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The investor conundrum

Views from a millennial with a love of finance.

Remember Nenegate and the trauma of having three finance ministers in the space of five days, and how this resulted in an 11% decline in the rand against the dollar? Since then South Africans have been inundated with market commentary predicting the capitulation of the rand and the South African economy.

This is not without merit. In the past five years, South Africans have faced significant headwinds. Unemployment has risen to scary levels, the economy has fallen into a technical recession twice in the past three years, we have experienced one of the worst droughts in decades, and to top that off we recently experienced the emerging market crash, which saw a 20% devaluation of the rand against the dollar.

At the height of Nenegate I witnessed seasoned market commentators advising investors to take money abroad at an eye-watering exchange rate of R16.79 to the dollar (at its peak). Any person who did so should have been aware of the old adage ‘Be fearful when others are greedy and be greedy when others are fearful’.

The advice that us normal folk were getting from the smartest minds in the room was contrary to that. They were essentially advising us to sell while everyone was panicking. Perhaps they too were panicking. I guess it’s easy to fall prey to the panic when you imagine your hard-earned money vanishing into thin air. But as Warren Buffett says: “You don’t have to be a rocket scientist, investing is not a game where the person with a 160 IQ beats the person with an IQ of 12.”

The smart minds

This brings me to the current and pervasive narrative from the smartest money managers in the world. Hedge fund heavyweights Ray Dalio (who runs one of the largest hedge funds in the world, Bridgewater Associates) and Stanley Druckenmiller (who, along with George Soros, is known as the guy who broke the Bank of England after shorting the British pound in 1992), have come out saying that the American economy is in the 7th inning stretch of the game.

They reckon the US economy will fall into a recession within the next 18 to 24 months. These are sobering words from the smartest guys in the room. Their forecast is based on past data, which shows how the US economy tends to fall into a recession following an interest rate hiking cycle.

As the US Federal Reserve continues to increase interest rates, investors who borrowed cheap money may find themselves exposed. As the saying goes, ‘Bull markets never die of old age’ – they usually end in sharp sell-offs.

Contrast this with the economic climate South Africans already find themselves in. Technical recession aside, there is no respite in sight. Low growth, low savings, and low foreign direct investment don’t help our cause. We also find ourselves in election season, with policy uncertainty brought about by expropriation of land without compensation among others.

South African investors thus face the typical investor’s conundrum. How do we position our portfolios in order to limit the downside and avoid losing our hard-earned cash in these trying times? The shiny advisors on TV have been recommending all sorts of strategies. Some seem a little extreme – from buying gold because it has an inverse correlation to the stock market to selling your shares now so that you have dry powder to buy shares after the market sell-off.

This reminds me of my finance lecturers who in 2013 were saying the market is overvalued and that the mother of all crashes is coming. Well, I am still waiting. In that time both the S&P 500 and the JSE Top 40 have continued to gain. Had I listened I would have missed out on all the gains.

Below are a few of the predictions that some of the smartest people in the room have given us over the years. If you had listened, you too would have missed out on the opportunities.

Source: Visual Capitalist

And if you had listened and bought gold in 1953 when the S&P 500 Index was first introduced, you might have wept:

 

Graph: Supplied

Buffett describes the stock market as a device for transferring money from the impatient to the patient. This was exemplified by his bet against hedge funds. He wagered that over a 10-year period (January 2008 to December 2017) the S&P 500 Index would outperform a portfolio of hedge funds net of transaction fees.

Needless to say, the Oracle of Omaha won that bet despite the 2008 market crash and global recession. Why is that? It is because on average markets tend to go up and market timing is impossible.

This logic applies equally here at home. If we had put our hard-earned money in the JSE Top 40 Index at the height of 2008, we would have made a gain on our investment of 49% – despite the Top 40 trending in a range for three years.

Graph: Supplied

Considering what South Africans have been through, they cannot be blamed for lapping up every suggestion from market commentators.

