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!

The cost of Comfort+ living

I was running along the beach the other day, minding my own business when I was distracted by the "for sale" signs along the road. The houses on offer where huge and mostly ugly but they did have a fantastic view of Table Bay and the mountain.

My mind was taken to the current economic uncertainties in the world and the words I read that morning in a research article that stated "Don't focus on the things you can't change. Rather focus on the things you can".

Now, I have always been fussy about where I lived, but never about what I drove. During my early years as a Financial Planner at Citadel, I noticed that most people spent a huge amount of money on their cars and I came to realise how fortunate I was to not have such a weakness, because it was pretty difficult to accommodate their passion and still get them to retire before they turned 80! 

I understand that everybody has something they splurge on, unfortunately cars and houses are two of the biggest ticket items. So, if you can be disciplined enough NOT to spend that extra couple of thousand on the top of the range product and adhere to the "focus on something you can change" principle, it will help a tremendous amount.

I call this the "Comfort +" effect.

Let's take an example. Your child finishes school and studies something for 4 years. The child is now 22 and starts working. The child earns enough to rent a small shared flat and to finance a small car. At age 30 the child saved enough money to buy a car without financial assistance and here the child is faced with the first choice. Buy a new car for R80 000 or a second hand one for R60 000? The child chooses the R60 000 option, thus saving R20 000. Time goes by and at age 35 the child faces the same choice. The child also has a choice to buy a flat for R1mil or one for R800 000. Once again the child chooses wisely and saves R20 000 on the car and R200 000 on the house.

The option of new or used car repeats itself every 5 years and at age 60 the child contemplates retirement at age 65. What was the financial impact of the wise choices made during the last 40 years? The answer is R3 000 000 if the cumulative saving of R340 000 grew at 8.5%. If we take inflation at 6%, the real saving was R580 000. This is R580 000 saved because the Comfort + effect was eliminated.

At this stage of my jog I am tired and sweating and the cool sea breeze isn't as comforting as before. I flop down onto a sofa and take a long drink from my water bottle, both of which would have been equally as nice in one of those big, ugly houses for sale on the beach, but not more so!

What I am trying to say is, spend money on what makes you happy in life, but remember that the bigger, faster, brighter, sweeter, smarter, louder product will not necessarily make your life more comfortable, but will definitely cost you more than it offers!

I feel better now.......

September was a bad month. The ride up and down the market was fun for a trader but unsettling for an investor. I do feel better than I felt at the end of August about the EU. The reason I can provide is the fact that I sense the market was waiting for someone to accept responsibility for the mess they have created. The difference between 2008 and 2011 is the fact that in 2008 a smelly skeleton was discovered as a complete surprise, where as in 2011 everybody knows about the skeleton but want somebody to actually open the cupboard and claim it!

Make no mistake, when the final medicine gets dished out, or the actual double dip recession is formally announced, the market will crack the whip with a knee-jerk 10% drop. But, I believe the bottom of this negative spiral is very close and investors are buying value on the dips.

For longer term investors, do not sell good shares, start buying good shares on dips if you have cash or trust your Unit Trust Fund Manager to do it for you.

Always remember, never use short term funds for equity investments, or hold long term money in cash!

The EU, Hurricane or Tropical Storm?

From the last week of July 2011, right after the USA debt ceiling fiasco, the JSE and Dow Jones lost 12% for the month to date. In investment terms it is called a "correction" on the markets. The exact same thing happened in the beginning of April 2010 so this is not new or alarming. We also predicted a lot of volatility in the markets after the recovery in 2009.

Something that should actually frighten you is a repeat of the 2008 crash, where the JSE dropped 46% and the Dow 54%. In financial terms that was a Hurricane, what we saw this month was only a strong wind with lots of rain.

The EU (European Union) on the other hand is turning out to be either a Tropical Storm at best, or a potential Hurricane. The USA has problems but I get this feeling that they will manage to fix the problems over time. The EU on the other hand has me spooked. The sad thing is that even though our beloved country (SA) is in a good position, we will be dragged down with the Tsunami of negative sentiment if Europe should go into a recession.

What should we do as a South African investor?

I think we should consider the following:

• After the August 2011 correction, only 6 of the top 40 shares are on the consensus selling list of Stockbrokers.
• The current Dividend Yield of the top 40 SA shares is 3.19% (note that a 4% DY is equal to a 6.15% interest rate after 35% tax).
• The Forward PE of the top 40 shares is 12 times (below the 15 year average).
• The loss incurred on an investment in 4 Balanced Unit Trust Funds was only 1.65% over the last 2 months.
• It is very apparent that investors are fearful if we look at the flight to Gold and the willingness of investor to buy US 10 year bonds at 2.2%.
• When others fear you should be bold, that is what Warren Buffett tells us.

On the negative consider this:

• If the EU does go into a recession, the market can drop another 10% in a day!
• If you are exposed to small companies or in a geared investment, you might experience a permanent loss of capital.
• Even without a recession, the world GDP growth might be very slow and equity returns much lower than in the previous decade.

