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    Knowing What You Invest In

    Gaining a thorough knowledge of what you invest in sounds like it should be a process that everyone practises. In reality, however, it happens far less frequently than you would think.

    Investors will certainly have a look around before buying a new property. There is plenty that one can do to make sure that what you buy is a worthwhile investment, including checking prices of surrounding properties at the Deed’s Office, making sure the plumbing works, and checking whether there are any leaks in the roof (among other checks that you can do). A property that ‘has a charming appeal’ quite possibly needs a new paint job or two, while everyone knows what ‘a DIY enthusiasts delight’ means, so visiting the property to verify what these ‘charms’ are is an important process in the investment decision.

    Often the same due diligence is not observed when financial instruments are purchased.

    We act on tips from friends, or the appeal of a prospectus. Who doesn’t want to get involved in the private placement of a new listing? While many IPO’s (initial public offerings – when a company lists on the JSE) are profitable on the listing day there will be some that won’t make the grade. Buying the latest IPO indiscriminately is a bomb waiting to explode. If you aren’t doing the necessary work beforehand you won’t know 1) if it is a good company with solid prospects, or 2) if it is listing at a reasonable price.

    While we need to educate ourselves on new listings, making investments into well established companies also requires some research. For example there might be the temptation to buy SABMiller as there is a burgeoning middle class in South Africa, and their drinking habits will probably move up the value chain to more premium (and profitable) brands as their wealth increases. Is the company cheap or expensive in relation to its history and global peers? Do you know that only one-third of SABMiller’s profits come from South Africa? What’s happening to the drinking habits in Eastern Europe, and South/North America, and China? There was a stage when SAB was only based in SA, but those days are long gone, it is now a truly globally diversified beverage company, and as such you needs to ensure that you understand the risks (and potential rewards) involved when investing in the company.

    If you don’t bother to distinguish between a good company at a good price, and a good company at an expensive price, then you could end up with a nasty surprise on your hands.

    If you aren’t aware of all the factors affecting your investments, then you could end up with a nasty surprise on your hands.

    Do you know who the management are in the company that you invest in? Do they have a good track record? Are they honest? Do they have shareholders interests at heart, or are they merely in it for themselves? These are the kinds of questions that you need to ask yourself before making investment decisions, and it is always best to check management’s actions rather than their words. A CEO talking up his company’s prospects, but at the same time selling his shares, should be questioned. Make sure that they are walking the talk.

    There will still be times when you end up making a bad decision despite the hard research that you put in, but by having a robust process, and diligently following it, you should be able to shift the probability of being a successful investors more to your favour.

    There are lots of investors out there who are merely investing “for the fun of it”, and I am by no means trying to be a party pooper to these fortunate individuals, but the question that I pose to these investors is, “Is it more fun to make money, or to lose money?”

    South Africa plays rugby against the Barbarians tomorrow, and it is meant to be a fun game. While the Springboks will be looking to have some fun out there, their first aim will be to win the match, as all sportsmen and women know that it is no fun to lose.

    Those investors who do their homework should have more fun (and success) in the long run.

    Have a good weekend, and good luck to the Proteas and Springboks.

    Kind regards,

    Mike Browne

    Permalink2007-11-30, 16:10:04, by Mike Email , Leave a comment

    Expectation of return on your investments

    An investor’s expectation of return on investment is an important element in the investment process. One finds that after strong gains in asset prices, both property and equities, return expectations are heightened. If investors were to really be honest they would understand that more expensive levels lead to lower prospective returns.

    So why do I say that return expectation is crucial to the investment process? It comes back to the fact that a real asset, such as a share in a business, will produce a high real return over time. It goes without saying that some businesses will produce a higher return than others, but it’s almost a proven fact that investors WILL achieve inflation beating returns by investing over the long run.

    And there is the rub – over the long run!

    The return from a share (being a share in a company) has three elements. Firstly the current and sustainable dividend income, secondly the growth rate of that dividend and thirdly the re-rating of the share price.

