VCS Agency

We are currently bombarded with negative news, globally as well as in South Africa. There’s a lot of noise about the poor global economy been weak, poor demand from China with significant ramifications for resource based economies, economic and political woes in South Africa, etc.

It is natural then that investors or potential investors find themselves in with difficult decisions to make and will often react in panic mode or simply look on in awe. However, it is often during these times that the best investment opportunities come about, precisely because investors are behaving irrationally. All assets are been painted by the same brush and been sold off because of the panic in the market.

In this blog, I will briefly discuss the approach that I generally take during these times. But firstly, I must add a warning: no two crises are the same. They may similar, but in all likelihood, they are not the same. In addition, it’s not always the case that a crisis will present opportunities for acquiring quality assets at bargain prices.

In a previous blog, Growth at a Fair Price, I discussed how you should seek high quality companies that have the best chance of taking advantage of certain sectoral changes taking place in the economy, provided you can get them at a price that is reasonable.

What to do?

Now the first thing to do during a crisis is Not to Panic. Rather try to understand the crisis and ask yourself whether this situation changes any of your key investment themes. And, how does it affect the valuation of the companies that you already own or those that you would like to own.

The reality is that even in difficult and turbulent times, the economy still functions, maybe at a slower pace, but it still functions. People still need to eat food, travel for business reasons, conduct banking services, meet their healthcare needs, government still needs to function to provide basic services, etc. This does not represent Dooms Day.

So, you have to try and figure out which companies could possibly come out stronger when conditions improve. Similarly, some companies may in fact be permanently damaged by the crisis, so if you have any of those in your portfolio, for whatever reason, this may be time to sell these, so that you can raise some cash to buy those that you think will come out stronger after the crisis has abated.

EXAMPLE: In the recent collapse of African Bank, the market painted all businesses that focussed on the low income banking market with the same brush. In fact, Capitec which is in a similar market to African bank, but with different business and risk assessment models to African Bank, was in fact sold off quite steeply just before and after the African Bank debacle (around August 2014).  This was a great opportunity to buy a quality business at a bargain basement price. African Bank was also a major competitor to Capitec and with African Bank now out of the way, Capitec could take advantage of growing its market share with clients that it could be selective about and with the ability to adjust their pricing to be more appropriate for the kind of risks they were taking.

You will also notice that there were similar opportunities during July 2015 and December 2015. The best opportunity however was during the African Bank crisis, when all businesses in the low-income banking sector were being valued with the same criteria. However, in retrospect we realise that Capitec had and still has a very different business model to African Bank. Well done if you bought Capitec during this period!

Source: Reuters

 

What if the Crisis lasts for longer?

In hindsight, it’s always easy to know what you should do. But, because of the significant noise and lack of information that you may have during a crisis, it’s not clear that you should be filling your boots with a particular stock like Capitec in the example above.

However, if during your analysis you do see value in the stock, but you are unclear how the market will play out and you also assess some additional risk; an approach is to acquire a portion of what you want to acquire initially and build up your position as the situation becomes clearer to you. In this way, if the market goes up, you start participating with the portion that you’ve bought already, but if it comes down further, you could be buying the quality business at cheaper prices.

If for some reason, your analysis is incorrect, at least you have limited the losses that you could have incurred and you would learn a valuable investment lesson.  In investing, you want to avoid permanent loss of capital, but you should take a great opportunity when it is presented to you.

Charlie Munger, Warren Buffet’s partner, says that that biggest risk that investors face is that they do not take enough risk when a great opportunity presents itself. How many times don’t we kick ourselves, because we didn’t act when we needed to? ‘If I had just bought PSG and held on to it, after it listed’, for example.

Be alert to opportunities when they present themselves, and by definition you will be doing something different to what the herd in the market is doing.

If you’re an investor through unit trusts or managed funds, you may want to seek professional advice. Just don’t make any panic decisions!

 

Stay true to your investment philosophy

Remember, as you go through your investment journey, you should be developing your investment philosophy. In turbulent times, your philosophy and more so your resolve to sticking to your philosophy will be severely tested. If you have a philosophy that’s worked for you thus far, you should ask yourself why you should abandon it during turbulent times. Similarly, if you are investing based on a set of investment themes, then you should stick to these themes unless you have analysis suggests that you should be changing some of these themes.

So, the basic rules to follow:

1. Don’t panic
2. Analyse what is happening and how it could impact your investment portfolio
3. Use the opportunity to raise cash
4. Use the cash to buy those businesses that are likely to come out stronger after the crisis is over
5. Be bold when good opportunities are presented to you (but you’ll have to drown out the noise}
6. Time your transactions based on your level of confidence
7. Have the patience to see out the turbulence

 

Current Market

Whilst there are opportunities for investing in the current market, the biggest issue in today’s market is that central bankers have far too much influence on the direction of the markets. So, my assessment is that if normality does come back to central bank policies, the current market could see further correction. A caution that I would provide is that it is very difficult to predict when the central bankers will stop quantitative easing, so you should be very selective when investing in these markets.

