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Our first quarterly review

Market Context

The Lunar BCI Worldwide Flexible Fund (LBWFA) was launched on 1 June 2016. In our first quarter to 31 August 2016, several significant events have been playing out locally and globally, which impact the investment markets:

• The ongoing, so-called SARS war between the South African Finance Minister and his adversaries;
• A potential for a ratings downgrade (to non-investment grade or junk status) for South Africa;
• Allegations and counter-allegations of corruption within state-owned enterprises and government departments;
• A significant reduction in the ANC’s majority and a loss of major metropolitans to opposition parties in the recent local government elections;
• British voters voting to leave the European Union;
• Donald Trump winning the Republican nomination for the US Presidential elections;
• Ongoing speculation on when the US Federal Reserve will raise interest rates in the USA.

 

The effects of the above has been felt quite significantly in the South African market. In particular, we have seen the Rand react (both positively and negatively) quite substantially when news on any of the above issues flows. The JSE has been looking for direction and also influenced by foreign investors (risk-on versus risk-off). The Price Earnings Ratio (PE) of the market as a whole is quite high, but shows quite a large variation between the different sectors. In particular, the large capitalisation shares like Naspers, SAB Miller, BAT, etc. have quite high PE’s influencing the market PE as a whole.

 

Our view is that the market is still largely influenced by central bank policies and currency fluctuations. Further, we believe that market is not sufficiently pricing in potential risks. Two recent cases in point: Mr Price and Aspen profit warnings have seen quite sharp corrections in their (and related industry) share prices.

 

How have we positioned the fund in this context?

We have taken a patient and somewhat conservative approach in the fund given this context. When we launched the fund, we had approximately 50% in cash and 50% in South African equities. This has changed somewhat and is reflected in the two pie charts below:

Figure 1

 

 

Figure 2

 

Even though we have increased our equity position (generally buying in the dips), we are still only 63% in equities. We also took the opportunity to remit cash offshore when the Rand strengthened. Our Top 10 Equity Holdings as at the end of August was as follows:

Figure 3

 

Needless to say, we are quite happy with the portfolio as it stands at the moment. We believe that we have some great businesses in our portfolio that support certain key investment themes. We are also satisfied that our positions (and size of positions) reflect our view of the valuations of these businesses.  Lastly, that at a portfolio level, we believe that our sector allocation is at a satisfactory level given where we see value at this point in time.

 

We believe that the structure and shape of the portfolio will change as the market changes. We have a number of other great businesses that we would like to own. At the appropriate time, we will buy into those businesses. We do prefer to hold onto businesses for the long-term, but also prefer to have concentrated positions in those businesses.

 

The table below provides a synopsis of our likes and dislikes of our Top 6 equity holdings at this time. It is not a comprehensive analysis, but rather a quick view of how we are thinking about these businesses:

 

Business	Likes	Dislikes	Investment Themes Supported
Omnia	– Innovative technology – Scalable – Back-door entry into potential resource revival – Valuation – Agriculture	– Liquidity – May take a while for resources to recover	– Innovation – Growing Emerging Markets Middle Class
Aspen	– Global generics and OTC business – Owner Managers – Strategic positioning in geographies and product portfolio	– Valuation high – Risks in some markets (e.g. Venezuela)	– Aging populations – Growth in Emerging Markets Middle Class – Exponential growth in Technology
PSG	– Diversified business – Owner managers – Disruptors – Focussed on solving SA problems – Private Equity potential upside	– Underlying businesses pricey	– Growing Emerging Markets Middle Class – Innovative – Exponential growth in Technology Changing preferences of millennials
Discovery	– Innovative – Owner Manager – Upside from global initiatives – Behavioural driven business model	– Valuation, especially price to Embedded Value – Banking foray – Initiatives need to start delivering	– Aging populations – Growth in Emerging Markets Middle Class – Exponential growth in technology – Changing preferences of millennials
Shoprite	– Rest of Africa strategy – Positioned for the cost conscious shopper – Owner Manager – Innovative arrangements with property owners	– SA Consumer struggling – Ability to remit cash from some countries	– Growth in Emerging Markets Middle Class
FirstRand	– Great franchises – Owner manager driven culture – Innovative – Valuation (especially ROE)	– Impact on funding if ratings downgrade	– Changing preferences of millennials – Growth in Emerging Markets Middle Class

Table 1

 

How have we performed since inception?