    Over long periods of time it has been shown that re-rating growth is not sustainable. What is this exactly? Lets assume you acquire a share on a price to earnings multiple of 10 times. You hold it and sell on a price to earnings multiple of 13 times a year later. Even with no growth whatsoever in earnings (or dividends as a proxy for earnings), you generated a return of 30% on the investment. If this was over a one year period it would have been a fantastic return.

    But clearly there is a limit to these positive returns that you have generated on your investment due to re-rating. To generate the same return off flat earnings over the next 2 years, that PE multiple will have to move to 17 times and then 22 times. Not impossible, but starting to get difficult.

    Then there is also the risk that due no fault to the company itself, the rating slides back to say 12 times from 13 times. Again assuming flat earnings the price in this case falls 8%.

    So in many respects over any shorter period of time – one, two, five years, the growth or decline in prices and hence positive or negative returns for investors is due to this so called re-rating. It’s either a positive or negative re-rating.

    Where investors get this wrong to extrapolate recent historical re-rating growth into perpetuity. It’s just not possible. The smarter investors pay a lot of attention to the price that they pay for a company earnings. The ideal situation is a double whammy of increasing earnings and a higher multiple.

    Your investment process must include a high focus on the multiple paid. If little attention is currently being paid to this, look for ways to increase the focus.

    Kind regards

    Ian de Lange

    Permalink2007-11-29, 16:58:16, by ian Email , Leave a comment

    Keeping Abreast with Market News

    Without a doubt the major news for today was the withdrawal of the cautionary announcements issued by MTN and Telkom on 3 September and 11 October. There have been talks between MTN and Telkom for the last three months regarding the combination of their assets (or portions thereof) and Telkom, in turn, has been in talks with Vodafone regarding the sale of a portion of Vodacom to the UK listed mobile giant.

    It is interesting to note that Telkom’s talks with Vodafone were dependent on them agreeing to a deal with MTN. Telkom understandably still want to have a significant interest in the mobile arena, where the high growth rates would help to offset Telkom’s pedestrian prospects. This breakdown in talks with Vodafone is a blow to Vodacom, as they continue to compete directly with their parent company, and the high energy, high growth, company would clearly love to be unbundled from the ‘frumpy’ old Telkom and potentially list on the JSE in its own right. Despite the talks breaking down Vodafone remains interested in increasing their stake in Vodacom.

    As expected MTN reacted positively to the news (it had been negatively affected by the original cautionary) and ended the day up 7.65%, with a closing market cap of R 241.24 bn. MTN’s market cap is now within touching distance of the fourth largest JSE listed company, Richemont, which has a market cap of R 241.37 bn. Telkom was hurt by the news and fell by as much as 12% intra-day before recovering slightly to end the day down 10.82%, some R 9.3 billion of shareholder value was knocked off on the day! It was a great day for those investors holding MTN shares, not so fun for those who have Telkom in their portfolio.

    In other news CPIX for the year ended October 2007 increased to 7.3% (up from 6.7% at the end of September). This is above a Reuters’ poll, which forecast a 7% increase. Inflation is now at a 4 and a half year high. This high inflation comes on the back of third quarter GDP growth coming out ahead of consensus. As we are now well over 1% outside of the SARB’s inflation band, and with GDP growth remaining robust, we could well see another hike in interest rates at the next MPC meeting in December.

    In other company news AECI released a trading statement indicating that they expect 2007 EPS to be 48 – 53% lower than 2006 reported EPS. This is mainly as a result of 2006 earnings being boosted by the disposal of their Milnerton site, and the creation of a Pension Fund employer surplus account. AECI’s year end is 31 December. The market didn’t like the news, and the share price immediately dropped 6.1%, and eventually ended the day down 4.76%.

    Aquarius Platinum’s share price closed the day down a whopping 67.45%, but this is mainly as a result of their 3 for 1 share split. This translates into a 2.34% decline in the market value of the company on the day. An investor not keeping a close eye on these developments might panic when they see the share price down by so much, but a share split is no reason to panic, and often occurs as the directors try and make their shares more attractive (although 10 shares at R 100 is no different to 100 shares at R 10) to investors.