Ideally be invested in those businesses that would withstand any change in central banker’s policies.  It also would not harm, if you have some cash that you could deploy when ‘normality’ returns to markets. Unfortunately, there’s no gurantees.

 

Sabir

In this blog, I want to share the investment philosophy and approach that I use for my own investments. I have termed it Growth at a Fair Price.

In my previous blog, Developing your Investment Philosophy, I discussed how you should develop your investment philosophy and approach that is suitable for you; given your circumstances, your knowledge, the amount of risk you want to take and the level confidence that you have in your investing skills.

I also started the blog by stating that “Investing is not easy” and that may well be because I am a bit slow. Even after 25-odd years of investing in the stock market, I still learn something every day about investing. And at times those lessons can be quite painful.

In this blog, I will outline the core aspects of the philosophy that I use in investing. This philosophy and approach has evolved over time, and is radically different to what it was (if I even had a philosophy then) when I started out. It is certainly not fool proof and there are times when I have questioned quite deeply whether it is right or wrong; learnt from that, and adjusted my thinking and approach accordingly (Learn. Invest. Review).

Importantly, my investing horizon is very long term. And, this philosophy and approach works for me over this long-term horizon. Further, given where my own knowledge and skills are, as well as the risk appetite that I have, it is appropriate for me.

 

Growth at a Fair Price

Broadly, I would categorise my style as Growth at a Fair Price. This involves scanning the market for growth opportunities which I translate into Investment Themes, identify those businesses that can best take advantage of those growth opportunities, establish a value for them and buy them if they meet my valuation criteria and fit well into my portfolio.

 

Investment Themes

To establish my investment themes, I scan the market for demographic changes, new trends and technologies, macroeconomic shifts and use these to develop investment themes. I’ll explain by way of an example.

One of my favourite investment themes at this moment is in the Energy sector. Take a look at the graph below from the IRENA Renewable Cost database.

From this, you can notice that firstly, the number of Solar photovoltaic electricity projects have increased significantly from 2010 to 2014; and secondly that the cost per kWh of the large projects in this area has also reduced quite significantly. More importantly that some of these projects are producing energy at costs which are at similar levels to fossil fuels.

These cost reductions in solar power will most likely continue as a result of more efficient solar panels and better battery storage technologies. In my opinion, this will have a profound impact on the cost of energy and environmental health (both positively) in the short-, medium and possibly long-term.

Thus an investment theme could be “Renewable Energy Technology Advancements” and I would try to identify those businesses that could benefit from this theme; and these could be providers of the technology or even consumers of energy.

As a guideline, I try to maintain the number of investment themes at any point in time to a range of between five to seven themes. The reasons for this are:

• Having too few themes could increase the risk in your portfolio if you are wrong;
• However, limiting the number of themes, also forces you to be more selective about your investment themes; and
• Lastly, limiting the number of themes allows your portfolio to gain meaningfully when you get the themes right.

 

Analysis and Valuation

Now once I have identified a number of businesses that could support my investment theme/s, in the next step I analyse and value each of these and make my decision on which businesses I want to buy into. Ideally, I like to choose quality businesses that are fairly valued (and hopefully undervalued).

Typically, I would do a high-level analysis on each of these businesses, looking at both quantitative and qualitative criteria. From a quantitative point of view, I will start by looking at the following key metrics:

• Market Capitalisation – Is this business worth its market capitalisation, how does it compare to other similar businesses, how does it compare to other businesses in other industries?
• Price to Earnings (PE) ratio and Forward Price to Earnings (FPE) Ratio – Does this business look cheap or expensive from a PE or FPE perspective? Are there any anomalies resulting in a distorted PE? If I put certain revenue and earnings projections based on my investment theme/s how does this share look like from a PE valuation point of view? How does it compare to other similar businesses and dissimilar businesses?
• Dividend Yield – What is the dividend yield from this business and how does it compare historically? A healthy dividend yield can provide a lot of confidence in a business and also provide regular and growing income to the portfolio. Is there a risk that the dividends could decrease and what does this do to my income objectives?
• Discounted Cash Flow (DCF) – This is when it starts getting a bit tricky, because I have to make certain assumptions on projected cash flows and discount rates. Here, I would build out some scenarios and estimate a valuation range for the business. Again, how does this compare to the market valuation of the business? Is there sufficient room for a margin of error? I specifically try and identify any inherent biases that I may have in making my assumptions, which is very difficult to do.
• Net Asset Value (NAV) and Price to Book (P:B) – what is the net asset value of the business and how does compare to the current price of the business? At what P:B value has it been a good value to buy into this business, historically?
• Margins – What is the gross and net margin of this business? Is there room to improve or is there risk in these margins? What can the business absorb if conditions get bad? Is the business scalable? What would happen to margins if there is growth based on the thematic trends we identified earlier?
• Debt to Equity – Is this business over indebted or over-leveraged? What interest rate and currency risks are there in the debt?

