Banish Negativity!

I once saw a movie where a device discovered under the ocean gave people the ability to replicate in real life what they dreamt. They were unaware of this ability and did not know what the device was for. Unfortunately things started going wrong and all sorts of horrible things happened to the crew of this underwater salvage operation, directly as a result of fellow crew members dreaming these horrors into life.

Almost every Holy scripture on earth alludes to the fact that your wishes /prayers/thoughts will become reality and all the motivational and spiritual literature that I have ever read mentioned the fact that your conscious thoughts will determine your future.

Why then do we default to being negative rather than being positive?!

Why do newspapers and magazines sell more copies when there is a war to write about or some disaster with blood, guts and despair than when there is something beautiful and positive going on?

Why do we get consumed by headlines that deal with bad stuff rather than good stuff? Why do we insist on elaborating on sad stories rather than good stories when we know that those things that we talk about most of the time will determine the things that we think about most of the time which will then ultimately become our reality?

What has this got to do with investments you must be screaming by now?

Well, I wish I could say "nothing" and that I am just sick of people being so negative (including myself), but unfortunately 50% or more of the decisions we make in our lives are made based on how we feel, rather than what we know.

So if you hear about the recessions, Greece going under, Railway strikes, FIFA failure, blackouts and generally the end of the word in 2012, you might just become so negative that you sell your house, cash in your share portfolio or liquidate your investment policy to enable you to move into a bunker south of Hot as Hell and stock up on Bully Beef and Beans.

That is why little gems like these I found in the Business Day of 20 May are so precious:

• "Recovery hopes soar as retail sales turn the corner"
• "IMF lifts SA growth forecast to 3%"
• "SA edges up in global competitive index for second year in a row"

All I can say is that everything I really wished for in life became a reality.

We have to understand the power of positive thinking. We have to understand that we were given the ability to choose and participate in the creation of our future. We have to realise that even if something bad happens, you can choose for the negativity to consume you or you can evaluate it, accept it and then move on, taking it as a lesson learned or at least not something personal that life has against you.

My advice is:

• Stop reading sad sensationalism.
• Start reading uplifting stories of achievement.
• Stop watching violent movies.
• Start watching the beauty in people and places around you.
• Stop taking life personally.
• Start accepting that life is a balance between suffering and joy.

And lastly, if everybody can start thinking the share market up our collective consciousness can perhaps give me an early retirement!

It makes my head spin!

Sunday afternoon I settled down behind my computer, sipping a steaming cup of coffee and watching the rain pelting down outside. The Atlantic was chasing enormous waves onto the beach at Bloubergstrand and looked as turbulent as the equity markets during the last couple of days.

My aim for the afternoon was to select a couple of shares to buy the following day on the back of a huge pullback of +/- 11% on the JSE All Share index. The problems in Europe and specifically Greece caused investors to panic and I was hoping to find some companies that offered good value after being treated unfairly by the markets.

After doing some comparisons I ended up with about 15 shares that experienced a pullback of between 7% and 17% over the last 30 days. After a while I chose only 2 which I wanted to buy at the current levels and for the balance I would wait for another 5% pullback before I would venture into buying.

Monday morning saw me sharpening my pencil to write the cheques for the acquisition of the 2 shares only to see them opening about 5% higher than my buying level! I waited for a "dead cat bounce" pullback but that never happened and the market ended 4% higher at the end of the day.

Market movements we experienced over the last 14 days can only make you gasp and feel dizzy. The JSE had 2 record setting trading days in its 123 year history last week alone!

Now this is not a good thing. I believe in the gradual unlocking of value from a share based on fundamental good management, earnings and prospects.

We are seeing something never seen before in the world economies. The 2008 credit crisis caused governments to print billions of $ to save the financial systems as we know it and now The EU and IMF are doing the same to prevent a small bankrupt country(Greece) to die. The next in line are Ireland, Portugal and Italy.