    Otherwise heavy weight industrials SABMiller, and Richemont, and financial companies Old Mutual and Investec Plc provide good positive impetus to the bourse. What these companies have in common is that they all derive a significant portion of their earnings outside of South Africa. Anglo’s and Billiton both ended the day relatively flat (down 0.02% and up 0.01% respectively) with the ALSI ending in the green, up 0.42%.

    That’s all for today, enjoy the rest of your week.

    Kind regards,

    Mike Browne

    Permalink2007-11-28, 17:20:01, by Mike Email , Leave a comment

    Has your profit on resource shares disappeared?

    Resource shares have been hugely impacted by the strong gains in commodity prices over the last few years. Windfall profits have boosted profits and helped raise their market caps to hundred billion dollar companies. There

    Now some of the resource prices are looking somewhat vulnerable. I looked at a chart of copper, which has come back to $6721/ton falling through technical levels. It has been in a long term uptrend for the last 4 years.

    Many see copper has a barometer for many of the other metals and it is therefore closely followed.

    Nickel is also coming off.

    Oil almost touched $100/barrel. Its now back at $93.34 for Brent crude. Its primary trend remains steadily up.

    The 1970’s oil spikes however saw the price of oil go up 8 times from 1974 – 1980. The current up cycle from 2002 – 2007 has seen the price move up 4 times. So to this end, we are not at crisis levels yet, despite the record high in nominal terms.

    Resource shares have fallen back sharply in recent months.

    So what does this all mean for investors? Well the resource up cycle does perhaps have another 10 – 15 years to go, if one gives credence to the super cycle, but there is no doubt that large price pullbacks can and will be experienced.

    An investor may have bought into Anglo American in May 2007 at R400. This is one of the top holdings in many private client portfolios. Now heading into the last month of the year and the price is still hovering just above R400.

    An investor into Billiton at R200 in June, would have fared slightly better, now at R219.

    An investor into Anglo platinum in February would have bought in at around R1000. The price went up to R1300, but now done to R944. That investor would not have gone anywhere for most of the year.

    The same with Implats – R230 in January and now still at that price.

    Fair enough investors would have received dividends in the interim, but there has been little to no capital appreciation.

    So yes in the shorter time horizon entry levels are important, but this is extremely difficult to assess at the time of investing. Many investors are looking at their portfolios for the last 12 months and especially 6 months and wondering if where their returns have disappeared to.

    Prices that ran away on the upside now have to trend sideways for a period in time as earnings levels catch up.

    Us the time going into December to assess your overall portfolio. While you will never only be able to have winners, try and gauge if the portfolio of shares and or funds and importantly the allocation to the various asset classes is such that you can remain invested even if the market moves sideways for another 6 months or more.

    Kind regards

    Ian de Lange

    Permalink2007-11-27, 21:56:30, by ian Email , Leave a comment

    A first glance view of values in the US

    While the shares price to earnings ratio is only one of the methods used to assess the value of the company, its generally the most widely used to gain a first glance view of whether there is value or not. Analysts use forward price to earnings ratios but more typically use earnings and dividend discount models and sum of the parts methodologies to assess values.

    So listening to one of the local fund managers last week extolling the attractiveness of relative values of offshore against local counterparts, I did some quick searching.

    Banks locally and offshore have been hard hit following the sub prime debacle in the US and also Europe. Share prices of major banks have declined substantially. Citigroup declined from USD55 in June 2007 to its current $31.

    I have written about the large losses that many US banks have and will continue to have to write off, impacting earnings and hence share prices. But often the price more than accurately discounts negative news before that negative news is fully reported. Citigroup is now trading on a trailing PE ratio of 8,37 times.

    JP Morgan trades at $41,66 from around $53 in May. At this price it’s trading on a trailing PE of 8,7 times.