Whilst the above is not comprehensive, it does provide an indication of whether a business is fairly priced or not. Specific industries may also have certain more pertinent metrics that I would include. This can warrant a more detailed analysis of a business before you make your final decision of whether to buy or not.

From a qualitative point of view, one is assessing the competitive edge that the business has, what are its barriers to entry, how do you rate the management of the business and is it a business that attracts talent? What intellectual property does it own? How will it benefit from the thematic trend that we identified earlier? What risks does it face and how does it mitigate those?

At this stage, I look to break the case of buying the business. What could go wrong? Are my assumption correct, or too rosy? Ideally, I would speak to someone who has a different view to me on that business, or read alternate views on the business from other analysts. Am I missing something?

These will all provide me with a basis to make a decision on whether I should be buying this business or not.

 

Portfolio Management

The final step in the approach that I use, is to make the portfolio decision. What does the current portfolio look like? Do I have sufficient funds available to buy this business into the portfolio? What adjustment would I need to make to the portfolio (e.g. sell something in the portfolio)? After these changes, what would the portfolio look like? Do I have the right balance between the different themes? Do I have the desired level of diversification and concentration in the portfolio?

One of the guidelines I use in my portfolio decisions is that of a 12-share rule. I try not to be invested in more than 12 businesses at any point in time. This provides me with the right level of diversification and concentration in my portfolio. It also helps to force me to make decisions to sell (something I am generally reluctant to do) when I have assessed a new business to include in my portfolio. I try to have a very good understanding of those businesses that I am invested in.

Finally, only after these questions have been considered, do I make the final decision of how much to buy of the business that I decided to buy into and what changes to make in the portfolio. Typically, at this stage, I would develop a strategy of how I am going to make those buys and sells, i.e. is it all in one go, or do I stage the transaction over a few days or even a few months.

I told you up front that Investing is not easy.

 

Concluding remarks

So the portfolio has been set up now. All that is left is to give the portfolio the opportunity to perform. If you have a high conviction that your investment themes are correct and that the businesses that you have acquired are the right ones then you should give yourself and your portfolio the benefit of the time to let the portfolio perform. I try not to tinker too much with the portfolio after this, but I will learn new information as time goes by and as the world around me changes, which I will use to re-assess my decisions and make appropriate adjustments to the portfolio.

I will measure the performance of the individual holdings as well as the portfolio as a whole on a regular basis. This gives me the opportunity to check back on whether the performance is due to the reasons I identified when I decided to buy into that business or some other reason. Here, I try to be brutally honest with myself and use this as an opportunity to hone my investment philosophy and approach.

So there it is then, Growth at a Fair Price. Identify key investment themes, analyse and value businesses that support those themes, assess the impact on the portfolio, review performance and re-assess investment strategy. All the time, I am continually looking at ways to further develop and hone my investing skills, through my own experiences and through learning from master investors.

 

Sabir

Investing is not easy. Even after many years of studying and experience in investing, many investment managers can still find themselves flummoxed by the markets. Yet, everyone should have a strategy for investing for their futures, so that they can increase their personal value (#MyPersonalValue) and get the benefit of time in (not timing) the market (see Why You Need To Start Investing Now).

In this blog, I will discuss a way that can assist you in developing your investment philosophy and approach. It’s worth remembering that developing your investment philosophy and approach is not a once off event but rather an ongoing learning and refining process as your knowledge grows, and as you learn from your successes and your mistakes and also as your financial circumstances change.

Everyone is different, our brains are wired differently, we have different risk profiles, and we have different abilities and skills. So, whilst you can and should learn from great investors, you should be prepared to have your own unique philosophy and approach to investing. There is no magic formula that will make you a great investor or even merely an above average investor. If there was, then we would all be following that formula, and then by definition, all be average.

So, how do you go about finding the philosophy and approach that will work for you?

 

LEARN. INVEST. REVIEW

The diagram below simplifies the process:

Learn – find out about investing, read books and articles, attend courses, speak to experts and other investors, find out more about specific funds or stocks that interest you, try and understand the risks that you may be faced with, etc.