I do understand that during 2008 governments printed money to save companies affected by bad investments. So the problem moved from companies to the Government. Who is going to save the Government when they go bankrupt? In the case of Greece it is the EU and IMF but what if the UK or USA go belly up?

At the end of the day I suppose that the problem started with man made cyber assets and will be solved with cyber assets. In the interim all I can say is that people lost all sense of value for money.

Important for me and you is to always understand the value we get when we pay for something.

What market crash?

The JSE All Share Index took aerial photographs of the 29 000 level as it flew over it! In March 2009 the market was at 18 000 points and now it is at 29 245 point. This is a 62% increase! (an investment in cash gave you about 7.5% taxable).

Lessons to be learnt.
13 months ago when things were at it's darkest and the ashes of Armageddon were raining down on the world, a small group of us were huddled round a boardroom table at the company I work for and we were asking the question " what now?"

We made one very important decision namely: "We are not clever enough to know what the market will do, so stick to the fundamentals of investing".

These fundamentals can be summed up as follows:

• Shares will outperform cash over the longer term (10 years +).
• Cash will provide stability over the shorter term (0-3 years).
• Asset classes will revert to their longer term average valuations.
• Timing the market is more about luck than skill.
• Base your investment decisions on your projected need for expenditure.

Based on these fundamentals we took the following decisions:

• Shares are very cheap compared to their longer term average valuations.
• Interest rates on cash investments will come down to stimulate growth. Bad for cash.
• When the recovery will take place is impossible to predict but when it starts you will not have time to get into shares, you have to be in already.
• Perform cash flows on our client's portfolios and ensure that they have enough cash for any expenditure over the next 3 years and make sure that the balance of their money is invested in shares.

Currently we are in the same situation of uncertainty. We are asking the question "what now?" again.

We go to the presentations of some of the best investment professionals in South Africa on a weekly basis and study all the investment and market analysis available. They have been predicting a market pullback since the JSE All Share was on 26 000 points and that the Rand against the $ should be at R8.70 but things are exactly the opposite.

The moral of the story is that somehow the predictions of people can be very wrong and that the market will continue doing what it did in the past. I therefore invest according to proven investment fundamentals and adjust my portfolio only slightly as things become obviously out of sync.

I can only say the following:

• Don't be greedy, stay in cash where you might need the cash over the next 3 years.
• Don't be fearful, stay in shares where you will not need the cash for the next 10 years.
• Re-calculate your cash flow every year and make adjustments to your investment portfolio where necessary.

There are two things I do indulge in that deviates from the pure investment fundamentals and they are:

• I keep the equivalent of 1 extra years expenses in cash based on my cash flow projection. This provides me with some additional cash to buy shares with should there be a substantial correction in the markets.
• I believe that the Rand will go back to R8.50+ against the US$ and focus on Rand hedge shares/financial instruments.

Don't try to predict what the market will do!! Have both cash and shares in your portfolio. Cash for short term expenditure and Shares for growth.

Remember: You only need to beat Inflation after costs and taxes to move forward in life.

Cutting Costs in 2010

If you still have a job, car and house you made it through the recession! If you only have your job, you will be okay.

A lot of people earn only enough money to cover their expenses. They have nothing to save for the day they can no longer work, not to mention luxuries. Both these issues are problematic for the following reasons:

• If you last longer than your job, you will have nothing to live with if you didn't save during your working life.
• If you can't buy something small but very special every now and then, life becomes gray.

The only way out is to force yourself to save something every month!

I have been researching ways to save money every month without changing anything except my habits. I forced myself to do the following 3 things and these were the results:

1. Never exceed the speed limit on the road. Save 10% on petrol (R150pm)
2. Buy the "no name" brands and "advertised specials" in supermarkets. Save (R100)
3. Switch of lights in the house and overall electricity conscious. Save (R120)

This is a monthly saving of R370.

NOW this might seem like a lot of effort for very little benefit but consider this:

For every R150 you can save per month at 7.5% return (Money Market rate), you will have R26 700 in 10 years from now.

If I invest my R370 per month in an Equity Unit Trust I believe I will get at least 10% growth which will give me an investment of R75 800 in 10 years time!

