Just after RMB Holdings unbundled from its respective FirstRand shares, I decided to invest in it at a weighting of about 10% of my portfolio. I was hasty and uninformed and reacted to a fallen share price. I have subsequently learnt more about shares and investing, leaving me with the understanding that it was a terrible investment.
Since then my RMH shares have slowly but surely declined 46%, leaving me with a terrible loss. I am willing to cut my losses and sell, allowing me to invest the residual capital into a more profitable company. However, I am unsure whether this is the correct decision to make. Could you please advise me on this decision?
The question in summary: should I sell my declined RMH shares or should I hold on and wait?
The math on the stock is: If you sell your stock, you will realise the loss of 46%. If you hold the stock, the stock will need to appreciate by around 80% to break even. Financials as a sector has seen a rebound over the last month or so, and so I would track the financial sector to see when there seems to be a technical peak.
I’m unfortunately not going to answer the question directly about RMH shares, nor comment whether or not it was a terrible investment. Harry Truman once said “Give me a one-handed economist. All my economists say, ‘on one hand…’, then ‘but on the other…” and this, unfortunately, is where the answer would be on this stock.
However, I will address the investing part, and how to select an investment stock and build a portfolio.
Investing in the stock market is not for the faint of heart: there are many risks involved in purchasing direct shares of a company. If your whole stock portfolio has comprised one stock, or multiple stocks that follow correlated returns, or you have built up a portfolio of stocks that are overweight in one specific sector, a change in economic policy, a surge or drop in oil prices or even a random pandemic can either give massive returns or devastating losses.
Investment portfolios are made up of the following asset allocations: cash, bonds, property and equities (also known as stocks and shares). Generally, cash is the least ‘risky asset’, followed by bonds (which also have different ranks of risk), then property, with equities considered to be the highest risk asset class.
Depending on your risk profile, and your risk tolerance, you will be able to build a portfolio that tries to track your expectations of returns, and volatility.
The due diligence that should be done on purchasing the stock of a company should be to look at the following:
- Review the financial statements of the company and read the ‘footnotes’ which are often longer than the other financial information.
- Review the senior management, and the management’s own financial transactions with the stocks: are they buying in their personal capacity because the company is trading at a discount, or are they selling because they think that it’s trading at an all-time high, or is it another reason due to some sort of restructuring?
- Read up on how to build discount cash flow models.
- Understand price-earnings (PE) ratios, and if it’s trading at an extremely high PE, whether it could be due to super revenues in the future.
- Understand what you are buying and if you agree with the company’s operating model, and if it will be sustainable in the long run.
There have been many investors who have not followed the above and have done well, but there are many that have lost more than they have made, and the markets have become a casino where the house has won.
If you have time to do your due diligence and analyse each stock you buy, and you are not betting your house, then individual stock trading is for you.
If the above does not apply, and your value of generating income outweighs the time of doing the research then I would recommend hiring a professional. Alternatively, you can take the stock tips from your mates around the braai (I would probably avoid that strategy personally).
There are investment funds that aim to achieve certain outcomes, by setting a benchmark and having the mandate to be either conservative, moderate, or aggressive; or that have a mandate to invest solely in property as an asset class for example. They can also follow a valuation, momentum, macro, contrarian, or smart beta investment styles.
My recommendation would be to build up a diversified investment portfolio, using various funds to achieve your investment goal, based on your investment mandate. However, many of these fund managers do also get it wrong. So understanding your risk profile, and tolerance, is important.