We are satisfied with our performance to date, but are mindful that it is still very early days in the fund. Figure 4 below shows the fund’s performance against the market benchmarks we measure ourselves against. Our weighted benchmark is 75% of the ALSI and 25% of the NASDAQ, converted to Rands.

 

Figure 4

 

As can be seen we are outperforming our benchmark, but gave back some of our gains that we made in July 2016 during August 2016. Our outperformance (net of fees) against the benchmark is 3.67% for the period. BUT, it’s still very early days.

 

 

Strategy

In our investment strategy over the next quarter, we will:

1. Continue to be patient in our investment approach, waiting for prices to better reflect value before we invest more funds in great companies for the long-term; and
2. Begin investing our offshore cash, again on a patient and steady approach. We are allowed to hold a maximum of 25% of our funds offshore.

 

Conclusion

Despite the turbulence in the market, we are pleased with our start and our performance. We have no doubt that we will continue to face headwinds along the way and that the markets will also provide great opportunities for investing. Whilst we will be patient in investing our funds, we will also not hesitate to be more aggressive if the market conditions provide great opportunities for us.

Kilimanjaro

Last month, my wife and I, together with eight great friends had the very challenging opportunity to hike up to the highest point in Africa, Uhuru Peak on Mount Kilimanjaro in Tanzania. Uhuru peak is at 5895 metres above sea level and is also the highest free standing mountain in the world.  We had chosen to go up via the Lemosho route over 7 days.

In this blog, I would like to draw on some of the lessons we learnt doing the hike and how this may be used in thinking about investing.

Lesson 1: You have the capacity and capability of achieving much more than what you think your limit is.

• Certainly all of us in the group and many others who have hiked up Kili (as she is affectionately known as), whom we have spoken to; have described this as one of the (if not the) most difficult physical challenge we ever had to endure. It required a deep mental resolve and determination in order to be able to summit.
• Not only did we need to be physically fit, but we had to endure the elements: wind, dust, cold, altitude; and also the lack of modern conveniences like running water, flushing loos and warm beds.
• So the lesson that I take away from this is that if you have the mental resolve, you can achieve much more than what you think your limit is. You just have to test yourself. Maybe you can do with a little less spending every month and use that to invest for the long term? Ultimately, it is only with some sacrifice and lots of endurance that you will be able to achieve your long-term investment objectives and aspirations.
• Another lesson that I draw from this is that you will have to endure market conditions throughout your investment journey. At times, those conditions will be very treacherous, and you will have to be able to cope with this if you if you want to achieve your investment aspirations. When markets are treacherous, it will certainly test your mental resolve. This is when you dig deep and make sure that you are able to withstand these conditions in your investment portfolio.
• In a previous blog, I talked about an investment club from the township that has achieved extraordinary growth (beyond each member’s wildest dreams) just through sheer determination and resolve. You have the capability of achieving much more than what you think your limit is.

 

Lesson 2: Some things are best done slowly.

