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How to water-board statistics until they confess

It wasn’t me … with apologies to Shaggy.
Picture: Shutterstock

Dear Patrick,

We have never met but I have been reading your columns in Moneyweb for many years now. Some have been good, even great, while a small number have been poor, like your last one. It was not fact-based as your articles usually are.

I’m not quite sure what you were trying to achieve with the article. It notably lacked the usual rigorous analysis that you tend to apply to your articles. In this case you seem to have water-boarded the statistics until they have confessed to a crime they did not commit.

Normally, I would not have responded, but several of those who commented on your article identified me, incorrectly, as being one of those people – “cough-cough” – who recommended that investors “take all their money and invest it offshore” when the rand was R17 to the US dollar. Your article was well-read and shared among many people.

Read: People with the strongest opinions are most often wrong

That left me in a bit of a quandary: ignore it, and the rest of the Moneyweb community will subconsciously agree with your postulation. You know the old saying that perception is reality. Or reply and try to put the whole issue in context.

What puts your article on a very weak foundation is the statement  “those who advised investors to move all their assets offshore …”.

You fail to mention even one who made such a recommendation.

In today’s Googlised world, you should have been able to find at least one person to attribute this claim of yours to. It certainly wasn’t me as I was happily working on my sun-tanning skills on the beaches of Mauritius for most of December 2015 and January 2016.

I was not on air, didn’t write a column and had very little interaction with human beings during that period of time, when the rand went from R15 to R17 (briefly) and back to R15 in a matter of weeks. The rand only traded once over R17 to the USD, and that was an obscure trade in the Far East which went from R16.94 to R17.82 to R16.31 in two days, 11 and 12 January 2016.

The average rate for January 2016 was closer to R16 than R17 to the USD.

So in the absence of anyone actually making such a recommendation, one has to conclude that your starting premise is false – and that you needed to falsify it in order to prove what you set out to prove in the first place. 

You then compound the falsity by making several gravity-defying leaps of logic, such as “those who advised investors to sell the rand also advised investors to sell RSA bonds.” Again, just one example would be nice. I am not a keen follower of bonds so, again, it wasn’t me …

The third misplaced assumption you make is the untested statement that “investors who took their money offshore probably invested in low equity managed funds.”

Do you have any statistic to back up this statement? My experience has been that investors have a significantly higher risk appetite when it comes to offshore investment, with an exposure of 60-70% equities in most cases.

Again, it wasn’t me …

And finally, you make the conclusion that those people who have strong views are normally wrong, especially about investments. Again – give us some examples.

I could equally give you many examples of strong-minded individuals who have made fortunes for themselves and their investors, such as Jim Rogers, George Soros, Warren Buffett, Ray Dalio, Carl Ichan and others.

Research-based investment advice

Let me provide Moneyweb readers with some context about my recommendation for most South African investors to diversify their investments. I can assure you that it’s not based on some whim or some anti-SA feeling I have, as some people seem to think. It was based on what I would like to think is solid, research-based recommendations.

Until 1997, South African investors were not legally allowed to invest any of their money offshore. Over time that was a severe impediment to global wealth creation.

This situation was improved by the introduction of foreign investment allowances which started at R200 000 in 1997 and gradually increased over the years until the stage we have now where you can take R11 million offshore every year (R10 million investment allowance plus R1 million annual allowance). For all practical purposes, foreign exchange controls have been scrapped, except for the very rich.

South African investors were initially loathe to take some money offshore. First there was the 2000-2002 tech boom/bust which put investors off, which was followed by a golden period for local investments on the JSE, which started in 2001 and continued unabated until the Great Financial Crisis of 2008.

This boom was characterised by rising commodity prices, a strengthening of the rand and several upgrades to our international credit ratings.

It would have been foolish and downright reckless to recommend offshore investments when all the cards were falling in favour of commodity-producing emerging countries such as South Africa.

When the facts change

But when the facts change, you need to change your views and recommendations with them.

By 2010 it was clear to me that the macro-environment was changing for the worse, especially for SA. The one thing my university professors told me many years ago was to be particularly alert to the commodity cycle and, with it, the terms of trade.

By the end of 2010 it became clear to me that the commodity cycle was starting to look downright toppish and heading lower. In several company newsletters – for all to see on our website on www.bwm.co.za—- and on air (SAFM and RSG) – I started recommending offshore investments based on these facts.

