SIKI MGABADELI: We are talking now about making the right investment decisions in uncertain times. As you know, the choices you make today will impact on your financial plan in the future. So we all understand it’s quite natural to be confused and frustrated when facing uncertainties. But you can’t make emotional decisions around your money.
WAYNE McCURRIE: Very much so.
SIKI MGABADELI: Wayne is still here with us and we also welcome Warren Ingram, who is a director with Galileo Capital and joins us on the line. Warren, thanks for your time this evening. What is an uncertain time?
WARREN INGRAM: Good evening. Gee, if we are not living in uncertain times right now in South Africa, then I don’t know what an uncertain time is. We’ve got the rand/dollar on its journey, we’ve got the South African economy slowly but surely grinding to a halt, thanks to Eskom. Hopefully Brian sorts that out. And then if you look at the prices and I guess the valuations of our stock market, the American stock markets, and then the uncertainty around how Europe’s future unfolds, we are living in the very definition of uncertain times.
SIKI MGABADELI: A lot has been done on behavioural economics, right, and how investors behave depending on what the market is doing. What’s the typical – if there is such a thing – behaviour of the retail investor?
WARREN INGRAM: Typically we tend as human beings to try and extrapolate trends. So, for example, if we just look at the rand as a great example of that, the rand has been on quite a long slide especially against the US dollar the last few years. And if you talked to a retail investor in South Africa now they would typically be saying to you that the rand is going to continue on the sort of inevitable slide to R20, R30, R40/dollar and everybody should be getting their money out of South Africa as fast as possible. That’s really typical of retail investment behaviour, and I think that’s really dangerous.
We’ve watched this movie before in the early 2000s when the rand did fall and then had a great sort of steady recovery all the way back down to I think around R5.50/R6 to the dollar. And so if that kind of a movie replays itself now in our future – I’m not saying the rand is going to go back to R6/dollar – but if you are buying your dollars now at R12/dollar because you think that the rand is going to go to R20, and it actually goes back to, let’s say, R8 or R9, you’ve really made a heck of a loss on your money on essentially an emotional decision and something based on really bad science.
SIKI MGABADELI: Yeah. I’ve done that when I am about to travel, and I think, ooh, I’d better buy now. And then I find myself in absolute trouble.
WAYNE McCURRIE: Look, Siki, I think there are two things I’d like to mention from my side. The herd mentality – be very careful about following the herd. But understand, the herd is right a lot of the time, because the herd itself creates the market. So if everyone is buying something, it’s probably going to go up in price. So what you’ve got to try and do is identify when things have become ridiculously valued. Maybe the rand at R12/dollar is ridiculously undervalued. It’s just far too cheap. But the run from R6.50 to R12 – if you had followed that you’ve done quite well. So what you’ve got to try and do is identify, I suppose, junctures in the market. The valuation of resource shares versus industrial shares is the lowest it’s been in 30 years. This might be a juncture. Things might be changing. The herd has been buying industrials for five years and it’s been right for five years. But it might be changing. So that’s the first point.
The second point is there is only one free lunch in investments – and that’s diversification. Own lots and lots of different kind of investments, different shares, different philosophies, different assets, local, overseas, everything. Don’t put all your eggs in one basket.
SIKI MGABADELI: And you’d agree with that Warren, right?
WARREN INGRAM: Ja, I couldn’t have written it better. I think in a situation like this, where people have said to me “what’s the stock market going to do in the next year?” in truth I can give a great answer that it’s going to go up and I can give a good answer as to why it’s going to go down. The reality is nobody has a cooking clue. And so Wayne’s point about diversification makes a lot of sense. You can’t just own the stock market and at the same time you can’t just sell all your allocations to shares in favour of cash as an alternative because you think the market is going to go down. To me, you always need to be investing and making sure that if you are wrong you don’t lose everything.
And if we look at that example around resources versus industrials, the market can be irrational for far longer than we all think. I think having some expose to industrials and some exposure to resources following on that diversification makes a lot of sense.
One advantage that private investors always have over institutional investors and unit trusts, etc, is they can take a really long-term view. So to me, buying something like Anglos and Billiton might be a really bad decision over a 12-month period and a really fantastic decision over a ten-year period right now. I think that’s the advantage a private investor has. They don’t have to answer to shareholders and trustees and performance rankings. They can just make really good, logical, rational decisions based on their own long-term planning and kind of ignore the herd and ignore the hype and all the fear-mongering that goes on there in the broader media, and just stick to their own plan.
SIKI MGABADELI: But also focusing on those long-term investment objectives, you obviously need to have had a proper plan right at the beginning.
WARREN INGRAM: Correct. And it really doesn’t need to be complicated. I think the financial industry loves to create big smoke and mirrors around how complex the financial world is, and it’s not really. If you are young and you don’t have debt, then you really should have a significant proportion of your money in shares and still keep some diversification. So, looking at the stock market now, if you didn’t have a lot of money in shares, feed you money into the market over a period of time and be patient and build up your share allocation.
Conversely, if you know you are going to need a whole lot of money in the near future, then stop selling your money out and feeding it out of the market again. But you can create all sorts of plans around your own specific requirements rather than what the talking is – like me here telling you what to do.
SIKI MGABADELI: Don’t say that. Thanks, Warren. At least don’t listen to the day-to-day stuff, because markets fluctuate on a day-to-day basis. Stick to your long-term plan.