The point is that by just thinking about saving I can have something I never would have had.

None of us have enough self discipline to save and then not spend it again so to make this work you have to SIGN A DEBIT ORDER!!! Never accumulate the saving in a tin on the fridge or in your savings account at the bank.

Some other things I do:

• Only drink coffee at a place where I can read the morning newspaper for free (save R6.20 per visit)
• Never park where I have to pay (save R7.50 per parking)
• Invest in a Retirement Annuity at end of the tax year (save up to 40% on the investment). If you earn R100 000 taxable income per year you can contribute R15 000 to an R/A and save up to R6 000 in Tax.
• Adjust my short term insurance values every year (save R100pm)
• Take lunch to work instead of buying takeaways (save R20 per lunch)
• I eat what I buy. You will only eat an over ripe banana once. Next time you will buy one less!

What I am going to start doing:

• Grow my own herbs and greens (save R100pm)

There are many more things you can save on without doing anything except changing your behaviour. We live in a world where we waist way too much. You can actually contribute to saving the Planet!!

2010!!

Good Luck for 2010, this will be a defining year as far as the sustainability of the economic recovery goes. One of 3 things can happen:

• Everybody can sit and wait to see what will happen resulting in the market moving sideways.
• The predictions of a double dip recession will materialise and we will see another 40% fall.
• The work done by governments in 2008/2009 to stimulate the economies will work and we will see markets grow at a moderate pace.

If you read the newspapers, experts are divided 50/50 between points 2 and 3, in other words, nobody has a clue!

2009 was easier to predict the direction of the markets. After a 40% drop the next direction would be up, the timing was uncertain. Evidence of this can be seen in the 10 shares I chose in April 2009 and discussed in my June Blog. I chose 10 shares based on their NAV valuation and reputation of the companies, the result was a 42% average return.

For 2010 I would play the game as follows:

• Interest rates would remain stable in SA.
• Only the companies with solid earnings growth will reap the benefit of higher share prices.
• Small marginal companies will suffer.
• The Rand will weaken, if not in 2010, then in 2011!

Based on the points mentioned, I would follow the following investment strategy:

• Stay in cash for any short term requirements (3-4 years worth).
• Invest 80% of your longer term money in bigger, solid companies. Unit Trusts can be used with such a mandate if you don't buy direct shares yourself. SATRIX DIVI and RAFI still offer a well diversified, low cost investment.
• Keep the remaining 20% in cash and wait for dips in the market to invest or invest this amount over a 12 month period using a monthly debit order.
• Make sure you invest half of this amount in international markets to protect yourself against the weakening of the Rand.
• If you have money that you can save on a monthly basis, get the debit order going and forget about it!

At the end of the day you have to remember:

• Investing in cash over the longer term is a dead investment.
• Never be impatient with the return on a share investment. If you can't wait for the return, don't do the investment.
• If you invest in a company that has been going for 20 years, chances are that even if the market drops by 40%, it will bounce back as before.
• Never compare your returns with that of your neighbour. Only focus on getting an after tax and cost return that outperforms Inflation.
• Spend less than you earn!
• Get rid of debt!

Some of us have to work harder for our money than others. Some are lucky and they get a couple of good breaks in life. Some inherit wealth and they have no financial concerns and others had financial peace of mind and lost it. At the end of the day none of this will matter if your mindset is one of making the best with what you have got, contributing to society where you can and taking pride in what you do. We need not eat the best food every day or live in the biggest house or drive the smartest car to experience contentment in life. The secret is in appreciating the small things like watching the sun set over the Atlantic or watching a bird building its nest in the garden.

Nothing is permanent, everything changes. If you can prepare for these changes in any manner, you will stay ahead of the game!

Reality check!

I have recently written a note on current market conditions to clients at the company I work for and decided to publish it on this blog so here goes:

It is important to understand the sensitivities of investments and I would like to highlight some current developments.