As a result of the dramatic downturn in commodities, our terms of trade, and some fiscal own-goals by the ANC-government, we also saw the start of our international downgrades to the current junk status by two of the three large credit ratings agencies.

At the same time, the tech and biotech boom was starting in the US, an investment area we don’t have access to in SA.

I only started writing columns for Moneyweb in 2012, but in one of them I referred to the fact that I liquidated my local investment portfolio, plus my preservation fund, in October 2011 – at a rand exchange rate of R6,84/USD – and moved that offshore.

I felt strongly enough about my own analysis to move 100% of my liquid investment abroad, but would never recommend such a move to anyone else.

I doubt I would today be able to afford my apartment in Mauritius. In rand terms, the price has gone up by 150% over five years … ouch!

To disprove the contention that people who took their money out when the rand was at R17/USD lost a substantial amount of money, herewith a chart showing just three different investment options: the JSE, Orbis Global Equity and the Orbis Japan fund. East or west, you would still be ahead in the relative investment game as opposed to leaving your money in the SA equity market – and that was the worst possible time to buy US dollars.

The truth of the matter is that local investors don’t seem to realise just how poor the local equity market has done over the past three, and soon four, years. The results have been disastrous as local companies shunted billions of rands offshore over this period of time.

Investing offshore when the rand was at R17 to the USD

Source: Highcharts.com

So any ‘analysis’ of my strong recommendations to invest a great deal of your portfolio offshore needs to take 2011 as the starting point, not the statistically convenient January 2016-April 2018 period. Do the same charts starting in December 2015 or February 2016, and you have a totally different picture, one that shows that your offshore investments have massively outperformed your local investments, particularly when you had included the S&P 500 and Japan, as indicated by the chart.

The outperformance has been massively in favour of offshore investments.

Japan not only now beats us on the rugby fields, its stock market returned more than double the returns earned on the JSE over seven years and more.

And finally Patrick, offshore investing is not always about being right or wrong (about the currency/markets/investment returns and so on). It is about diversification. Are you suggesting that local investors should not be diversifying at least a portion of their wealth into other markets?

I repeat, for the record: some investors should not have any money offshore – their risk profile does not allow for this. Others, again, should have 100% offshore if their long-term objective is to emigrate to another country or to retire there. It all depends.

But just to make sure you understand what I am trying to say: “It wasn’t me … ”

Magnus Heystek is investment strategist at Brenthurst Wealth. 

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COMMENTS   19

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The Israeli physicist Eli Goldratt (RIP) used to write books on production management championing the Theory of Constraints. He once said that the worst kind of criticism is that which is true i.e. resonates, cuts to the bone and the recipient comes out guns blazing in his/her own defence. Warren Buffet also noted that diversification is for those who need protection against themselves. Buffet was, of course, speaking from Omaha not Johannesburg and was touting pure Munger and Fischer and not mired in Jacob Zuma’s ooze.

Magnus also comes out with real pearls such as SA gold peaking circa 1979 with 1000 tonnes (simply not true) and selecting starting/ finishing points on commodity graphs to prove how bad they are as investments (rather disingenuous, there Magnus). Only now he admits there is some cyclicity to commodities.

Let’s make one thing clear, Magnus, you are wrong about another thing: that the rest of Moneyweb community will subconsciously agree with Patrick’s postulation. How the heck do you know what I am thinking? Do you read minds? In a courtroom I would say you were assuming facts not in evidence and move to strike.

Be that what it may, my nitpicking filibuster aside, Magnus’ advice is generally rather sound, maybe leaning towards rock solid, which is why I am surprised at this rebuttal. Maybe he is not so sure of himself? When I read Paddy’s piece I immediately thought this is a sideswipe at Magnus with the benefit of 20/20 hindsight but I know whom I agree with.

Overall the ANC have structured the tax regime that it is almost impossible to avoid wealth confiscation. Even minor dwellings like flats are now attracting CGT as the Rand continues its inexorable debasement towards zero. Now with EWC they can simply go an and take it. Note EWC refers to property not only land. Criminals.

The recent Rand appreciation is largely an exogenous event superposed on what is essentially and unchanged economic landscape characterised by low growth, a population explosion, extreme unemployment, maladministration, divestment, high risk, wealth confiscation and a ruling African kleptocracy. Nobody could have predicted the latest appreciation (Ramaphoria) and the even market got it very wrong (future R/$ exchange rates). It wont last. South Africa pays 4 x the interest on Eurobonds compared with Germany. That screams from the rooftops about risk.

