Investing 2013

What a fantastic surprise we got in 2012! The JSE gave us 27% including dividends and the S&P close to it. I was hoping for 12% return on shares. The amazing thing I take away from 2012 is how wrong we all are in our expectations.

January 2012 people stormed into my office, begging me to sell all their shares and to buy Gold. The big thing back then was that the EU was going to collapse and that Gold was going to hit $2 500 at the end of 2012!

Gold returned 6%, Inflation was about 5.8%!!! Gold shares like AngloGold returned -25%!!!

So if you sold your JSE share portfolio in Jan 2012 for R1mil and bought AngloGold shares, your LOSS would have been R520 000!!! This is something that will take you a very long time to recover from, if ever.

It is because of these emotionally driven disaster choices that people suffer financially, and the worst thing is that they then blame Shares for their predicament and make the mistake of keeping their longer term funds in Cash because their investment confidence got shattered!

I am convinced that the BIGGEST mistake we can make is to tamper with a well diversified equity portfolio. If you invest in 2 or 3 of our most successful (based on 7-10 years past performance) EQUITY Fund managers like Coronation, Foord or Nedgroup, you need not worry because with ALL the ups and downs, you will receive a good return after 7-10 years!

The Second Biggest mistake we make is to not build a relationship with a qualified licensed IFA (Independent Financial Advisor). I can give you 2 reasons why you should do it:

1. If you are still young and accumulating investments for future retirement, the IFA can work out a plan that will give you precise information on how much you have to save, for how long and in what.This plan can be monitored every year to see how you are doing.
2. At some stage in your life you will have to start drawing money from your investments (retirement). At that stage the IFA will know you well enough, and you will trust him/her enough to split your portfolio between the short term cash and the longer term equity exposure.

Regarding investments for 2013 I list the assets in order of preference:

1. Developed countries Equity.
2. Emerging Market Equity including SA (The Rand might be rather strong so no currency profit).
3. Bonds are expensive and when interest rates turn up they will suffer, so avoid.
4. Listed Property is expensive, as it has been for the last decade and keeps surprising on the upside but I will avoid it.
5. Cash only for short term expenses, it is not an investment.

Good Luck.

The day I lost all my money

I was deep in the Himalayas in Northern Nepal on the 10th day of a 15 day hike. The altitude was just over 4000 meters and the clouds were rolling in so I decided to stop at a small refuge in the mountains. The rooms were very basic and unsecured so I decided to break my 25 year backpacking rule of diversification.

Usually I would split my travel money into 3 sections: The first batch consisting of my daily allowance will go into my shirt pocket with my credit card and passport. The second batch consisting of my hard currency ($, Euro etc) and 50% of my local currency would go into my wallet/money-belt and the last batch would be the other half of my local currency which I would hide in my backpack.

I was keen to do an acclimatisation hike up the mountain to a small monastery before sunset and in my haste decided to put all my money into my wallet and take it with me. I forgot all about it and that evening I joined the 6 or so other guests round the little Yak dung stove in the dimly lit dining room to escape the bitter cold.

When I woke the following morning I did what I always do, I re-packed my backpack to make sure that I had everything. My final check was to sort out my money diversification strategy. After going through all my pockets I realized that my wallet was missing. At first I thought nothing of it and unpacked everything in order to locate it. As I checked every pocket I started to get that cold, clammy uneasy feeling.

I calmly walked down to the place where we sat the previous night and looked under all the tables and chairs. I then went back to my room and, being in full denial, re-checked everything. At that moment the gravity of my situation started to dawn on me. I had 5 days of tough hiking to get off the mountain and back to civilization. Without money to pay for food and shelter I was completely dependent on the charity of other people for my survival.

In a full panic I rushed back down to the lounge in the hope of a miracle, and I encountered one. The Sherpa guide of one of the other guests saw my frantic search and asked if I was looking for my money belt. I actually became dizzy with relieve when I realized that I was going to be okay.

Now you can ask me, what is the moral of the story? And my answer is DIVERSIFICATION!!

If you go through life and start building up a portfolio of assets through diligent and responsible investing, the most unnecessary and gutted feeling you will ever encounter will be the permanent loss of all your savings due to betting everything on one single asset.

And remember! The "safest" place might not be that safe!

Avoid Probate on Offshore Investments

While we are waiting for Greece to exit the EU, we might as well discuss something important regarding your death. Did you know that, if you've got investments Offshore (as a South African), the executor of your estate will have to request an authorized person in the country your investment is registered in, to release the investment to the estate. This is called Probate.

This can take months, if not years to happen and the fees will be sky high. Now imagine the nightmare if you have got 10 different investments in 10 different countries! Property in the UK, shares in the USA, Unit Trusts in Guernsey etc. The easy solution is to invest in products where you can nominate a beneficiary or where you can nominate a joint owner. In such a case probate will be avoided.

One product that can actually do all the probate avoidance tricks as well as consolidate a portfolio consisting of a number of different assets like bank account, shares, unit trusts etc, is the new Old Mutual International Investment Portfolio. This product not only allows the sophisticated investor with the means to invest in a range of assets under one admin roof, but also allows for tax free returns (no Capital Gains Tax, no tax on Dividends or Interest, nothing).

The only drawback is that the minimum investment is $150 000.


As a South African, investing in a country outside the political grasp of the SA government, investing in a market offering products and services not offered in SA, investing in countries where the assets are cheap compared to similar assets in SA, one has no choice but to do it, if not for your own wealth diversification, then for your children and grandchildren's.