• One of the first things we learnt from our guides during the hike was the Swahili words ‘pole pole’. It literally means slowly slowly. Unless you are a super-being, with great athletic capabilities and you have the ability to cope with altitude, then the best way to summit Kili is by doing it slowly. Slowly slowly. Pole pole.
• Our guides paced us at a slow shuffle from the first step on Day 1. Even though initially we could have walked at a faster pace, we were being trained to slow down, so that we do not run out of steam. Our minds and bodies were being conditioned to slow down, so that we can conserve energy and to allow our bodies to acclimatise to the altitude.
• In our everyday lives, we are so accustomed to rushing to get things done and to meet our commitments. But if you rush on the mountain, you burn out very quickly and reduce your chances of summiting dramatically. Slowing down was hard for this Jo’burg kid at first!
• With a moderate level of fitness, most people will be able to summit Kili if they pace themselves appropriately from Day 1.
• Investing in many ways is the same. Take time to build up your portfolio. Acquire little bits of great companies over time and you will likely be more successful in your investing strategy. If you try to swing for the fences, you will likely burn out quickly. Remember what I wrote in a previous blog: It’s not timing the market but TIME IN the market!
• Pole pole also implies that you need to take the time to develop your investment philosophy and approach, to study the businesses that you want to be invested in – read their annual financial statements, understand the industry that they operate in, who their management is and whether they have skin-in-the game.
• Pole pole also means that you need to ignore the bombardment of ‘tips’ by so-called experts, ignoring the minute-by-minute or daily fluctuations in the market, not watching the screen all day, and not trying to react to every tweet or breaking news story.
• Warren Buffet read the annual reports of IBM for 50 years before he started making an investment in the company. Only when he was convinced that this was a good investment did he finally decide to invest in the business. Now how pole pole is that for making an investment decision?
• Personally, I will make some additional time for reading great books on subjects that interest me and also study company annual reports more rigorously.

 

Lesson 3: Eat, Hydrate and Focus.

• We were also encouraged by our guides to eat when we still had an appetite, hydrate throughout the hike and lastly to stay focussed.
• When you are faced a long and difficult task, you need to ensure that you have the right resources to carry you through and that you do have a high degree of focus on the task at hand.
• In investing, this is similar. Make sure that you arm yourself with the knowledge to make the right investment decisions. Keep educating yourself about the market and the companies that you are invested in, so you don’t make rash decisions when there is a dislocation in the market.
• Staying focussed on the task at hand allows you to attain your long-term goals and aspirations. There’s a famous saying by Lao Tzu that the journey of a thousand miles begins with one step. I would like to humbly add that you need to take each step at a time – i.e. start with the first step and stay focussed on every step.
• If you are in the fortunate position of having a regular job or income, then now is the time for you to nourish your balance sheet, by feeding it every month so that you can build up a reserve that you can use one day when you need it.

So there goes some really great lessons that I learnt whilst hiking up to Uhuru Peak, Mt. Kilimanjaro:

• Your threshold is much higher than you think – test yourself!
• Pole pole – some things can only be done slowly slowly by us mere mortals. If you don’t do it slowly, there is a very high probability of not meeting your objectives. If you do it slowly, there is a much higher probability of achieving more than what you thought yourself capable of.
• Build up your resources because you will be needing it when things get much tougher. Stay focussed on the task at hand and give yourself the resources to stay focussed on every step.

My final words are of deep gratitude to my wife, my hiking friends, our guides and porters who made our hike up Kili possible, with great memories and full of wonderful life lessons.

 

Asante sana!

 

Curse or Blessing in disguise?

Lunar Capital, the company I co-founded last year and Boutique Collective Investment Schemes have partnered and launched an investment fund (Lunar BCI Worldwide Flexible Fund) on 1 June 2016. If someone had told us that Brexit was going to happen later in the month, I’m pretty sure we would have either delayed the launch or possibly had another strategy for the fund. However, we know that no-one knows for sure what will happen in the future. So the paradox that we as investment managers face is that we sell the future, yet we are unable to guarantee the future. Arguably, Brexit could have been predicted given how close the polls were calling the vote. But, there was always going to be uncertainty until the final result.

 

In a previous blog, I gave you some of thoughts on how to invest in the current market.  Basically, I suggested that the current market is overvalued as a result of a number of factors, but that you should have a good understanding of the businesses that you want to be invested in, i.e. those that meet your long-term investment criteria and build up a stake in those businesses at a slow rate. Where possible, if the market does show weakness, you can buy a bit more or if not, you can slow down your purchases even more. When you think that valuations are good, then you can be a bit more aggressive in your purchases.

 

To know how to get to your destination, you need to know where you are first?