    Another stalwart of the Dow Jones Industrial index is Pfizer at $21,91 down from around $28/share in September 2006. Again this share trades at 10,8 times historical PE.

    While some shares are trading at PE of 17,5 times for General electric and 14,3 times for Du Pont etc. Some shares like the 3 detailed above appear relatively cheap.

    And with the cheaper US shares, the currency itself, the US dollar has declined substantially against a basket of currencies. It’s almost at $1,5 to the Euro its weakest level ever against the Euro.

    What’s causing this? Well one factor is the continued move of capital into other opportunities, including emerging markets.

    I received the following e-mail from a contact in Europe about the interest in Africa today.

    “I mentioned to you earlier that there is a growing European interest in investing in (South) Africa. I can tell you now that investing in Africa is really booming in Europe. There are a growing number of African investment funds and investing in Africa makes the headlines of most serious business magazines. At this moment Africa is still a niche in investment products although well known financial institutes like Citigroup and Aegon are getting started to launch new investment products. Obviously China's candid interest in the African resources and the fear of a recession in the western economies is drawing investor's attention towards Africa.”

    With interest into emerging markets having risen so substantially and still on the up, it’s opportune for local investors with an underweight offshore exposure to increase this. I.e. smarter investors should slowly move against the general prevailing trend.

    Feel free to discuss you investment planning requirements at any stage. Mail me on ian@seedinvestments.co.za


    Ian de Lange

    Permalink2007-11-26, 17:34:21, by ian Email , Leave a comment

    Capital preservation is important

    From February to now, some of the furniture retailers’ share prices have reduced 35% - 40%. These are big moves, and investors need to understand the impact that a steep drawdown has on the subsequent return required, in order to place a high value on preservation of capital.

    Lets look at a relatively simple example where an investor starts with R1m looking to invest over the next 5 years.

    In the first instance he invests in a more cautious portfolio that generates 12% per annum compounded. At the end of 5 years the portfolio will be worth R1,76m.

    Alternatively in the first year he gets more aggressive, but because there is never any certainty with investments, rather than going up 20%, the portfolio declines some 30%. It’s a big drop – but not a wipe-out of the portfolio.

    However what this reduced portfolio needs to generate over the remaining 4 year period just to be at the equivalent of R1,76m (i.e. the compounded 12%) is a 26% per annum return. You will agree this is a lot more onerous to achieve, especially over a 4 year period.

    Had the first year decline been slightly steeper at 35%, then the compounded return requirement for the next 4 years jumps to 28%.

    Capital preservation is therefore very important for achieving longer term wealth creation. One of the best ways to improve the probability of capital preservation is diversification within a total investment strategy.

    Returning to the furniture retailers, JD Group touched a high of R106, only to decline to its current R60, a drop of 43%.

    Lewis shares have dropped 34% from their peak.

    They may have been expensive at their peaks, or perhaps investors have got so disillusioned with growth prospects or lack thereof, negative publicity etc, and moved on to something more exciting such as new construction listings. They both now look cheap on PE’s in single digits and trailing dividend yields of 5% and 6%.

    But just as expensive can get more expensive, so cheap can continue down and get even cheaper. They say don’t try and catch a falling knife. i.e. don’t try and invest into a share price that is falling sharply.

    These share values are starting to appear attractive. The forecast PE for Lewis is 6,8 times on a forward DY of 7%.

    JD Group has a forecast forward PE of 6,2 times and a forward DY of 8,6%.

    Value investors are definitely looking at these values relative to a much more expensive market.

    Have a great weekend


    Ian de Lange

    Permalink2007-11-23, 16:01:19, by ian Email , Leave a comment

    More construction shares listing

    African Brick released their interim results. The company listed on the Altx market of the JSE on the 8 Oct 2007. The company has 2 manufacturing factories situated at Krugersdorp and Lenasia with a combined manufacturing production capacity of 90 million bricks per annum.

    The company raised R45m.

    It sells its production at 9 of its own and 18 franchise centres.