Clarity on previous post about Greece

I mentioned the trading range on the Top 40 and the return day traders (speculators) make as 15%. This is the "geared" return due to instruments they use being options,warrants etc. If for example I buy the index using a warrant (TopDWC) which is 9 times geared at the current moment, I will receive a return of 30% if the Top 40 moves from 29 500 points to 30 500 points (3.39% x 9). Usually you don't get the full participation and you average up or down and I halved the return to illustrate the point.

Still very risky when the range is broken!

If Greece should exit the EU

This is not for a long term, monthly investors. This post is aimed at those investors who sit on a pile of cash and want to make a quick buck. Be warned, if your timing is out and you invest into equities before a Greek default or even exit from the EU, you will see a 10% to 15% loss of capital.

Although the markets price shares on a forward looking basis, the actualization of an anticipated event will give journalists something to exaggerate about and blow the event out of all proportion, giving rise to an investor over reaction! Not only does the speculator sell (or buy on good news) regardless of the fundamentals, but the automated institutional trading desks get a "sell" or "buy" trigger and PRESTO!


The uncertainty in the markets, fuelled by the comments financial commentators and journalists have been making over the last 5 months, have kept the JSE Top 40 index in a trading range of  between 29 500 and 30 500 points, that is a 15% difference and for day traders this is heaven because when the TOP 40 gets to 29 500 points, they buy the index, and after a day or two, when it gets back to 30 500, they sell the index and buy a "Put" (sell the market using a warrant or other derivative instrument), and enjoy the ride back down, making 15% on their capital every couple of days.

I know this because I have been doing it myself (with a very small amount of money). The problem is that at some point the cycle will be broken and the market will re-rate out of the trading range, either up or down, and then the day trader (speculator) will lose big.

So, the morale of the story is either invest properly, over the longer term and forget about the short term volatility, or wait for a major correction and hope you don't miss the boat.

JUST remember, we live in dangerous times for making predictions. If you are sure about something, you are probably wrong!

Satrix RESI, time to buy?

The Satrix RESI is an exchange traded fund (ETF), providing the investor in one fell swoop with exposure to 10 of South Africa's biggest Resources companies. Naturally Anglo American, BHP Billiton and Sasol make up 75% of the fund so a person investing directly on the JSE might as well buy those 3 shares instead of the ETF.

The Question that needs answering is:  Do we invest in SA resource companies or not?


I am going to keep this short and to the point.

Pros:

• Satrix Resi is trading at the same price it has traded 5 years ago.
• Satrix Resi pays you 2.23% dividend yield.
• Over the last 12months resources has underperformed the JSE All Share index by 18% and the Financial/Industrial index by 30%!!
• Over the last 5 years Resources has underperformed the All Share by 27% and the Industrials by 65%!!!
• Anglo American is trading on a PE ratio of 8, Billiton on 7.9 and Sasol on 8.3 (cheap!)
• Commodity prices (Copper, Silver, Platinum) have come down substantially.
• World growth expectations are very low (sentiment is negative).

Cons:

• Growth in China is slowing down.
• EU is falling apart, hampering growth which supports commodity prices and demand.
• Most of our mines are unproductive due to high costs (labour, electricity).
• Mines might be nationalized in 10 years time.

So what to do!?

Everything has a price. If something becomes cheap enough, somebody will see value and start buying. I believe we will see some growth returning to the world over the next 5 years and demand for resources improves.

It might take 7 years or 3 years, the point is we have had spectacular returns from Industrial and Financial companies over the last 5 years and nothing from Resource companies. I punted Satrix Divi and Satrix Rafi over the last 3 years and am happy with the results. I will also not sell out of them but what I will do is start buying resources as part of my portfolio for the longer term recovery.

Alternative to buying the ETF or Shares

For the sophisticated investor who wants to participate in the potential upswing in commodities without buying the company with the operational problems, there is always the pure exposure to Platinum, Silver or Gold that can be bought using the SA listed Exchange Traded Notes on the JSE. You then effectively get the exposure to the metal and not the company.

Conclusion: Satrix Resi might become cheaper but for the patient investor with a monthly amount to invest, this asset class might produce lovely, succulent returns over the next decade.

Virtues of leading a simple life

Nepal

Contemplating the meaning of life in the thin air at 4000m above sea level in the high Himalayas of Nepal is not something I do every year, but it surely gives one perspective. 31% of people living in Nepal lives below the national poverty line (23% for South Africa).The Gross National Income per Capita is US$490 (SA is $6 090)

In the 21 days I spent trekking through the rural countryside and up into the mountains I have seen no luxury, not even in Kathmandu (the capital). Food consists mainly of starches like rice, noodles and potatoes with some vegetables in the mix, very little meat. In Kathmandu you get electricity for 3hours in the morning and again in the evening. For 18 hours of the day you have to generate your own or go without.

The roads are nonexistent. Eating and drinking is like playing dice with your health. Proper sanitation is just not in the top half of the daily grind list (I got violently ill twice). Kathmandu is so polluted that most people wear those surgical masks to prevent developing a horrible cough.

And after all the negatives there is one grand positive, the people get along just fine. 

I have spoken to many of the locals and they all tell me that the problem is with the government playing politics all day and not helping with the upliftment of the country's infrastructure and managing the huge potential tourism offers. 

And at the end of the day the thing that kept coming back to my mind was that people are very adaptable. We can forgo our creature comforts if we have to without too much tears. We can adjust our lifestyle (up or down) without too much fuss. But there is one thing that we have to guard against with much vigil, dropping below the minimum level of comfort to the level of suffering.

Many people earn just enough to cover their expenses from month to month and have nothing to save for a rainy day. The best they can do is making sure they keep their job by doing it exceptionally well. For those of us who do have a couple of coins left over at the end of the month, please consider saving it instead of spending it on something useless. 

There is no shame in having very little money, but having some helps in desperate times.

I have great admiration for people living a simple life, taking pride in what they do.