Keeping our emotions in check during such times is probably the hardest skill to master: keeping your money in the market while there is a sell-off, for instance; or worse, being a buyer during such times. It requires a level of resolve that only a few are able to master. But it is possible.

The reason Buffett won the hedge-fund bet is precisely the opposite of what market commentators are telling us to do. He beat a basket of hedge funds whose managers had all the tools at hand to profit from both the ups and the downs in the market, and who could employ a myriad of strategies that are designed by nuclear physicists and rocket scientists.

He won the bet by buying the index then sitting on his hands and forgetting about it for 10 years.

That is exactly the opposite of what many market commentators are telling people to do because they profit from processing more transactions.

If you take one thing from this article it should be that it pays to be in the market regardless of where we are in the cycle.

I am extremely optimistic about South Africa despite the prevailing headwinds. We were able to forge through apartheid to become the Rainbow Nation without a civil war.

Every investor has heard the saying ‘Buy when there is blood on the streets’ and I believe that with the recession, political uncertainty and the emerging market sell-off, there is blood on the streets.

* Olwethu Tomtala holds a BCom (Honours) in Accounting and Taxation from UCT, has completed his post-graduate diploma in accounting exams through Unisa, and is studying to be a CA. He hails from Mthatha in the Eastern Cape.

The views and opinions shared in this article belong to their author, cannot be construed as financial advice, and do not necessarily mirror the views and opinions of Moneyweb.

COMMENTS   6

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Some nice analogies and background. What we always have to remember is that history is 20/20 vision and the most volatile financial playgrounds on earth are the international currency and stock exchanges.

What we also need to focus on is that all the reputable ones of them have underlying assets which occasionally fall out of favour, like gold or property. But for all those underlying assets to collapse into breakup value would mean an asteroid strike. Even a nuclear war will enrich many investors. Refer the Kennedy family

The other thing to bear in mind is that the stock price is not necessarily directly related the actual value of the assets of the company: refer Steinhoff and others.

So yes, things rise and fall, but ensure that what you invest your hard-earned cash in has some intrinsic value and that when you buy it you are not overpaying relative to the nuts and bolts assets which in the worst case scenario should be more that the liquidator .10c in the Rand.

This means that you have to do some hard research and trust no-one. But then it is your money after all.

And Buffet being the smart cookie that he is bought his S&P 500 EFT at the bottom of the bottom of the market in 2008. So how could he loose, especially considering the fees extracted by the fund managers.

The best time to start investing is when you get your first pay check and the best time to stop is when your will is read out.

Olwethu, Nicely written and an enjoyable all round read, well put together, thank you.

Great article and in John D Rockefeller words “The way to make money is to buy when blood is running in the streets” and it is currently running in huge amounts.

“At the height of Nenegate I witnessed seasoned market commentators advising investors to take money abroad at an eye-watering exchange rate of R16.79” – I’m one of these people (R16.60). I took hald my money off and left the rest in the JSE.

The RAND return of the US stocks I invested in is +25% right now. My JSE shares in the same time did -18%. The JSE as a whole (driven by Naspers) returned +10%. S&P500 in dollar terms is up close to 50% over that same period. It doesn’t take a lot of research to find this out.

So regardless of the exchange rate, the JSE has underperformed insanely since then. It’s really annoying when people assume R16.60 resulted in bad results – it’s still better IN RANDS (and obviously dollars) than what the JSE returned. But otherwise good article, agree with a lot of the other views.

You have nailed it @Simple_Simon. JSE fans are always looking for reasons to comfort themselves. I bailed out in 2014, sold all the local shares I had and moved all my money offshore. Today I sit and smile every day. In addition, every month I transfer all my investment money offshore. 100% fully invested offshore

The point is that it is now R14 to the dollar. The second point is that past performance does not translate into future similar perfromance. Will the JSE returns be better than the S and P in the future? If you can answer that question, you can make an informed decision where to invest. Unfortunately no one can accurately. That is the nature of the beast!!

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