    The company is in a sweet spot at the moment with the level of building activity. From anecdotal evidence, there are shortages of inputs into the building trade, including cranes, scaffolding etc.

    Brick production is excellent business with solid margins of 52% for this company. Revenue increased 20% to R57m and gross profit from R19,6m to R29,8m.

    Headline EPS rose from 2,6c to 4,4c.

    Cash flow however was negative at R2,5m for the 6 months compared to attributable profit of R19,6m. The report discussed this, saying that the reason was due to an increase in working capital in the business.

    Excellent results. So why did the price decline 4,35% to 88c. Well after listing at a R1, the price climbed to a high of 150c, soon after listing, but then starting falling. Assuming an 8c earnings per share, the price is on a forward PE of 11 times. On this basis it does not appear too expensive. But perhaps the earnings are high and the margins unsustainable. These are the questions investors should be asking.

    Other similar businesses are due to list soon.

    Buildworks is a supplier of heavy building materials to the construction industry, supplying bricks and crushed stone and sand. They are raising R50m by way of a private placement of shares at 100c a share and listing on the AltX on 28 November.

    It appears to be a similar size to that of African brick.

    Then Erbacon is a KZN construction firm specialising in civils and plant hire. As mentioned there is such demand for these inputs into building that owners of these businesses can now command decent premiums for their businesses.

    This company is looking at listing on the 7 December. Just in time for the owners to celebrate the annual builders holiday – which typically starts on the 15 December or so.

    As I have discussed before the listing of these type of companies is symptomatic of the type of market that we find ourselves in. As always some will be excellent businesses, but many will just be too expensive. The job of sifting will get harder as more and more come on to the board.


    Ian de Lange

    Permalink2007-11-22, 17:21:31, by ian Email , Leave a comment

    Long bond yields are very expensive

    The yield on the US long bond is a barometer of future expected returns on all asset classes and so when it declines to below 4% investors have a muted outlook for returns. With ongoing global market jitters, investors have turned defensive and bought into US bonds, taking the yield to below 4% for the first time in more than 2 years.

    Unlike a real asset such as a stake in a business – i.e. a share, a bond is a debt instrument with a fixed and agreed nominal rate of return. So when the yield on a 10 year US bond trades at 3,99%, that is saying that an investor in that bond will receive 3,99% annual return on the invest if he holds it to maturity, i.e. for the 10 year period.

    When the bond was initially issued, the issuer would have defined a certain coupon rate. Once the bond is issued and then as that bond trades in the secondary market however, due to changing circumstances, (quality, supply and demand, change in outlook for interest rates etc) the price of the bond goes up and down. The yield is a function of price and so a change in price causes yields to move in the opposite direction.

    A falling price is the same as the yield moving up, and vice versa, a declining yield is good news for holders of bonds.

    OK, it’s not always easy to understand and believe me the maths on bonds gets pretty complex.

    I just look at the yield to maturity, which is the percentage rate that is quoted. As mentioned above, this is the pretty close to the exact nominal return that an investor WILL receive when holding that bond to maturity. This is unlike real assets like shares, where there is varying degrees of uncertainty in the return that will eventually be achieved by an investor.

    So when an “asset” is set to provide the investor with a nominal 3,99% annual return, i.e. before inflation, for the next 10 years, this must mean that return expectations for all other asset classes adjusting for expected risk, is also lower.

    At face value 3,99% nominal is VERY expensive. Especially when inflation (official or otherwise) is on the increase. For this reason it typically does not make sense to invest in this “asset” if you have any reasonably long investment horizon.

    Clearly there is a lot of money that prefers the certainty of a low return as opposed the now greater uncertainty of a higher return from riskier investments. Yields at these levels indicate a high degree of uncertainty in global markets.

    Locally yields for the longer dated R157 are at 8,35% - we think also relatively expensive. Shorter dated cash returns are more attractive, but from various discussions with investors, I find that many investors have too high a cash / bond component in their portfolio and are unsure what to do with this, or indeed what is the longer term detrimental impact on their wealth.

