Owningyour
own
Piece
of thePie
PSG portfolio manager HANNES SMUTS
advises how you can avoid the risk involved with investing in shares
I
nvesting in listed equities makes you
an owner of a share in companies
listed on the Johannesburg Stock
Exchange (JSE). It is exciting to
be able to own part of Woolworths,
Checkers, Vodacom, Mediclinic, Sasol, First
National Bank, DStv and Capitec Bank, to
name a few prominent household brands, all
part of our daily lives. Equally, if not more
exciting, is the possibility for local investors
to invest via local stockbrokers in global
companies such as Nestlé, Volkswagen,
Coca-Cola, Apple, and Johnson & Johnson
listed on international stock exchanges.
Equities are a versatile investment class.
The flip side of having so many options
available is that equity markets have become something of a mine
field. It can be increasingly difficult to make appropriate choices,
especially for new investors. They find it best to employ the capable
guidance of investment managers to assist in introducing and sticking
to a few basic principles. If one gets it right, it can be a particularly
rewarding journey.
Many successful investors and their advisers make no secret of the
fact that they have achieved results, not by developing some magical
formula, but merely by following the advice and proven strategies of
seasoned investment gurus. Names that come to mind are Benjamin
Graham, widely known as the ‘father of value investing’, and Warren
Buffet, arguably the most successful investor of our time. Buffet’s
passion for shares is best embodied in his well-known quote: ‘I made
my first investment at age 11. I was wasting my life up until then’.
May 2017
Closer to home, investors will do well to
follow the advice of super-successful businessmen
like the chairman of the PSG Group, Jannie
Mouton, to whom Moneyweb refers as the
‘Boere Buffet’. Jannie attributes his knowledge to
reading, reading and more reading. He stresses the
importance of having time on your side, i.e. being
patient and taking a long-term view when it comes
to receiving rewards.
Paramount to this investment approach is the
amazing power of compound growth; if you start
with an initial monthly investment of R1 000
and increase it by 10% each year, an investment
returning 15% per annum will accumulate to
R57 million in 40 years. Jannie further shares
a mistake to avoid – how he initially tried to make
money through speculating in shares for short-term gains, and how
he burnt his fingers. He says in 40 years he made no money through
thoughtless speculation or ‘lekker tips’. So what is the appropriate
approach to investment on the stock market?
To determine the suitability of any investment for your portfolio,
you need to understand how returns are generated, particularly in the
long-term. It is sensible to judge the suitability of a specific class of
investment by comparing its likely return with that of other investment
classes. For example, what the expected reward is for investing in
shares, compared to property or a bank deposit. This boils down to
assessing the risk associated with different asset classes (the higher
the risk, the higher the likely return).
Also, determine your risk appetite. Taking proper account of the
different aspects of risk makes it possible for most investors to achieve
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shares w INVESTMENTS
leads to short-term volatility in equity markets. During periods of
negative news flow, share prices, even of top companies, could drop
significantly. Certain investors are tempted to sell and move to the
side-lines, believing that they will time re-entry into the market to
their benefit. Research seems to indicate quite the contrary. For the
10 years to 11 August 2011, investors who remained fully invested
in the JSE, would have earned 366%. If they missed the best 10 days
their return would have dropped to 163%. If they missed the best
30 days their return would have been a paltry 15%. Jumping in
and out of quality shares brings no joy.
2. Risk diversification Equity investors reduce risk considerably
by constructing a well-diversified portfolio, combining different
asset classes, companies and sectors. Most will need professional
guidance in this regard as over-diversification is likely to
compromise returns as time goes by.
3. The quality of the counters in your portfolio Select shares in
companies with good management and a well-established business
model. Most businesses are cyclical and will probably go through
tough times at some stage.
A quality company is one that will survive a slump and thrive again
when its business environment improves. Investors must also assess
an appropriate entry price in order to avoid paying too much for
a share in a top-class company.
4. The quality of investment advice Inexperienced or uncertain
investors will do well to seek professional advice before embarking
on their investment journey. Look for a suitably qualified adviser
with ample experience. If he/she has the backing of an established
investment house, it should add to your peace of mind.
a balanced investment portfolio containing a mix of different asset
classes. Your investment objectives, which depend on your personal
circumstances, should be realistic and in line with your ability to
stomach risk. Low-risk, conservative investments tend to focus on
earning income (interest, for example). Higher-risk investments seek
to attain high growth of capital over time.
Typical examples of income-bearing investments are money market
funds, government retail bonds and bank deposits. They carry a low
risk of capital loss and aim to deliver the highest possible interest
income. The downside is that investors have no growth on capital.
On the other end of the scale are investments that are likely to show
attractive capital growth over the long-term, but generate low or no
income returns. These include art, antiques, vintage cars, rare coins,
gold coins and other commodities. Certain shares also pay no, or very
low, dividends. Most listed companies, however, do pay meaningful
dividends, usually twice a year. Investments in this class are usually
referred to as growth assets.
There is a perception among certain people that equity investments
are only for gamblers and speculators. Perhaps it is due, in part, to the
severe short-term volatility that equity markets exhibit at times. It is
Finally, successful investors have a specific mind-set. Jannie
important to distinguish between punters of a certain share who chase
Mouton compares long-term investing to having a happy family –
a ‘quick buck’ and investors who weigh up risk, return and quality of
it requires lifelong love, care and dedication. As good friends
company when selecting equity investments for a portfolio. The ‘easy
carry you through emotional crises, quality investments carry
money’ perception of investing in equities is often encouraged by the
you through economic storms. n
portrayal of equity trading in the media as being ‘easy’. Certain local
and global institutions regularly advertise low-cost trading platforms,
PSG 028 312 1508, www.psg.co.za/hmns, [email protected]
often combined with programmes promoting active, trading strategies,
with these usually based on graphs, other
technical aids and algorithms. Active
share trading and its spoils have also been
150000
glamorised in movies like The Wolf of
Had you been invested in the JSE All Share Index over the last 40 years to end
December 2016, you would have earned a nominal (i.e. not inflation-adjusted)
Wall Street.
How risky then is a serious investment in the
stock market? Judging over long periods,
its risk is no higher than, for instance,
investment in property. Inherent risks are
certainly there, but they can be managed by
focusing on aspects you can control:
1. The time period of investment.
The most common mistake made by
investors is to overreact to short-term
price movements. Uncertainty often
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10000
return of 19.7% per annum with income reinvested.
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