New investment options.

There are 2 things I can tell you that you might not know about when it comes to investment products and that might be to your benefit.

The First one is a product from Discovery Invest and you might have heard the ads on radio. It is all about them giving you up to 26% more than the amount you invest and guaranteeing a 6% growth on that portion.

The cool thing is that if you lost money in the crash last year, you can get it back by investing with them. So these are the basic facts:

• Invest say R1 000 000 in any of the unit trust funds they have on their list.


• Get R260 000 from them invested at 6%. (26% of amount invested)

What do you have to do to deserve this?

• You have to take out a life policy from them. The higher the monthly premium, the bigger the sweetener up to the 26%.

Bottom Line: If you need life cover, consider this opportunity, if not, not the best investment but also not bad. I will provide more details if requested.

The Second product is called the Investec Money Market iSelect fund. If you want to leave your money in cash, this fund will give you on average a 0.25% higher yield than the normal Investec Money Market.

Fund Name and Yield
Cadiz Money Market 9.09
Gryphon Money Market 8.88

Investec B (iSelect)* 8.79
Allan Gray 8.57
Investec Money Market R* 8.49
Metlife 8.43
Old Mutual 8.32
Standard 8.22
Nedbank 8.21
Coronation 8.13
Prudential 8.11
Symmetry Money Market 8.10
RMB 8.09
Absa 7.96
PSG 7.96
Sanlam 7.61
Glacier Money Market 7.11

The higher yield is due to the way the iSelect fund is priced. If you pay tax on interest at a rate of 40%, you can also benefit by buying this fund in a sinking fund wrapper and paying only 30% tax on interest.

6 months down...,6 to go!!

And with hindsight we can see that the JSE All Share has hit the SA Cash investor for a huge 6!

Early in April I sat down and selected the 10 shares on the JSE main board that were trading at the highest discount to their Net Asset Value. In simple terms, I selected shares that were washed down the toilet by me, you and all the other people in the world!

Now you must understand, this required very little intellect. All you have to do is open the list of companies trading on the JSE, go to the column that says NAV, go to the column that says Current price and choose 10 with the biggest difference.

The only spice you have to add is ensuring that the companies are reputable. This is the list I chose:

1. Grindrod
2. Investec
3. Metropolitan
4. Old Mutual
5. Pallinghurst
6. Peregrine
7. PSG
8. Reinet
9. Remgro
10. Stefanutti

And the result is.......19.5% capital return if I sell them today and that is not all!!! They will pay me an annual tax free dividend of 5.325%.

Now if that doesn't get you excited, compare it to a 1.875% taxable return cash would have given you over the same period.

Why do I tell you this? Because it was so damn nice to be able to play the lotto with such good odds!

Moving On...

What now? Well...the odds are slightly less favourable but let's consider the following:

• Shares on the JSE are still trading 29% below their highs in 2008.
• The US shares are way behind in the recovery.
• Interest rates have come down 4.5%.
• World sentiment and company earnings are stabilizing overseas.

These bullets all point toward more growth in share prices from current levels.

But consider the following: A number of companies in South Africa will report very weak earnings during 2009 which will turn sentiment negative every time the press reports it. This will create volatile markets.

Conclusion:

If you still have money to invest for 5 years +, buy the SATRIX RAFI share and forget about it for now, and even better, if you haven't got any international exposure, NOW is a good time to get the exposure with the Rand trading at R8/1$. Buy an international Unit trust like Allan Gray Orbis International Equity Fund of Funds or Sim Global Best Ideas Fund.

Quote From Warren Buffett:

'the argument is made that there are just too many question marks about the near term future; wouldn't it be better to wait until things clear up a bit and maintain cash reserves until current uncertainties are resolved?

Before reaching for that crutch, face up to two very unpleasant facts: the future is never clear and you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values".

Warren Buffet, Forbes interview, 6 August 1979

Please tell me...!!

....you have purchased shares with the cash you don't want to use for the near term! Since my last piece the JSE all share has moved as high as 22 700 and now stands on 22 015. That is a 10% increase in a couple of weeks.

If you are still in cash, you are earning 1% less than when we last touched base!

The other thing to take note of is the Rand exchange against the US$(R10.00 to R8.30). If you want to invest offshore or buy $ you should consider doing so now.

Something that a lot of investors forget about is their offshore investments. A lot of people have large $ cash portfolios offshore earning almost no interest due to the rates coming down. With the international equity markets also 30% cheaper than 18 months ago, you should consider switching the cash into shares if you deem the cash to be a longer term investment!

How to invest in shares without incurring high costs or admin hassles? Try the range of SATRIX investments. You can get all the info on www.Satrix.co.za

Something that you should start thinking about for the future is the possibility of inflation going up due to all the cash made available by international governments. Now, if you stay in cash, you will be slaughtered! if you are invested in shared you will be protected and if you want to have a lower risk investment you could look at an inflation linked bond like the newly launched product from RMB called "INFLATION-X".