The only way left to protect yourself is to externalise your wealth in your own name in a safe jurisdiction *gosh* who said that?. The recent Rand appreciation does not prove Magnus wrong, rather presents a unique cheap buying opportunity, possibly your last. The Forex controls are still there, they are just relaxed, temporarily. Ignore Magnus’ advice but the next exogenous shock may not be in your favour. When the bough breaks the cradle will fall and fall it will.

Written like a lawyer.

I suspect of the two evils, an investment advisor is the lesser.

Perhaps. But personally I thought Richard’s comment was excellent and echoed my own thoughts and reaction while reading this article.

Diversity of opinion, agree to disagree and all that. Its what makes life, and investing, interesting.

This website is a SALES website! Constantly trying to get you to call them and their contributors for business. When they print and article that is WRONG they don’t let you comment. Don’t worry replacement by computer/robot coming.

So Magnus, for just those ~2 months your “invest offshore” didn’t apply?

For the record, I do believe that one should push the 30% limit in RAs and have about 50% in feeder funds or directly overseas (if you’re wealthy enough for that) in discretionary investments.

No one has ever contacted me from Moneyweb.I dont know if it is because my perceived net worth or profile makes me an unattractive proposition, but there you have it.

I for one find their articles to be informative. The only comment of mine which was unpublished, was one in which the topic seriously upset me and I was tempted to use what could be considered course language..

An investor in a company or country is basically buying the human capital of that company of country. It requires capable individuals to turn infrastructure and resources into cash flow. In a very competitive international economy it is only the companies with the best human capital that will survive. In South Africa companies are forced by law to employ individuals on other grounds than skill.

South African companies are forced to invest in history by spending cash on the equalizing of the society. With the policies of BEE, Employment Equity and cadre deployment the state forces the investor spend money on human capital of inferior value. If the human capital did offer value, no law would be needed to force investors into the transaction. The fact that such laws exist, implies that there is little value, and that it is a bad deal for investors.

The financial status, and level of service delivery at SOE’s and municipalities, tells us the true value of the human capital in management positions. This is clearly not the type of deal the investor signed up for. He is conned, it is a scam, a giant ponzi-scheme. There are never-ending promises, but the human capital is never delivered.

So what can this poor scammed investor do? He starts to look offshore, where there are no laws that coerce him into a bad deal.

Indeed. What is the true source of wealth in a country? It’s the people, their creativity, work ethic and intellectual capacity. Often, countries with little to no natural resources become economic giants. E g. Germany,Japan,Hong Kong, Singapore, Taiwan etc. Our people’s productive capacity is pathetic, all government departments and SOE’s are chaotic, our government only excells in two areas, incompetence and corruption. The interest on our debt is in excess of our education budget and education is a bad joke. Einstein said; “We cannot solve problems with the same thinking we used to create them”. So, what is there to make anyone think that our problems can be solved by the coterie of corrupt incompetents that created them? Our government’s idea of raising productivity is to lower the pass rates so that more incompetents can be “educated”!! Then squeeze every cent out of the pockets of the few hard working and successful citizens (the job creators) to cover budget shortfalls and support the majority who are on welfare! Every cent that goes to taxes is a transfer from the productive economy to the unproductive economy. The fact that Chris Hart was right when he said that it is just a matter of time before the Rand hits R60 to the US$ did not prevent him from being fired and firing him won’t change the trajectory.

There is actually solid scientific proof that supports your statement. Chris Hart and the Most Honorable Judge Mabel Jansen had to resign for stating factual truths.

You can get access to the following pages online. “IQ and the Wealth of Nations” by By Richard Lynn, Tatu Vanhanen, M. Stuart

Pages 196 and 219. This should put the situation into perspective. Keep in mind that the US military does not enlist anybody with an IQ below 80 because they are regarded as untrainable and unemployable. It explains the reason why South Africa is “the most unequal society on earth”. I love the country and respect the people. My point is that competent people should be employed in important positions otherwise everybody loses.

Then on the other hand – less-capable(stupid) people cannot make intelligent decisions.

Thanks Magnus – I now know you holiday in Mauritius for an extended period over Christmas – what I would call CHEAP BRAG!