Then Invest – make an appropriate investment decision based on what you have learnt, your risk profile, how much you can invest, how much you are willing to lose. This is the action step, i.e. when you make a decision based on what you have learnt. And by the way: don’t stop learning during this time.

After you have given your investment decision a sufficient time to perform, you can then Review your performance – check how your portfolio has performed and if your assumptions have proven correct. If you’ve selected to invest with a fund or specific manager, how has that decision panned out for you and most importantly what have you learnt from this and what more do you need to learn?

This is a continuous cycle of learning, making investment decisions, and reviewing your performance.

Over time, you will find an appropriate investment philosophy and approach that is suitable for you. Your investment philosophy will mature over time, possibly with you taking more or maybe even less risk, finding the asset classes or mix of asset classes that is suitable for you, possibly taking more decisions on your own or even leaving more decisions to professionals.

 

Investment Philosophies

So, a possible path that you could follow in your journey of developing your investment philosophy and approach could be as follows. I am going to assume that you are looking to develop your philosophy and approach for investing in the stock market, so that you can get the benefit of higher returns and building your wealth over the long-term.

Passive Strategy

You could begin with a Passive Strategy, i.e. you could simply buy the market (which is represented by the stock market index). You could choose to buy the lowest cost exchange traded funds for the markets that you wish to be invested in and sit back and watch how you outperform 75% of the professional investment managers who invest in the same universe. Surveys show that most fund managers (some statistics say more than 75% of them) consistently underperform the benchmark that they have set themselves to beat. A passive philosophy could simply involve you buying the index and not worrying about which specific shares to acquire or even which funds or fund managers to put your money with.

But even in this case you will be required to make certain decisions: which markets should you invest in; how much should you invest in local markets versus offshore markets; how much should you have in equities, bonds and in cash, etc.? The big advantage of this approach is that your costs are low and any saving in costs is in fact a positive return to you. Over an extended period, an annual saving of 1% or more can have quite a material positive impact on your portfolio. To illustrate, the table below shows you the Rand value of an investment of a R1,000 per month over 20 years. An annual saving of 1% in costs for a R1,000 investment per month, over 20 years, can leave you with 14-15% more in your investment at the end of the 20-year period.

Annual Return	Value at End	Diff in %
10.00%	R759 369
11.00%	R865 638	14%
12.00%	R989 255	14%
13.00%	R1 133 242	15%
14.00%	R1 301 166	15%

 

So, this could be quite a good strategy. This is called a passive investment approach. It’s low cost and it beats most fund managers.

However, you still need to make a decision on which exchange traded funds (ETF) to purchase: should be the All Share Index, the Industrial Index, a Dividend Fund, which offshore markets, etc.

Professionally managed

If you are not comfortable with taking a Passive approach or you think that you require an active strategy (because you want to beat the market) but you cannot yet manage your own portfolio, you can go with a Professionally Managed philosophy.

This is where you can approach an investment adviser or portfolio manager. An investment adviser can assist you in allocating your portfolio to the various asset classes and funds. But even this requires you to do some homework on a reputable investment adviser. Not all investment advisers are the same and some may be motivated by advising you on products or funds that pay them the best commissions.

In the same way that a 1% per annum cost saving can result in approximately 14% more value at the end of a 20-year, R1,000-per-month investment; if you employ a skilled adviser or portfolio manager, and her advice provides you with an extra (net, after her fees) return of 1% more per annum; then your portfolio will be approximately 14% larger at the end.

You can work out from the table, the difference on your portfolio of 2%, 3%, 4%, additional returns or costs per annum on the impact of your portfolio. The differences become more significant. So, a good adviser and/or portfolio manager can certainly provide real value.

So, an alternative strategy to the Passive strategy we discussed above is to seek the assistance of a professional. This could take one of 2 forms:

1. A financial adviser who can assess your requirements and risk profile and recommend certain funds for you: either ETFs or specific funds like unit trusts (also known as collective investment schemes). In this case, you will give up some fees and you will also hope that the adviser that you have chosen will deliver the way that you expected them to.
2. Selecting one or more portfolio managers (or funds) to whom you entrust your investment decisions. You could also have a stockbroker or portfolio manager manage a customised fund for yourself.

In this case the strength of your decision will be based on how good you are at finding either the right investment adviser or the right funds/portfolio managers with whom to invest. Unfortunately, you will only know how good you are after the fact.

 

Manage Your Own Portfolio

In the third scenario, you could manage your own portfolio. In this case, your cost structure is very low, if you open an account with a low-cost stockbroker. Ofcourse, here you have to select your own stocks. To do this properly, you need to have a methodology for selecting these stocks.