When the Lunar BCI Worldwide Flexible Fund (LBWFA) was launched, it was seeded by a number of investors, including myself. The seed funding took place in the form of cash and shares. So, our first task as investment/portfolio managers was to develop a strategy for how we were going to get our portfolio from what it was when we started it, to what we want it to be in the long-term.

In this blog, I will share with you how we are going through this.

 

Develop a Target Portfolio

The first task we set about was to develop a Target Portfolio. For this, we started with our key investment themes, which we depict in the diagram below:

 

Our Key Investment Themes

 We then scanned the market and identified the companies (i.e. businesses that we would love to own) that we had a reasonable understanding of, that could benefit from one or more of these themes. This was not an exhaustive list, but we identified approximately 40-50 local and offshore companies on this list.

We then whittled this down to 15 companies (we do want a concentrated portfolio, so ideally, we want to be invested in a maximum of approximately 12 companies at any point in time). This forces us to focus our mind. We weighted these 15 companies, e.g. 9% for a high conviction investment; 5% for one with a bit more risk. We also tried to balance the companies and weightings to the various sectors and between local and offshore (subject to regulatory requirements). Thus, we created a Target Portfolio.

 

Where are we?

The next step was to identify what we inherited through the seeding of the fund. The most beneficial part of this was that a large part of the seeding portfolio was in cash. We were particularly pleased with this and in fact most of us were holding on to cash to seed the portfolio, because we were concerned about the high valuation levels on the market.

For the remainder of the portfolio, we put the investments into the following buckets:

• Investments that fitted in with our Target Portfolio. This was the second largest pot (after cash), and we decided not to sell any of these.
• Investments that we didn’t like, for whatever reason.
• Investments in sectors that we like, but not our first choice company in that sector.
• Offshore investments, i.e. primarily offshore businesses or instruments (Exchange Traded Funds) listed on the Johannesburg Stock Exchange.

This grouping allowed us to develop a strategy around each group.

 

What did we do?

• For the investments that we didn’t like, we simply decided to sell out of them and we did this over a 2 week period. We also, utilised the proceeds from these sales to buy into Target Portfolio companies, particularly those that we either had none of or very little of in our portfolio and where we though that the valuations were reasonable (not necessarily cheap).
• Similarly, we swopped out those investments in sectors that we liked, but that were not our first choice companies in that sector, with our first choice companies in those sectors.
• Overall, we also increased our equity exposure from just below 50% to around 57% today, buying when there was a dip in the market in small quantities and to shape our portfolio closer to our Target portfolio.
• In a few weeks’ time, when our offshore accounts are open, we will sell the “Offshore Investments” bucket of investments and use the proceeds plus any additional amounts we have targeted to direct offshore investments. We are mindful ofcourse, that the currency and equity markets may play havoc with our decision making and timing. We would consider drip feeding into the offshore portfolio as well.

 

What does the portfolio look like now?

The graph below shows you our core holdings in the portfolio at this point in time.

As you can see, quite a conservative portfolio, but also how it fits our investment themes. As we go along, we will keep on evaluating this portfolio and building on it. In particular, we will be increasing our equity exposure as valuations reach better levels.

Closing

By sharing how we went about getting to our current portfolio and also showing you that it is work in progress, we hope that this will stimulate you into either starting to build your portfolio or developing a strategy to change your portfolio to be more ‘shaped’ in the way that you want it to be.

Also, by sharing this with you, I wanted to alert you to the fact that there is no perfect time to start a portfolio, unless of course you have the benefit of hindsight.  However, you can take a prudent approach, by defining a strategy, and slowly moving in that direction. Moving faster when valuations are better and slower when valuations are higher. In this way you will reduce the risk of getting you timing wrong.

I’ll leave you with a saying and a mantra that I adhere to:

It’s not timing the market but time in the market that builds wealth.

Over many years of investing, one develops an investment philosophy and approach that you start feeling comfortable with. You know that it is not risk free, but you are confident that it gives you a framework for making your investment decisions. It’s also not cast in stone, so you are continuously making adjustments to it as you gain experience in the markets and you hone your investing skills.