Please don’t think you know what I know or think!

Patrick did not name you – as I see it, you are using your attack on him to advertise your (self perceived) superiority on these matters – I find this in bad taste.

Moneyweb – what is the problem? You sensor my comment – again – just perhaps because I call the author a Brag!!

The “*cough* Magn-u-s *cough*” comment only got 23 likes. That is quite a few, but far from a unanimous vote.

I would never have thought a tongue in cheek joke/comment would provoke someone to write a article, to be honest I actually quite like Magnus, I listen to him most afternoons/evenings on my way home from work on RSG Geldsake, and I generally really like his attitude towards investing, he is never really a optimist or a pessimist more of a realist which is a stand I quite like, there are some painful realities staring us in the face and some of us don’t want to admit them, but MH is not afraid of admitting they are there and they are real, ok now that, everyone knows that I quite like MH my slight criticism has to be mentioned

He says that anybody in today’s world can go and google anything and see that he was in-active in December and January due to sun-bathing in Mauritius, well I actually did a google and found that he was in-fact on RSG Geldsake on 8 January, just a few days before the rand had its worst day, and that when asked where he would put his money (RSG geldsake Vrydag 08 January deel 2) he punted the biostocks, granted he advised tech stocks as well which have done very well, but if someone at any point in January decided to add US biostocks their portfolio they would not have been off to a cracking start, the US biostock index hasn’t done wonders in the last 3 years, and the ZAR has strengthened tremendously over that period from R15.xx/R16.xx to R12.xx/R13.xx

So he was definitively not wrong, but not 100% right, and its because I listen to his advice that I know this, I bought some rand-hedge and non-SA shares, some I bought when the rand was down, some I bought recently with a strong rand, and his advice does ring true, almost all of them are in the green, and its more a thing of timing, so basically if my comment upset Magnus, I actually would like to apologize, from the guy that made the snide comment.

Rather than criticising the messenger, do your own homework, speak with an independent and qualified adviser and make your own decision. Remember that diversification of wealth is the key objective with offshore investments, which over time and managed through a quality and regulated offshore provider, can add real value in terms of your own financial objectives. Typically a 3 – 5 year investment horizon should be ones minimum…

Our regulations restricting offshore severely damaged our savings and by extension our national balance sheet.

Obviously one should diversify globally – probably 80% plus offshore but then it depends what asset. People that fell for London property schemes at 22 on pound definitely are way underwater and will probably take a decade to recover.

If the comments hit a nerve it is probably because the financial services industry tends to bombard the retail investor market with products and horror stories on radio chat programs at the worst times. That is : promote a company or sector after massive momentum, or going offshore when the Runt is in one of its regular bad spikes.

Nobody was screaming go offshore when the Runt was 6 in 2006, they were probably exhausted from screaming go offshore when the runt was 11 three years before.

Anyway, I do not believe in currency investment – rather pick the right assets. For the simplest example compare an investor that stayed in runts in SABMiller on JSE to one that went into pounds by way of Glencore IPO.

And it is in asset allocation that our advisors suck really badly.

After also reading all the comments (so far), GLAD TO SEE everyone at least agrees that DIVERSIFICATION is the key factor for considering offshore investments (and short-term losses or gains on ZAR movements of a secondary importance).

Not sure if/why I got moderated, but in essence:

1. Pick Assets not Currencies! Classic example given that half the brokers were pushing Glencore like candy:
If you took runts into Glencore LSE pounds at its IPO a few years back
vs
If you kept runts in SABMiller JSE at same time.

2. Ignoring currency you are spoilt for choice among many really good global companies with high returns on capital, solid management, great balance sheets, huge defensive positions. If you did consider global companies and still end up with mainly local, fine. Unlikely, but fine.

3. Avoid ALL products and unit trusts other than enormous ETF such as SPY that you can trade direct and have expense ratios under 0.1%. that is not a typo, you can buy the S&P into broker account at 0.08% total expense ratio. Why buy a unit trust or 5y fund that targets S&P when you can buy the S&P and be liquid and not pay an advisor anything?

If you were a normal American investor, living in the U.S. – would you invest most of your money in “a basket of South Africa’s best run companies”?

And if not, why would a sensible South African investor, living in SA do this unless he is forced to?

Capital should be globalised to seek the best risk-adjusted returns.

End of comments.

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