    Short term it may have merit, but over a longer period after tax and inflation, the real returns disappear.
    The 10 year US Treasury yield is an important number. When it declines to a 2 year low, it’s an important piece of information.


    Ian de Lange

    Permalink2007-11-21, 17:05:17, by ian Email , Leave a comment

    Why Invest Offshore?

    Many investors have experienced exceptional growth in their local investments over the last 4 years or so when measured in any currency. South Africa (and most emerging markets) has experienced exceptional growth, so one can be forgiven for thinking that all your investments should be made locally.

    There are investors out there that still bare the scars of taking their money offshore when the rand was over 12 to the US dollar. If you had taken your money out at the end of 2001, and invested it in a fund that returned 10% compounded per annum in hard currency (US dollar) your investment would STILL be in negative territory when translated into rand! This is especially painful if you compare this return to an investor who would have trebled their money over the same period had they invested into the ALSI. Those investors who got burnt are particularly adverse to the idea of investing offshore.

    As much as you diversify your assets between shares/unit trusts to mitigate company/manager risk, and spread your investments between asset classes to enhance your risk/reward profile, so you should diversify your assets across geographic areas to reduce country/region specific risk.

    While I am extremely positive about our country’s future one should be cognisant of the fact that we are classed as an emerging market, and the so called developed markets don’t do much homework on the differences between South Africa, South Korea, Russia, Brazil, etc. If one of these developing countries has a blow out, then our markets (and quite possibly currency) will be hit hard.

    SA has a massive current account deficit, and we need foreign capital inflows to keep our currency strong. There is currently no reason why these flows should dry up, but if they do (or worse flow out of the country) then our currency will face massive pressure. When we speak to other investment professionals our feeling with regards to the current account deficit is confirmed in that the deficit won’t matter until it matters, i.e. if the risk of having a large deficit gets ‘re-priced’, then the currency could weaken quickly.

    While currency considerations do form part of your decision, it shouldn’t dominate your time as it is notoriously difficult to consistently predict where currencies will be in the short to medium term. Looking at the relative attractiveness of the different markets should arguably receive the majority of your focus.

    I was at a fund manager presentation last week, and they put up a graph that showed how expensive the ALSI has been relative to the S&P over the last 33 years. The South African market has, over time, moved from cheap to expensive relative to the US market, and moved from extremely cheap levels in 2003 to currently being more expensive than average (partly as a function of the strong rand). Most investors moved out of the JSE when we were at historic relative lows. When comparing global companies to similar local ones we also see that they are currently trading at lower ratings. One would expect a global player such as Walmart to trade at a higher rating than Shoprite, but it doesn’t!

    While South African assets have produced phenomenal returns recently, including offshore assets that have a low correlation with your local investments into your portfolio should assist in skewing the risk/reward ratio in your favour. Skewing the risk/reward ratio in your favour will, over time, tilt the probability of being a successful investor in your direction.

    Kind regards,

    Mike Browne

    Permalink2007-11-20, 17:20:08, by Mike Email , Leave a comment

    News Flow

    It amazing just how much investment ‘news’ is out there. SENS news items pop up regularly during the day informing the investor of; transactions in shares by directors, drilling updates, appointments, cautionaries, AGM results, financial results, and everything in between. All in all there were over 50 SENS items starting at 7am this morning until just before 6pm this evening.

    As can be expected most news items are relatively inconsequential to the average investor with you either not having an interest in the company, or if the news item was merely confirmation of public knowledge or execution of an agreed transaction. The bigger news items do attract more attention.

    One of the larger items today was Remgro and Richemont announcing that they are considering restructuring their assets. They both have large stakes in the tobacco group British American Tobacco (BAT), collectively owning 29.9% of company (Remgro 10.6%, Richemont 19.3%). These companies are looking at splitting their tobacco assets from their other interests. Shareholders were advised to exercise caution in dealing in these shares. Both shares prices responded positively to the news with Remgro reaching a new high of R 196.90, before ending the day up 0.11% at R 186.00. Richemont fared better, ending the day up 3.87%. By way of comparison the ALSI ended the day down 2.16%, so this news was clearly seen in a favourable light by investors.

