Letter from and reply to an anxious investor

Dear Gregg

“Your pest client again! I was listening to an economist talking on the radio yesterday & he said we were not just in a recession but we are in a depression & it might take 10 years to come out of this. What if:

  1. What would it cost if I sold everything in my portfolio.
  2. Put it all into the money market.
  3. What are the Tax implications every year.
  4. When it came up to the level I am at now we buy everything back again & what would that cost.

Just a thought. I can just see you pulling your hair out …… saying oh X, X…I was thinking say I lost R300 000 doing the above as apposed to maybe losing R500 000 or maybe even R1 000 000.”

And then my reply…

You are not a pest – far from it…

I am going to try and answer your question with the points below – if you are still not happy then we can get into more details.

Below is a graph of the Gryphon All Share tracker fund – it pretty much is a proxy for the whole of the JSE (and for other markets as well, as you should see).

The graph is from the 4 March (pretty much when markets started their serious downturn) until 19th April…and my points are as follows:

  • It is incredibly easy to get out of the market – you just move everything to cash – you would have lost 21% in doing this (that’s how much it fell) and I use the word “lost” very deliberately because you would have realised the fall by selling and as a result, the loss will be real.
  • With the benefit of hindsight, let’s imagine that you managed to get out around the 16th March (close to the bottom) and that you moved to the money market (safety)
  • The plan is to go back into the market at some stage in the future…
  • While you are in the money market funds you would now be earning a taxable return of ±5-5.5% pa – that’s all
  • However, since the bottom, the market has now moved up ±22% (it still has some way to go to where it was) but you have now missed that 22%…this is on top of the 21% loss you realised.
  • So you continue to wait…and…one or more of the following happens.
  • The market could continue to go up – and you still wait
  • The market could fall a bit, but not all the way back down to where you sold – and so you wait
  • The market could fall a lot, past where you got out, and so you wait because it might still fall further
  • Then the market goes up a bit – close to where you got out, but you are not sure where it is going next so you wait, perhaps it might fall further…
  • But then the market goes up even further and now you have missed getting back in again and now you are upset about your losses and you hope the market will fall again and so you wait some more
  • And this could go on for months or years and you would still be sitting in cash – or like many investors, you capitulate and go in at higher prices than when you got out…
  • And if you think this whole scenario does not happen, look at the 2nd graph below which is the same fund but from just before the 2008 crash where the market fell around 45%…and then it recovered more than 300% over the next 6 years – there are some people who are still sitting in cash…they missed all of it.

I think that the final points are as follows:

  • Investing takes time
  • There are going to be times where things get really volatile but that’s the price you pay for long term inflation beating returns
  • If we bring this back to your portfolio and use the same dates as the first graph above…and we take the N Fund which is kind of a proxy for global markets then the fund was at $85973 on 16 March – it moved back up to $94232 on the 17 April – that’s just under 10% growth over that period…at the same time, the offshore money market fund gave you a return of 0%…I know that this is a really short period but it illustrates my points above

So, if you want to move to cash, I will help you do that, but I can’t tell you when the right time to get back into the market will be (no one can) and my advice would be to stay where you are – your funds are well diversified and you have enough cash (local and offshore). When you sell your property, we can review what we do with that money.

Hope this is helpful – let me know if you would like to chat on the phone

Take care


Covid 19 – planting trees

We are now 2 days into the extended lock-down and what a crazy time it has been so far…

While these are very uncertain and without a doubt, very exceptional times and we have no idea when we will come out of them, we remain convinced that the best thing to do with your investments is nothing. Remember that investing is long term and requires time to work. Because of this, there will always be times when we experience incredible volatility and what feels like the end of the world as we know it. History has shown that the best strategy during these periods is not to panic. It is incredibly easy to get out of the market, however, it’s not so easy to get back in again and you will usually end up going in at a higher level than at which you got out, thus locking in your losses.

As I have been thinking about this, I think that investing can best be compared to planting a tree – there is a lot of initial preparation as you find the right spot and dig a big hole, but once it is in the spot you want it to be, apart from the initial watering and occasional pruning, there is nothing to do but wait for it to grow, and that takes a long time. We have quite a few beautiful trees at home, some of which are more than 25 years old – they have weathered many storms and while they may have lost a few branches over the years, they are still standing strong and growing. The point is this, once we planted them, we left them alone to grow – some years they grow more than others, but it’s only many years later that you can look back and see the growth.

Are Passives really that cheap?

I got really excited recently when I noted the addition of some of the CoreShares funds to the list of funds on one of the LISP platforms that we use…

And then I started doing some quotes to see what the effect the addition the CoreSharesTop50 would have on the fees on the client’s portfolio. I was surprised to see that the EAC of the Top50 fund is just under 1.5% which seemed really odd for a passive fund that claims to have really low fees. So I started investigating…

I started with the fact sheet for the fund which shows an annual fund fee of 0.2% (max) and a TER (total expense ratio) of 0.26% (including the fund fee). The TIC (total expense ratio) shows a figure of 0.43% but there is no mention anywhere of the EAC (effective annual cost) on the fund. So I called the CoreShares Call Centre and was told that I would have to open an account to see this information (which seemed very odd). I called again and was then told to send an email requesting the info, which I did. Still nothing, so I called again and was told it would be sent to me (still waiting).

The next step was to pull the missing information from Morningstar (through a connection in the asset management industry) and it turns out that the TER may well be 0.26% but the transaction costs (according to Morningstar) are around 1.24% so the EAC is actually around 1.5%. So much for cheap passives. I suspect that the high transaction costs might be a function of the fund size but I’m still waiting to hear.