There are so many different approaches and strategies for selecting stocks. This is a topic of many books and articles. Strategies can vary from trading i.e. holding stocks for short periods of time through to long-term investing.

It is not the objective of this blog to discuss the merits and demerits of the different strategies but it is safe to say that different strategies do work at certain times, but don’t work all of the time.

My own preferred philosophy is to select key investment themes and then to create a universe of stocks that I would like to invest in, if they meet certain valuation criteria.

In a future blog, maybe the next one. I will discuss this philosophy and approach in more detail.

Concluding Remarks

The above approaches to investing need not be mutually exclusive. There is nothing wrong in developing a strategy that has a combination of the above. You could give yourself a portion of your investments for you to invest directly in the stock market yourself. The rest could be managed by professionals. And as your confidence, risk profile, and knowledge grows, you can start managing more and more of your own funds.

By investing with a recognised professional, you can also follow their strategy and see if you can learn from it. Why have they selected certain shares? What is their top pick/s of share in their portfolio? How do they compare with other investment manager’s funds?

The way to develop your philosophy and approach is to continuously learn, apply your learning, and review your decisions. You will start developing solid principles that you are comfortable with in your journey to building your wealth. At times, these principles will be severely tested by abnormal market conditions. And even these experiences will allow you to grow your investment prowess and ultimately you will use this to grow your wealth.

LEARN. INVEST. REVIEW. A simple process to starting the development of your investment philosophy and approach.

 

Sabir

This is the transcript of a talk that I am giving to the staff of various organisations and groups of individuals and the topic is “Why you need to start investing now”.

 I am incredibly grateful that I have had an interest in investing from a very early part of my adulthood, both in seeking knowledge so that I could do well in my career as well as in investing in the financial markets to build wealth. So, I hope that today’s talk inspires you to also start investing or if you’re already doing so, to be encouraged to continue to hone your investing skills so that each one of you can truly build wealth for your and your families’ benefit.

I want to premise my talk on the following:

Rapid technological change is making life better for all in the long term, but it has serious implications for individuals and families in the short-term.

So what do I mean by that.

Well, let’s face it, if we compare humankind to a century ago or even half a century ago, almost all of humankind is living under better conditions – most have a roof over their heads, access to running water, better sanitation, and better access to healthcare, better access to education, to information, to transportation… We are living longer, infant mortality has reduced, more people are attending universities, eating out, having access to entertainment in our homes, etc.

So, whilst it may not seem like we are having a good time, because of issues like high levels of inequality, crime, unemployment, migration from war-torn or poverty-stricken countries, life has actually gotten much better for most of us.

Now one of the reasons for that I believe is that mankind will always seek ways to improve their lives and this means embracing new technologies whether it is better transportation, better communication tools, more efficient farming methods or more efficient production or service methods. So it is human nature to seek changes that improve our lives, yet most of us are resistant to change or ill-prepared for change.

We know that everyone benefits in the long-term, i.e. over generations; but how can we benefit more directly; whether we are government, businesses, families or individuals? I believe that these benefits can be gained by making conscious investment decisions.

As I am talking to a group of individuals, I want to talk to you about how you go about making investments decisions and how this can positively impact not only you, but also those around you and society as a whole. How do you go about building your personal value: #MyPersonalValue. You can broadly do this by doing 2 things, firstly you should keep on developing your skills to be relevant for the changing environment and secondly you should be consciously investing to secure your financial future. You have to do both, but I will focus today’s discussion on the latter, i.e. securing your financial future and building wealth.

I’ll relate this as a story. The story begins in a South African township around the late 1970’s. A group of high school kids get together every weekend and do what teenagers do. Look for the next party, find some good stuff to make them happy, whatever … Now these are not kids coming out of wealthy environments, most would get some pocket money which would really be for their school lunch and some would supplement this by doing odd jobs on a Saturday morning or Friday afternoon.

One of the bright sparks, suggests that each of the Group of around 10, should give him R20 per month, and he will then save this in a call account which can be used in the future, for whatever purposes, even if just to give back everyone their contribution plus the interest that was earned. Now in my book this is a stokvel. After many fits and starts, with a few members dropping off along the way and then a few joining later on. I was one of those that joined in 1994. Today, this group of individuals is worth approximately R17m and that is only their pooled investments that started with a humble R20 per month.

The lesson and maybe the target I want to you to set for yourself is to be a millionaire, whether it is a Rand, Dollar Euro or Pound millionaire. You have seen that it is possible even if you start with very humble plans.