Cash and Bonds
Not much needs to be said about these asset classes except to avoid them for longer term investments but treasure them for shorter term liquidity (0-3 years).

Listed Property
The longer the consumer takes to start buying goods and services, the longer it will take for retail and commercial properties to justify the fantastic recovery in the share prices of listed property stocks. We are not experts on this specific asset class and entrust the rating thereof in the hands of fund managers, but it seems as if this asset class carries more risk than some other equity investments.

Listed Equities (Shares)
As we are writing this the JSE All Share Index stands on 26 188 points. This means that it is fair value if compared to the average over the last 10 years. We want to make the following comments about investments in South African Shares:

1) We do not believe that the market should go up another 30% over the next 12 months as it has done over the previous couple of months. If this should happen, fundamental value would no longer exist and anything could happen.
2) On a technical valuation, everything is due for a correction. We do not invest client’s money based on technical valuations but rather on sustainable fundamental valuations. The implication hereof is that longer term the best place to invest is still shares but over the short term nobody can predict the direction of the market.
3)Our investment strategy is still to evaluate the timeline of our client’s investments and invest longer term funds in equities at the current fair value.

Rand vs. Other currencies
We are still of the opinion that the Rand at R7.87/US$ is too strong and that it should be closer to R8.50. To predict the value of the Rand is for us a guessing game and we suffice in saying that it is still a good time to invest in the International market if you haven’t reached your optimal offshore exposure (+/- 30% of longer term investments).

In Closing
We would like to remind our clients that investments are all about buying value for money and then having the patience for it to unlock. We believe that any sell-off in the market should be seen as an opportunity for a longer term investor to buy shares and for clients already in the market to understand that volatility is the nature of the beast (bulls and bears).

Understanding the last 9 months

So we wake up one morning and it is October 1, 2009. We pour ourselves a cup of coffee and contemplate the Share market. Year to date your investment in shares is up 15.81%, your investment in cash is up 6.5% and inflation is at about 6.4%.

Now if you are like me you think about the future and ask yourself "what now?"

This is what flashes through my mind at that moment of asking the question:

Cash is killing me! (return wise that is). I earn 7% pre tax (4.2% after tax) and inflation is at 6.4%. That is okay for short term liquidity but what about the longer term, say 5 years from now.

Do I invest in shares at these levels? This I will only do if the price I pay for them now is still good value. A good way to determine the value of a share is to look at its Price/Earnings ratio (PE).

We have experienced what they call a "crash" in the share markets in 2008. An easy way to see how severe this "crash" was is to look at what happened to the PE ratio of the market and compare it to the long term average.

The 20 year average PE for the JSE All Share index in South Africa is 14. If the current PE ratio is below this average, we can say that the market offers good value and vice versa. In March 2009 the PE stood at 8 (market very cheap), currently it is at 13.5 and rising.

The increase from 8 to 13.5 is reflected in the 30% + rise in the share market from March. The question is, "can this continue?" The answer lies in the historic behaviour of the market.

2 Things happen after a crash. We saw this in 1961, 71, 76, 82, 88, 91, 98 and 2003.

First there is a Re-Rating of the share market. This is not a recovery based on a fundamental improvement in the shares like an increased earnings growth, but rather a reversion to mean. The 20 year PE mean is 14; it stood at 8 so it wants to go back to 14!

This reversion is lightning fast and unannounced. This time it happened at the beginning of March 2009 and is over. If you weren't in the market you lost this re-rating rally.

Secondly you get the fundamental recovery which is mainly driven by the earnings growth of companies. Investors will not continue buying a share from these levels until they are satisfied that the company will grow its earnings from current levels. We saw a 30% year on year growth for 4 years after 2003. The important thing to remember is that the PE ratio of the share does not increase substantially because the earnings growth matches the increase in the share price so the company with a 10 PE might increase its PE to 11 but the share might go up 20%.

After all this I can give you a short answer: The JSE All Share is still good value but the next 20% growth will take much longer than 6 months to materialise and will be driven by the recovery of company earnings rather than re-rating or sentiment.