Some more thoughts:

• If you are invested in shares, make sure you can wait for10 years before you have to sell.
• If you are thinking of investing in shares, make sure you can wait 10 years before you need to sell.
• If you have a lump sum to invest in shares, consider phasing in the investment over 12 months. Take note however that although we are at the same level on the JSE as we were in April 2010, phasing in or lump sum investments at the beginning of 2010 would not have made a difference.
• Always remember to diversify, especially into international companies.
• Cash must only be held for the short term (3-4 years). If you wait for the crash or for the pullback after a run, you will never invest!

Last thoughts:

• I believe that the outcome of the problems in the EU is very unclear and therefore you have to invest with caution. You have to select companies that are well established, with lots of cash and whose income streams are well diversified. They have to pay you a good DIVIDEND!
• It seems as if governments have no more solutions for the problems but somehow, they always end up finding one. The thing that hurts your investment the most is the negative sentiment created by uncertainties. Never act on sentiment, always act on fundamentals.

I have to admit that I have used the recent correction in the market to sell some of the companies in my portfolio which I believe offer less value than others based on size, valuation, prospects as well as overweight percentage of the total. I increased my cash in this way and will re-balance into a more diversified portfolio in the months to come. I will not hold onto the cash for too long!

USA is not a responsible parent!

Do you want to tell me that the politicians in the US could not have handled their problems in a more responsible manner!? Was it necessary to parade their power hungry ambitions in public, demonstrating to the whole world how stupid they are when given their 15 minutes of fame in front of the camera and the world stage?

And after receiving the reprimand from a dysfunctional rating agency (S&P) in the form of a downgrade to AA+, after the same agency was unable to see the debt crisis of 2008, Obama stands up and says that the US will always be AAA!

So now the ignorant world investor is losing his/her money due to the market reaction. US is 16% down and SA 14%. I believe that the US policy makers created this new round of panic selling.

For those who have extra cash to invest, this is a mega sale in Blue Chip companies. Look at this:

• BHP Billiton: trading at same price as in July 2007
• Anglo American: trading at same price as in April 2006
• FirstRand: trading at same price as in December 2005
• Standard Bank: trading at same price as in December 2006
• Old Mutual: Trading at same price as in July 2002

The combined average PE of these 5 companies is 9.86 with a dividend yield of 3.33%. The forward PE is 8.17.

In a newsletter written at the end of May 2011 I said that an equity investor needs to understand that volatility will play a big part in his/her investment. I also wrote that trying to time the market will end in tears and that no matter what happens with the price of a good quality company, you will receive the dividend and the company will continue making profits and eventually you will make a good return on investment.

Please, do not invest in Equities if you haven't got the guts to hold on during the bad periods, and do not invest in cash if you have a longer term time horizon!!

So, unfortunately as an SA investor all the profits for the last 20 months have been erased from your portfolio. Fortunately you will still receive your dividends because most of the companies have strong Balance Sheets and loads of Cash!

I received a question regarding Satrix

Unfortunately this question was from anonymous and I have to provide my answer in public rather than in person. Perhaps it is a good thing because the debate about Index tracking funds like Satrix vs Actively managed unit trust funds is in the spotlight again.

When the market as a whole is down, the market as a whole will bounce backup as we saw after the crash of 2008. It is more cost effective to be in an index tracking fund like Satrix in those circumstances.

Currently the JSE is close to its level prior to the 2008 crash and not very cheap so an Active Fund Manager's fund like Coronation Top 20 can perform better than the Satrix fund because even though the market as a whole re-rated upwards, some quality shares might have stayed behind. A good fund manager will be able to identify such shares and outperform the Index.

If you have decided to go for Satrix anyway, I would rather invest in the "Smart" Satrix funds like Satrix Divi and Satrix Rafi because the companies in the portfolio are not included purely on size.

Hope this helps!

Gold!

Yes, gold is over $1 600. Do I have to buy now? Well, consider this:

• Most novice investors buy an investment when it has reached its peak, and sell when it is at its bottom. This is a better way of losing money than gambling!
• Gold is not even back to the inflation adjusted level it was at the all time high in 1980. So, if you bought at the top in 1980, you are still making a loss on your investment on an inflation adjusted basis after 31 years.

For the last 51 years gold was an investment where if you bought it at the right time, you made mega bucks, but if you bought it at the wrong time, you lost mega bucks. You also do not get any interest or dividends when buying gold.

So, if you feel lucky, buy gold when you get the urge. Just remember that you might have to wait for 30years to get your money back, without any return!

If you buy a portfolio of shares on the other hand, there are also times where you have to wait for 10 years to get capital growth on an inflation adjusted basis, but at least you receive some dividends while you wait.

In most instances, you can determine the fundamental value of a company. Gold is driven more by sentiment than anything else. After everything is said, understand that gold has had a fantastic run over the last 5 years on the back of financial uncertainties in the world. If you buy now, make sure you can wait for a very long time before you have to sell again.

Lastly, if you decide to go ahead and buy gold, rather buy the ETF on the JSE called Newgold, rather than coins or gold mining company shares.

Happy gambling!