So how did the growth in the investment club come about? Let’s put some of the facts on the table:

• This wasn’t a smooth journey, It’s not like 10 guys get together, decide to contribute R20 per month, adjust for inflation each year, invest in various assets and voila they are now worth R17m;
• There were fits and starts, contributions stopped, some people pulled out, others were invited in, contributions started again, and eventually stopped about 4 years ago;
• So we don’t have a monthly contribution any longer;
• There was a discipline that was established, pay monthly, pool the money, and find ways to invest that money wisely.

The starting point is to start somewhere (Sounds like a Yogi Berry quote). Laozi, a famous Chinese philosopher said: “The journey of a thousand miles begins with a single step”.

You have to consciously start saving some money (however little), every month. It means that you have to spend less than you earn. It means every month, when you get your salary paid into your account, you have to pay yourself first. As a rule of thumb, I recommend that you save approximately 20-25% of your monthly income if you want to be financially free and live a reasonable lifestyle in your retirement days. Now, I know that not everyone can save that much, but start somewhere and target to get to that savings rate as soon as possible.

Remember, if you are in formal employment, you already have an obligatory retirement savings plan. That is already part of your contribution into the 20-25% savings that I recommend that you target. So, if you are contributing 12% say to your retirement savings, then you only have another 12-odd % to save.

Practical Step One: So a practical first step would be to open up a savings account or a unit trust account. If you haven’t already taken advantage of the Tax Free Savings Account – open one up now, before the end of the tax year. Then commit a monthly amount to invest.

The second part of your journey, is to do something with your savings. In fact, I like to call that process, the process from saving to investing.

Saving is generally a very passive process. You decide how much to save and then you set up a monthly debit order, and your money goes into a call account. You earn monthly interest, SARS (South African Revenue Service) takes a healthy portion of your interest earned and basically you are left with a return that is below inflation. So in fact every year you are losing money in real terms, i.e. inflation is eating into your nest egg. Whilst this is better than not saving at all, it still does not bode well for your future. Now there is a role in call accounts in any financial planning process, but its role is very specific, to give you access to cash during desperate times or to park your money whilst you assess where to invest.

So if saving through call accounts ultimately yield a negative growth in real terms, it thus becomes your duty to educate yourself about investing for your future, and dare I say for the future of this country.  Where could you possibly invest?

Now, you can see from this, there are many different areas in which you can invest. It can also be very complex to understand. But to secure your financial future, you do need to start learning about this and investing in investments that will give you a better return than just cash.

You can learn by reading, checking the myriad of information on the web or by talking to experts like a financial adviser. With this knowledge you can arm yourself to make some decisions, so that a portion or all of your monthly savings will now be directed to investing in these investments that over the long term will give you a better return.

Take a look at the Chart below that I got from Old Mutual.

Now this shows you what you will miss out on if you do not make some sharp investment decisions. Let’s assume that you have a 30-year working career. If you invested R1000 per month in real terms and you got the average returns that we showed earlier, then the difference between investing in SA Equities and Cash is that after 30 years you will have is R1,4m versus R400,000 for equities versus cash. You would have invested R360,000. And remember that this is today’s value, as these are real rates of return, i.e. they have been adjusted for inflation. Now here’s some magic: R2000 per month = R2.8m; R10,000 per month = R14m. You’re already a Dollar millionaire.

You can also see from this that the impact of compounding has a very dramatic impact on your wealth over the long-term. So, if you want to build wealth for yourself, you have start improving your knowledge and go up the investment curve.

Going back to the township kids, they figured out, or at least those that stayed with the stokvel, that they needed to go up the knowledge curve and up the investment curve. So, their R20 per month is now valued at approximately R17m. This was achieved through a growth rate of 20.4% per annum, after tax and expenses; but includes inflation of probably around 7-odd percent. So their real rate of return is around 13%, better than the average painted above. They went a long way in building their Personal Value. Over the last 21 years, since they have kept performance records; if they invested R1000 per month without stop, they would in fact have achieved a value today of R4m for a contribution of R360,000. There’s a lesson for them here too.

Now, I’m not suggesting that you rush out and go and buy equities, but what I am saying is that you owe it to yourself, your family and the country to begin learning about investing and then consciously investing for your future. But remember the first step – start saving more money NOW.

Then, with your financial adviser and your own learning and growth, you can start investing in other asset classes.

Practical Step Two: With your own learning and the help of an expert, make a monthly investment in a balanced unit trust or a low-cost index tracking fund. This takes away the risk of investing a lump sum when the markets are high, and similarly you have the benefit of diversification. I also strongly suggest that you take an active interest in how your investment is doing. Don’t also forget to check out how your retirement fund/pension fund is doing. Many of these retirement plans give you a choice of where to invest and you need to know why you have chosen a particular investment strategy.

Naturally, if you are already investing, then that is great. I encourage you to keep on investing not only financially but also in your knowledge and education. And, I’m sure that some of you will become great investors and give advice to many others.