    Other big news that was released before the market opened was the interim results for Telkom. The share price opened up from Friday’s close, but was down 1.48% by the time the market closed. In and amongst the detail of the two SENS announcements (Telkom also released separate results for its subsidiary, Vodacom) it was clear that most of the good news came from the mobile portion of the business (which Telkom might be getting rid of). While Vodacom’s customer base is growing rapidly (up 22.6%), Telkom are struggling to hang onto fixed line customers with the number of fixed access lines down 1.2%. The report is a meaty one that analysts will be poring over to help them better understand the underlying company dynamics. MTN fared slightly better than Telkom today, ending the day down 0.96%.

    Tiger Brands, who have recently settled with the Competition Commission over pricing collusion, released their results for the year ended 30 September 2007 just after the market closed. Headline earnings are up 6%, while EPS are down 3%. Earnings have been negatively affected by the above mentioned settlement, and also as a result of provisions for the expected unbundling of its Healthcare Interests. It will be interesting to see how the market reacts to these results when it opens tomorrow. Tiger ended the day down 0.42%, slightly ahead of the Industrial 25 Index (large cap Industrial shares) which was off 0.65%.

    While investors are often side tracked by the ‘noise’ that the market creates, you must make sure that when news of substance comes out about a company that is relevant to your investment portfolio that you study the news item to ensure that you act in a rational manner.

    Have a good week.

    Kind regards,

    Mike Browne

    Permalink2007-11-19, 18:29:38, by Mike Email , Leave a comment

    Have you considered probability?

    Nassim Taleb, an ex Chicago floor trader, adjunct professor at Courant Institute of Mathematical Sciences of New York University, wrote an exceptional book, called Fooled by Randomness, which looks at the hidden role of chance in financial markets. More recently he has followed this book up with “The Black Swan.”

    He defined a black swan as:

    1. an outlier (event) beyond the realm of our regular expectations. (rarity)

    2. an event that carries an extreme impact.

    3. a happening that, after the fact, our human nature enables us to accept by concocting explanations that make it seem predictable at the time.

    Some of the main points he makes in this book:

    • Investors often confuse luck with skill, probability with certainty and belief with knowledge

    • In estimating the value of an outcome, it is also wise to consider the possible alternative histories that may have transpired.

    • Asymmetry is critical in finance because rare events can have major consequences.

    Let’s look at the last points he makes, i.e. asymmetry in markets which is key to his thesis on randomness.

    The idea of asymmetry does not matter in most disciplines. E.g. when a professor computes the average of students marks and eliminates the highest and lowest markets as outliers, and then takes the average of the remaining markets, this as very little impact.

    In financial markets however, outliers or rare events are often less rare than the statistics would have us believe and then even more importantly, these cannot be ignored because when they do occur (more frequently than a normally distributed set of returns would indicate) they can bring large consequences.

    He uses the simple example for illustration purposes:

    “I engage in a gambling strategy that has 999 chances in 1000 of making $1 (event A) and 1 in 1000 chance of losing $10 000 (event B ). Then the frequency or probability of the loss in and by itself is totally irrelevant, because it must be judged in connection with the magnitude of the outcome.”

    The odds are an investor would probably make money by continually betting for event A, but given the expectation, it is not a good idea to do so.

    The point is rather simple, but many investors continue to confuse probability and expectation. Expectation is the probability multiplied by the payoff.

    Because of uncertainty of payoff, with the ever present possibility of a large negative payoff, investors should always look to make investments where there is adequate compensation for taking on the risk. I.e. feel no compulsion to make an investment where there is a low reward.

    Have a great weekend


    Ian de Lange

    Permalink2007-11-16, 12:05:13, by ian Email , Leave a comment

    Listings and delistings - what do they tell us?