In this blog, I will outline the methodology that we use in investing. I must stress that investment styles differ significantly and one can find many counter arguments for any given strategy or style. What is important is that you should be aware of the investment philosophy or style that you are following at any point in time and you should only deviate from this in a deliberate and considered way. You should follow a style because you are comfortable with that style. Similarly, through learning and experience, you should adjust your style accordingly; but be deliberate about this adjustment or change in style. You should give your preferred philosophy the time to mature, rather than chopping and changing. Remember that you are in this for the long-term, and investment cycles play out over a very long time.

Before I go into our Investment Selection methodology, I want to stress the importance of learning, and learning through experimentation. Use every opportunity to learn: Why did a particular investment pay off? What assumptions did you make, and were they in fact the reasons for success or failure? Was there an element of luck (good or bad) in your call? What will you do differently from here on?

The matrix below summarizes how we choose to invest in businesses:

 

The Price Continuum

Let’s start with how we determine whether a share price is high or low. A price is high or low relative to the intrinsic value of a share or company. To determine this, we look at the following:

• Market Value: what is the current market value of the company? How does it compare to its peers? If the market value was immaterial with respect to your financial circumstances, would you buy that business?
• Earnings: What are the earnings of the company? How stable or secure is the earnings, i.e. are these quality earnings? Is the earnings real, i.e. how does it compare to the cash flow of the company? We like companies with good quality earnings that are reflected in the cash flow of the company. One of the measures that we look at to determine quality of earnings is the gross and net margins of the company.
• Current Price:Earnings Ratio: what is the current PE of the company? Is there some extraordinary items that either inflate or deflate the PE? What is the adjusted (for extraordinary items) PE? How does it compare to the historical PE of the company? How does its stack up against its peers?
• 3-Year Forecast: attempt a 3-year forecast of the company’s growth prospects. This is where you would take into account the analysis of sectoral and demographic trends that we discussed in the last section, if the company is ‘in-the-zone’ of the investment themes, then you would expect a higher than normal growth rate.
• PEG Ratio: we love companies where the Average 3-year growth forecast is greater than the Current PE; what is termed as the PEG Ratio. When the PEG ratio is > 1, in general we are buyers, when below 1, we are sellers, and almost definitely not buyers. In fact, in our experience, 10-baggers, i.e. those shares that grown to 10 times the value we originally bought them for, are the shares when the growth rate extends over longer than the 3- year horizon we originally looked at. Forecasting growth is not trivial (nobody has a crystal ball) though and hence we look at some of the other metrics in this section as well.
• Price to Book: the price of the share versus the net asset value of the share is also a good indicator of value, especially when compared to peers and the company’s history.
• Return on Equity (ROE): ROE is a great indicator of whether a company is efficiently run or not. We tend to favour companies where the ROE’s are generally, but reasonably higher than peers
• Gearing: gearing helps ROE, but too much gearing introduces risk when business doesn’t go as well as was anticipated.
• Dividend Yield: we tend to favour companies that pay dividends, but do make exceptions to this for companies that are on a steep growth trajectory and require capital for expansion and they pay low or no dividends;
• Risk: we also like to understand whether companies are reliant on specific commodities or currency rates. Whilst we do not say that we will not invest in these companies, we are sensitive to when these commodity prices or exchange rates turn and are quick to get out of these investments. These we prefer to trade or ride through a cycle;
• Sentiment: management sentiment in a company is also a good indicator of whether we should be buying or selling. We prefer positive, but realistic sentiments from management.

 

The table below shows you how we summarise this information and we use this to determine where we assess the Price of a company is relative to how we value the company, i.e. on the Price axis of the Price Value Matrix.