To complete the story of the stokvel, the members invest directly via the JSE on the stock market. They have toyed with investing with derivatives as well as investing offshore. And, because they have been at it for a long time, they have a better understanding of the gyrations of the market and can live with levels of volatility. Over the 21 years of measuring performance, they have had 2 negative years. And as I indicated earlier, have far beaten inflation as well as cash by far. Many of these members also invest in their own capacities, because the investment club allowed them to learn from each other. Also, if the club does not buy a share that one of the members may have a strong view on, she can buy it in her own capacity.

This is the compounded effect of increasing your knowledge base and making it work for you in your investment decisions.

Practical Step Three: As your knowledge grows, increase your risk profile. Ultimately, you want to be investing in the stock market as you saw from the Old Mutual and the Investment Club data. This will require you to open up a stock broking account. Here again you will use your own knowledge and that of your stockbroker to make decisions on which stocks to invest in.

This journey of learning and taking practical steps in investing will set you well on you way to building wealth for yourself (#MyPersonalValue) and your family. Ultimately, you will also be helping our country too.

I want to end of the talk, by referring you to an article that I read in the Moneyweb, dated 27 January 2016, titled ‘Higher household savings could transform SA’s economic growth’. Dr Adrian Saville, puts forward that South Africa’s savings rate is approximately 16.3% per annum and this increases to 18.7%pa if you include the effect of foreigners saving in SA. This translates into a GDP growth rate of 2% pa and this is nowhere enough for us to absorb new job seekers in the economy and to improve the living conditions of the general population. We know our unemployment rate is very high.

His analysis indicates that we need to save at a rate of 28.3%pa to be able to generate GDP growth rates of 5%, which is what we need to be able to create prosperity for the general population. This is determined by looking at those countries that have sustainably grown at 7%pa plus over a long period. These ‘rock-star countries’ national savings rate averages 28.3%. I am also pleased that the Gordon Institute of Business (GIBS) has launched the Investec GIBS Savings Index to try and stem the tide of our poor savings record.

What that means is that each of us have to make our contribution. We should all target to save at least 10% more per annum. This will result in investments in the productive sectors of our economy and generate more long-term and sustainable growth for all of us. We have as important a role to play in the growth of this country as does government and business as well. Rather than moaning about what government and business should do, let’s do what we can control ourselves and benefit personally as a result anyway.

Remember what I said earlier, technological advancements improve humankind’s lot over the long-term. So, we must be investing in the development of these technologies, through making choices by where we invest our savings. This results in a higher educated work force as well as better returns for investors. I also said that the other side of that coin is that the impact of technology also results in job losses. So, if you do invest wisely, and if you do get impacted by restructuring, then you can be much more prepared for that. Your investments can provide a cushion and allow you to re-educate yourself or perhaps even to become an entrepreneur and run your own business.

Start Investing NOW to build your personal value (#MyPersonalValue)! It is for your own good, for the good of your family, your community and for the country.

Remember the practical steps that I laid out for you:

1. Open up a savings account or a tax free savings account now and commit to saving an amount every month;
2. With the help of an expert and with your own knowledge, invest in a unit trust or a low cost exchange traded fund;
3. As your knowledge grows, open a stock broking account and invest directly in the stock market.

Your journey of wealth building has begun.

Should any of you wish to start this conversation started in your organisations, please let me know if I can be of any assistance to you. You can contact me at my email address: [email protected].

Good luck!

Sabir

In this first blog for Lunar Capital, I wanted to start with a discussion on how you can more consciously measure your value and build it over time.

Over the last 15-odd years, I have regularly (at least annually, and recently semi-annually) updated what I term as My Personal Value (MPV) measure. This has helped me achieve my aspirations and secure my financial future. My Personal Value is in fact a personal balance sheet. It measures your net worth at a point in time. It is simple and easy to complete and update.

By regularly completing My Personal Value, it allowed me to:

• Understand the assets that I have and whether they are working for me or not;
• Understand the liabilities that I have and how much this is costing me;
• Understand the mix of assets and liabilities that I have and to consider how I could change this mix to make it more optimal;
• Track over time whether I was achieving my long-term financial objectives and to consider what I should do to be on track;
• And most importantly, it measured my value in a tangible way.

Personal Value  

In this blog, I will share with you my thinking and the process I follow, as well as provide you with a template spreadsheet that you can use to create a My Personal Value measure for yourself. A MPV is in fact a personal balance sheet; and we know that a balance sheet reflects your assets and liabilities, and the difference between the two reflects your Net Value, i.e. Asset – Liabilities = Net Value.

