anglo American, Amplats, Impala, Harmony, Kumba etc?

My feeling was that the Rand will find it difficult to strengthen significantly given the political situation in SA as well as the risk of a downgrade of SA's debt to junk status. I also thought that as an investor into the commodity shares, the return on these shares, 5 years from now should be good.

On the first point, the Rand collapsed to R17/$ early in the year but currently (in mid April) it sits at R14.50. So after a 9% weakening, it strengthened almost 7% to the US$ year to date.

On the second point, resources shares shot up faster than you could invest in them. Anglos 104%, Amplats 118%, Impala 87%, Harmony 246%, Kumba 152% and so it goes on.

For me the sort of clarity gained by these two outcomes can be described as significant. Why? because of the following:

The Rand

If you read my posts going back a couple of years, you will see that my sentiment towards South Africa turned more and more negative. I saw the corruption and arrogance of one man, Zuma, impacting the credibility of South Africa as a nation and knew that the cancer would spread until it was cut out. The problem was that the removal of this cancer could only be done by politicians with the support of the media. If the Nene and Nkandla debacles were not taken up by the DA, EFF and Media, it would have disappeared. The "one man one vote" would not have changed things.

The currency of a country is an accurate indicator (over the short term), of international sentiment towards the country. If you make a mistake, your currency will weaken, and if you do something right, your currency will strengthen. This will only happen over the very short term. Over the longer term, economic fundamentals will determine the level of the currency.

So to me, the Rand strength indicates that Zuma is losing power and that we will soon have a new leader in SA. So even if we get a credit downgrade or economic blowout and the Rand goes back to R17/$, it will not be political. (You can clearly see that I can accept free market movements but not political interference).

Commodities

The significance of the bounce in commodity shares is that we have reached the turning point. A free fall is never nice because of the uncertainty as to where it will stop. Uncertainty is the worst scenario for any investor. So as I have said before, if you are not in the market, you will never get in. How difficult is it to invest in a company that has jumped 104% in 2 months!

Conclusion

For me the great take away from the issues regarding the Rand and the Resources, is that I feel some sense of control returning. I know that there will always be corruption in politics and we will play this game again. I also know that there will be another collapse in some asset class but for now I feel more positive.

Don't panic!

The reason why I am saying this is because it is too late! The dark clouds have been building in the world markets for a while now. We have written about it and we have read the predictions. So now that the panic is setting in, the frail rationality of human beings is collapsing in a heap.

If you were prudent in your investment planning, you will be in a position where you can sit on the sidelines because you will have enough cash to see you though this bad patch. If you are an investor of new money, you are buying assets at 15% less than a few months ago!

For the most part I think it is more negative sentiment than anything else. The main culprit of this negative sentiment is the continuing slowing down of the Chinese economy. This causes the further drop in commodity prices and lowering of oil prices.

This might continue for a while and I am sure that marginal companies and even economies will be wiped out. It is like a bush fire that burns hot and moves fast. It takes away all the grass but leaves the trees. As a South African investor, your offshore investments are protecting you against the worst because of the depreciation of the Rand (beautiful to see diversification paying off).

Just don't panic and sell your equity investments. Markets will bounce back one day and if you sell out now and put your money in cash, I can almost guarantee you that you will not get back into the market in time for the bounce.