Whilst the above table does already give one a sense of the quality of a company, we also assess the following to determine where we place the company on the Quality continuum:The Quality Continuum

• Industry: is this one of our preferred industries determined from our sectoral analysis; is it cyclical;
• Management: how do we rate the quality of the company’s management and people; is management aligned with shareholders; is this an owner/manager company?
• Brand: does this company have a market leading brand; does the brand capture the sectoral trends that we identified;
• Innovation: is this an innovative company; can its innovations be used beyond SA; can its innovations capture greater market share and higher margins?
• Strategy: what is the strategy of the company and do we buy into this, does it align with our sectoral trends, is the company growth oriented and does it have legs left in its growth?

 

So, what we have described above is our philosophy and methodology for learning about investing, valuing and assessing the quality of companies that we want to invest in and finally placing that company on the Price Quality Matrix.

 

Where we assess a good quality company at a low price relative to its intrinsic value: we BUY that share/company and in fact may also take a higher than average position in that company. Quality companies at good prices relative to their intrinsic value, are very hard to come by and therefore when the opportunity comes you must take full advantage of this. These opportunities come when times are bleak and the market is very bearish. You also will need to have some patience during these times, as it may take a while for the bearish trend to reverse.

 

We AVOID poor quality companies that are assessed to have high prices.

 

Most times however, we find that the companies that we want to invest in, i.e. high quality companies, are in fact priced high relative to our valuation of its intrinsic value. This puts us in a quandary if we do not have any holdings in that company. If we think that the price is not too high and we are in a bull market, we will invest in those companies, but in small chunks. These generally have paid off in bull markets; but have lost us money when the markets turn bearish quickly. We do tend to HOLD these counters if we are already invested in them if we already have them in the portfolio. We may lighten our holding if the position is very high as a percentage of the portfolio.

 

At times we may TRADE in lower quality companies that may offer value over a short period of time; but these tend to be small bets over short periods of time with strict stop loss limits.

In this blog, I want share with you some of my thinking on how I would position an investment portfolio in the current market.

Central banks

The current market in South Africa and globally is influenced by a number of factors. What stands out for me however is the role of central bankers in trying to stimulate growth through ultra-easy monetary policy, i.e. keeping interest rates artificially low, in fact even negative in real terms. These low rates ultimately influence asset prices by inflating their value. This can be observed in the high relative valuations (price earnings ratios) in the market.

Arguably, any sign that interest rates (globally) will normalise, will quickly result in asset prices being lowered significantly. We witnessed the turbulence in the markets when the US Federal Reserve stopped its quantitative easing programme and started raising interest rates (albeit very cautiously). The challenge for investors, however is that it is very hard to predict how central bankers will act. The complexity is further compounded because central bankers are not a homogenous group and do not act as one. When the US Federal Reserve raised interest rates, the European and Japanese central banks in fact decreased interest rates. This resulted in some whipsawing in the markets. By the way: the relevance for South Africa is that cheap money looks for assets anywhere in the world, including South African assets, thus also impacting South African asset prices.

South Africa

For South African investors, additional complexities arise: an ANC government that is split along factional lines, the scourge of corruption in the country, insufficient growth to meet the needs of job seekers and to meet government expenditure requirements, the potential for a sovereign credit ratings downgrade; etc. But perhaps the biggest problem facing the country is that failure of government policy in stimulating growth, creating jobs, reducing high levels of inequality and making South Africa a globally competitive business environment. Entrepreneurial, professional, technical and artisanal skills are not being sufficiently developed to give South Africans coming into the job market a better chance of getting meaningful employment and to make South Africa a stable and globally competitive environment.

Overvalued Market?

We can see from the picture below, obtained from an article by Steve Blumenthal in www.valuewalk.com that looking at it from a historical basis, the current market is overvalued and that returns are likely to be on the lower end if one is investing broadly in the market at these levels. The picture shows the valuation and subsequent 10-years returns.

 

The JSE ALSI is trading at a PE of approximately 21.5. This is also at an aggregate level, in expensive territory. So, if you want to invest, you need to be much more discerning, making decisions very hard for investors.

 

What to do?

The first question to ask then is:

“Is there any positives amongst all this doom and gloom?”