The first step in making your assets work for you is to have a clear understanding of what assets and liabilities you have. I define assets as the ‘things’ that you have or own that provide you with a return. For example, a financial asset like a share gives you a return in the form of dividends and/or capital appreciation (at least you hope it does). However, I like to think of assets in a wider context. The skills and capabilities that you have can also be considered as assets. In fact for most people, this is their most valuable asset, as over their lifetime this provides the greatest returns. This return is through your earnings as you apply your skills and capabilities in a work environment and you get paid for it.

Liabilities are things that you owe, for example if you have a loan from a bank, you owe the bank the value of the loan, and you have to repay the bank this amount. Liabilities give you a negative return, i.e. it costs you to have that liability, for example, the bank will charge you interest on your loan. So, not only do you have to repay the amount that you have borrowed but also any interest that accrues on the borrowed amount. I like to think of liabilities then as negative assets. A housing loan, personal loan or outstanding amounts on your credit cards are all liabilities.

Your assets

Simply, I categorise my assets as follows:

• Non-tangible Assets, i.e. these are my skills and capabilities, my network, etc. and
• Tangible Assets, i.e. my financial assets, such as the property, car, shares, unit trusts, etc. that I own.

I further categorise my Tangible assets as follows:

• Lifestyle assets, i.e. home, car, furniture, etc.; and
• Investment assets, i.e. retirement fund, stocks, bonds, investment properties, savings accounts, etc.

This is not to say that one cannot have other types of assets, but this is merely to keep things simple. By keeping it simple, it helped me to have the discipline of creating My Personal Value measure and then regularly updating it.

I do not want to spend too much time on your Non-Tangible assets in this blog, suffice to say that this is most people’s cash cow. So, it is important to learn and educate yourself and to keep on building up your skills base. The longer you can stay in a formal business, be it working for someone or if you run your own business, the greater the financial (and hopefully, personal satisfaction) rewards you will get. So pay particular attention to developing these assets, i.e. your skills and capabilities and this will allow you to progress your career and ultimately if you follow the advice below, grow your personal financial value.

Financial Assets

As we discussed above, these can be classified as Lifestyle assets and Investment assets. Lifestyle assets allow you to live a certain lifestyle, which can range from frugal to extravagant. One does need certain lifestyle assets not only to survive, but also to support you in creating a happy home and in supporting your career. You need a home to live in, transport to take you to and from work, and also certain luxuries to help you to relax (think TV for example).

Investment assets on the other hand, are those assets that provide for one’s future financial security, whether this is retirement, or for ‘rainy days’ or even to support a certain lifestyle that one aspires to. Immediately, we can see that if we do not have sufficient Investment assets and too much Lifestyle assets, we could end up in a disastrous situation where one does not have the income, for whatever reason, to support one’s lifestyle. I do not classify a property for personal use as an investment asset, it is a lifestyle asset (even though it may go up in value). Let’s not even talk about motor vehicles.

So, over time, one wants to build up one’s Investment assets – to cater for your and your family’s financial security should you be unable to earn an income any longer. Now by taking the time to complete and/or update your My Personal Value measure you will immediately start understanding whether your mix between Lifestyle Assets and Investment Assets are optimal or not. Similarly, you will be able to answer the following key questions that you should regularly ask yourself:

• What is my current personal value?
• Will my family be taken care of if something happens to me tomorrow?
• Would my family know what policies and accounts we have, should something happen to me?
• Has my Net Value grown from the previous year? And, where has this growth come from: is it through increased savings rate; better returns from my assets or from reducing my liabilities?
• Are my Investment Assets providing market related returns or are they underperforming?
• What growth in my Investment Assets do I need to meet my long-term financial objectives?
  • Should I be investing more from my income for the future, by cutting back on my spending?
• Am I invested in the right asset classes to get the kind of return that I should be getting?
  • Is my mix between stocks, bonds, property, and cash optimal?
  • Am I overly exposed to certain assets?
• Are my liabilities coming down? Is it quick enough?

Start updating your Balance Sheet

As it is the beginning of a new year, and especially with lots of financial uncertainties, there is no better time for you to update your My Personal Value measure and start the process to your financial security and freedom. As discussed previously, I have attached the spreadsheet template with this blog. This is a very simple process and should take you no more than an hour or two for most people.

\”View My Personal Value Balance Sheet\”

Once you have completed your My Personal Value measure, I encourage you to discuss this with your family, so that as a family you can set your objectives. If everyone in your family are pulling in the same direction, then you have a much better chance of securing your family’s financial security. The sooner you teach your children about financial planning, the chances are much better that they will become financially responsible earlier in their lives.

Please let me know if this has helped you or not and write to me on any improvements that you may have.

Good luck and a happy new year to you.

Sabir