Stay in Cash or move to Shares?

If you are not asking yourself this question yet, here are some reasons why you should:

Cash (prime overdraft rate): 15.5% (June 2008) now 13% Down 16%

The Reserve Bank changed the frequency of its meetings to monthly (excl. July) and cut the repo by 100bps in March. A further 100bps cut is expected in April which should give even more relief for the indebted. We would expect another 250bps-300bps in interest cuts which should provide a strong stimulus for equities.

Although cash provide a positive return on investment, the trend is down and you might end up earning only 9.5% on your cash at the end of the year.

SA Equities (JSE All Share): 33 000 (May 2008) now 20 000 Down 39%

Markets remain volatile and a further correction in the market cannot be ruled out. However, the second half of 2009 should be an improvement on the first, with equities expected to re-rate ahead of the economic recovery.

Equities went from its low of 17 770 (Nov 2008) to 20 000 currently. This is an improvement of 12.5% over 5 months which is a 30% annualised return.

Example on possible investment:

If you invest R100 000 in cash for 5 years and you end up earning 9.5% interest on average over the period (before tax), your R100 000 will grow to R157 424. This is an 11.49% annual growth.

If you invest R100 000 in shares for 5 years and you end up earning half the last 5 month average annual return (15%), your R100 000 will grow to R201 136. This is a 20.23% annual growth.

Conclusion

One should look at the markets objectively and intelligently. An investor should understand that investing in cash could be just as risky as investing in shares. Too much cash has an opportunity cost (earning less than one could earn elsewhere), and too much shares could have an absolute cost (losing money).

Stick to an investment philosophy of:

· Hold enough cash to cover expenses for the next 5 years.
· Invest the rest in shares, bonds and listed property.

Elections!

An ex colleague and very good friend of mine wrote the following piece on his website regarding the SA election. I found it uplifting like all of his insights. This has no direct connotation with investments except that a stable country will create investment magic.

By Louis Fourie (The Logic Filter)

“What went through your mind during the election period?”


I actually enjoyed all the private debates, political rhetoric and trumpeting of viewpoints. Not always because of the quality of the content or purity of intent, but because of the privilege to live in a society in which free expression precedes proper elections.

Fifteen years may feel like a long time, but in times like these, I always remind myself of a time not too long ago when our highways were empty most of the day; convenient, but eerie. When state spending was the engine of paltry economic growth, our weapons industry our national pride, Waterkloof Air Force Base busier than Jan Smuts International, and Eskom sitting with 60% overcapacity. A time when we needed two exchange rates to imprison capital, and during which the tax burden of individuals doubled in ten years to finance the organs of separate development and support a nation isolated from free trade.

Those were the times when we had to pay amateur sportsmen to play against us, when we had to put strange labels on our export wines, when some of our SAA aircrafts had to be painted white to secure brief landing rights. When millions have never uttered or heard the names of their future heads of state.

Personally, I always pity the fact that many great people never had the chance of meeting during those years, as making eye contact, shaking hands and having a meal together were segregated events.

Despite all our shortcomings and some fifteen years down the bumpy road of normalisation, I’m really proud of the fact that we are no longer a bankrupt nation, that we’re standing tall even in a time when leading economies stumble. That policy makers had the insight to choose the path of evolutionary economic restoration, instead of latching onto all the popular theories of the early nineties that promoted fast-tracking of reconstruction in some or other unsustainable way.

I’m proud of an unfettered-with Constitution that enshrines the rights of all our people - and the landmark rulings which resulted from it over the last fifteen years. Of a change in Presidents without civil unrest. Of our free press and robust civil society – the ultimate guardians of democracy. Of the distance between state and religion. Of the fact that private fixed investment spending has become one of the dominant drivers of economic growth.

I feel indebted to the majority of South Africans out there who chose reconciliation, participation and respectfulness above indifference or resentment. And I’m really proud of our business acumen, which equips us with the competitive guts to do global business on merit, the organisational savvy to conduct free and fair elections, and the sophisticated edge to fluently assemble the stage for the world’s ultimate sporting event in 2010.

While standing in the queue to cast my vote, I dreamed of a future in which the life expectancy of our nation starts rising again. A future in which all people who want to work are skilled enough to find a job, when parents can be proud of the dwellings in which they raise their children, and children be proud of their parents. I imagined a South Africa that is a no-go area for organised criminals and violent perpetrators, and too transparent for corruption to flourish.

I pictured a country served excellently by its state departments and local authorities, buzzing with small businesses, propelling their young into a life of opportunity off an innovative education system. I pictured forty eight million people boasting a proud one-ness.

While casting my ballot, I renewed an intimate commitment to be a net source of energy to this country. To leave it better off every day, however small the contribution may seem. And to afford dignity, goodwill and respect every step of the way, remaining deeply cognisant of a sacred opportunity to help eliminate our legacy of disregard and neglect.

Regards
Louis
www.thelogicfilter.com

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!