The doom and gloom should not be ignored, but one also should not be carried away by it. So, my first recommendation would be to be more risk averse in the current market. As a guideline, I would suggest that holding some cash that can be deployed when more favourable investment opportunities present themselves would not be such a bad idea.

The problem however, is that one does not know how long the current circumstances will last. As the saying goes: “nobody rings the bell at the top or the bottom of the market”, so one does have to retain some investments in the market. In a previous blog, on growth at a fair price, I discussed how you need to choose key sectoral themes and identify businesses that will take advantage of those themes.

Some of the themes that I think may play out over the next few years are depicted in the diagram below:

 

If these are the themes that will play out over the next 3-10 years, then one should be looking at those businesses that can take advantage of these trends. So, a second strategy that I would adopt is to have approximately 25%-35% of one’s investment portfolio offshore as the businesses that will benefit from some of these trends are listed in offshore markets and there may be very limited opportunities in the South African market.

Let’s take a few examples: businesses like Apple, Google, Amazon, and Facebook cut across a number of themes:

• Changing preferences of millennials
• Aging Populations in developed markets
• Pace of technological breakthrough
• Rapid urbanisation with megacities

There really are no equivalent businesses in the South African market that are in a similar league, yet most people are users of one or more of those companies services in South Africa. So, to get exposure to those businesses, one has to have offshore exposure. Warning: I am not necessarily suggesting that you buy into these businesses, as you would still need to conduct a valuation analysis to determine if the price is less than its intrinsic value before you invest in them. However, I do recommend that you do at least have a closer look at whether you should invest in these businesses if you accept the themes in the diagram above.

Now, one would have some cash, some offshore exposure, but there is still a large chunk of one’s portfolio left. Let’s assume that you are looking for equity exposure with the rest. Where would you look to find opportunities?

 

World Class South African Businesses

South Africa is home to a number of world class businesses.

Another one of my favourite businesses in South Africa is Discovery. Discovery is owner-managed, i.e. the owners have a large stake in the business. It is highly innovative, continuously seeking out new products, continuously analysing data so that it can be more efficient, price sharper, identify fraud, etc. It has the ability to attract great talent. Its Vitality loyalty programme is one of the best in the world, and it is continuously seeking opportunities in other markets. On the negative side, some of their products and ventures have not been as successful as expected and project costs have been higher than planned.

Discovery plays into the themes of:

• Rising African Middle Class
• Changing preferences of millennials
• Aging Populations in developed markets
• Pace of technological breakthrough

The share price is down by more than 25% since its peak of R155.77 per share, but still trading at a historical price earnings ratio of approximately 20. Still a bit expensive in my book, but if it manages to ride the waves of the sectoral trends, it may yet be a great investment even at these price levels.

Other South African world-class businesses that are globally competitive and provide opportunities for investors, include FirstRand, Standard Bank, Sanlam, PSG, Capitec, Mediclinic, Shoprite, Aspen to name a few. However, if there is a correction in the market, in all likelihood, these companies’ share prices will also probably come down, offering better entry points for investors. Some prices have already come down (perhaps not sufficiently) as we see with Discovery. So, if one does not have these quality businesses in one’s portfolio, a strategy could be to start slowly building up stakes in these businesses, with a view to be more fully invested over a few months or even a year or two, depending on the price entry points. One should also take advantage when prices are down, bearing in mind that sentiment will probably very low at that time. This is when your conviction is severely tested.

Conclusion

In summary, my view is that the markets are expensive at the moment and very difficult to predict as a result of central bank and government actions. Having some cash in one’s portfolio to take advantage when markets weaken is not a bad strategy. Similarly, my view is that approximately 25-35% on one’s portfolio should be in offshore assets. Lastly, if you haven’t already started, then begin building positions in great South African businesses that are likely to take advantage of key demographic trends.

Finally, I would also not recommend that anyone invests for a single outcome, e.g. Rand weakening or Rand strengthening. Invest with a view to manage the risks if your view/s do not pan out. The market is not always rational, especially in the short term.

 

 

Sabir

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