So for now, until we can clarify the cause of the high EAC on the fund, we’ll be staying away from it and until further notice, you be better off (from a fees point of view at least) in an actively managed fund like the Coronation Top20 Fund if you are looking for a concentrated equity portfolio.

It is also absolutely crazy that we have 4 different ways of expressing the fees on a fund -and they are all different:

  • Annual management fund
  • Total expense ratio
  • Total investment charge
  • Effective annual cost

Surely “total” means “everything” and there should be no difference between the Total Expense Ratio, Total Investment Charge and the Effective Annual Cost…little wonder that there is so much distrust in the investment industry!

Cash guarantees?

We have come across many clients recently who are wanting to move their funds into the “bank” following the very poor returns of the past 5 years. Their rationale usually revolves around the fact that at least they would be guaranteed a return of ±7% per annum compared to the dismal returns from the market.

What we have to keep reminding them is that yes, they may well get a “guaranteed return” in the short term, but we can also guarantee them that they will be poorer in the future if they follow this route. Money markets are great for short term use – they are not appropriate for long-term investing. As someone once said to me “If you want to accept cash returns as your worst-case scenario, then you also have to accept cash returns as your best-case scenario”

Perhaps it is pertinent to remind ourselves about a few good old investment principles:

  • Markets move in cycles: they go up and down over time (not necessarily in that order).
  • Nobody knows exactly when this will happen – no one can consistently time the markets.
  • Equity markets (shares) should provide out-performance over the longer term (>10 years) but they are also more volatile over shorter periods.
  • High risk does not necessarily imply a high return (take gambling for instance).
  • Diversification is the prudent way to manage risk. This includes diversification among various asset classes, regions and investment styles.
  • Be mindful of the costs associated with your portfolio – higher costs will generally lead to lower returns over time.

Now is NOT the time to be deviating from your investment plan (unless your personal circumstances have changed). We don’t know which sector will perform best next nor do we know when the rand will weaken further or even if the market has bottomed. We do know, however, on balance of probability (built up over a very long time) that as an asset class, equities will outperform property which will in turn outperform bonds which will outperform cash (after tax). This is a fundamental consequence of the risk/return relationship. In fact, statistics show that SA asset classes have produced the following real returns over time:

Asset class Real return
Cash 0-1%
Bonds 1-3%
Property 2-4%
Equities 7-9%

  Source: Fortune Strategy, Bradley et al (the international experience is similar)

What investors fail to realize is that with the risk/return relationship comes volatility! There are periods (which can extend for a number of years) when the equity markets can be extremely volatile – the way to combat this is to have a well-diversified portfolio with sufficient access to cash (short term funds) so as to allow you to ignore the ups and downs in the short term. “The psychology of the speculator militates strongly against his success. For by relation of cause and effect he is most optimistic when prices are highest and most despondent when they are at the bottom.” Remember you are an investor and not a speculator.

It was Warren Buffett who said “Be fearful when others are greedy and greedy when others are fearful”. When people start to get greedy then it is time to be fearful and vice versa. From what I am seeing around me, there is too much fear – maybe, just maybe, it is time to start “getting greedy”.

There’s something insane about buying a R1.6m property that you can rent for less than R6000pm

I was recently approached by a client about whether or not I thought he should sell his rental property. Let’s take a look at the facts:

Bought in 2001: R210k (a further ±R70k spent on renovations).

Current value: ±R1.58m (he hopes)

Current rental: R6000 pm (it’s a 27 m2 1 roomed apartment in Stellenbosch)

Levies + rates: ±R1300pm

Net rental: R4700pm which equates to a yield of under 4% (3.6% before any tax has been paid on the rental). Continue reading There’s something insane about buying a R1.6m property that you can rent for less than R6000pm

Marcus Jooste’s school-boy error

Much has been written and much will still be written about the Steinhoff saga but after listening to some of the testimony and reading the bit below…there is only one conclusion that can be made and that is this: Ethics aside, Marcus Jooste’s biggest mistake was failure to diversify. It’s a classic school-boy error of over-confidence. We have seen it before with the collapse of Lehman Brothers where employees had their entire life savings invested in just one share and we will see it again in the future.

If there is a financial planning lesson here it is this: diversification is essential to a successful long-term investment strategy. Even if you are the CEO of a huge company you should not have all your money invested in just your company share. You need to diversify and this means holding a wide-range of different asset classes and currencies. Failure to diversify will ultimately result in failure to accumulate wealth!

“Jooste family trust held R3bn in Steinhoff shares on day of fallout

On the day of the Steinhoff share price fallout, Jooste’s family trust which has an investment company Mayfair, lost R3bn. The company held 68 million Steinhoff shares.”


Dont do this at home!

ENT specialists will tell anyone who listens that the only thing that you should ever stick into your ear is your elbow (it’s impossible, just as it is impossible to lick your elbow). And yet a quick trip down the supermarket aisle or peak into just about any bathroom cabinet will show that there is a massive market for ear-buds! Doctors tell us not to use them and yet we still do. We do things that are bad for us, even when we know that they are bad for us.

This got me thinking about share trading – there seems to be no end to the courses and platforms on offer and while the research shows that people don’t make money from share-trading, we still believe that we know better and that we can beat the markets. Perhaps online share-trading platforms are the ear-buds of the financial markets?

It’s time to do the Mickey Blue (again)

I recently watched someone using a leaf blower to clear their pavement. As I watched, it struck me what a pointless exercise it was and it crossed my mind that the leaf blower must be one of the most senseless machines yet invented. Continue reading It’s time to do the Mickey Blue (again)