    It’s interesting to note the extent to which there are both new listings and proposed delistings from the market. I have discussed this, but its worth looking at again. Normally the trend is to one or the other for reasons of increasing or declining valuations.

    Typically as prices start to move up, sellers can obtain higher and higher values for listing their business (essentially selling equity), and so the number of new entrants increases. It’s a clear sign of values becoming stretched in certain favourite sectors of the economy, and normally it’s a process whereby wealth is transferred from the smarter investors (the sellers) to the not-so-smart investors (the buyers).

    In the short term and depending on the state of the market and the extent of the euphoria, a lot of money can be made by speculators. It happened back in 1998 when financial services companies listed at high multiples and prices raced ever higher, and continued into 1999 and 2000 when IT companies listed in the IT boom.

    More recently there have been many junior mining and exploration companies listed, although many have listed on the more receptive Canadian market. High commodity prices and record margins have attracted a flood of money looking for new commodity opportunities.

    A quarter of all companies now listed on the Alt X exchange are construction related shares. Again as valuations are becoming more expensive, so owners of construction and related companies, are looking at listing (selling equity at the higher prices).

    At the same time, where valuations remain subdued for lengthy periods of time, astute investors will look at making offers for the whole business and delist. Often it’s the smart investor buying value. Where a company, with strong cash flows, generates a return on equity higher than the cost of capital, then it makes the perfect candidate for a private equity company to work with management in a leveraged buy out.

    Four years ago, just prior to the recent retail boom, Pepkor, was taken private by a consortium which included its large shareholder and chairman, Mr Christo Wiese. Investors sold out, and substantial wealth was transferred from the sellers to the buyer. Subsequently private equity bought out Edcon.


    • A boom in new listings in a certain sector gives an indication that valuations are becoming expensive. Currently commodity and construction

    • The focus of delistings gives an indication of possible value. Currently still some selected financial services.

    Investors must gauge the extent to which investment bankers are working with private businesses in either coming onto the market, or looking to delist and take the upside in value. It provides a very valuable clue.

    Successful Investing


    Ian de Lange

    Permalink2007-11-15, 20:48:34, by ian Email , Leave a comment

    Watch director's dealings

    One of the important criteria an investor wants to see is an alignment of interests with top management. The cleanest way for this to happen is not necessarily granting options to directors, but where management have a direct equity stake.

    Professional investors will watch director’s dealings very closely as possible early warning signs of possible trouble. Like with most indicators this is not foolproof, but when used in conjunction with other factors starts to become important.

    Some entrepreneurial companies have seen consistent buying of shares by top management. PSG is a classic example of where management have a direct and growing stake.

    In May, director Mr Markus Jooste bought R165m worth of shares at 2850c.

    In July 2007 Mr Christo Wiese acquired R13,7m worth of shares at just over R27. Then also R39m in Nov at 2605c.

    In October Mr Otto acquired R71k worth of shares at 2817c. Then also shares worth R732 000 at just over R4/share from the share trust.

    In Nov 2007 Mr Jannie Mouton bought shares worth at least R32m.

    I had a look back at the annual report to see what stake management held. As at February 2007 Mr Jannie Mouton, the chairman, at that stage held 18,5% of the issued shares. In total directors owned 29,9% of issued shares. With recent purchases this has moved up and now probably exceeds the 30% level..

    PSG shares jumped 6,45% today to close at 2805c

    Another company in the financial services is African Bank. Here the directors are not as active as in PSG, but they own a large portion of the business with CEO Leon Kirkinis the largest stake at 15,7 m. In total directors own 36m shares, around 7,25% of issued share capital.

    This is clearly not as high as PSG, but apparently Kirkinis has not sold any shares and his 15,7m shares are worth R550m.

    Abil gained 22c to 3501c

    Another company that has seen a boost in management ownership has been Coronation Fund Managers. The latest report indicated that the effective staff ownership in the company is 31% up from 28%.

    Results for the year to end of September were excellent. The share price ended unchanged at 970c.

    In an environment where owners are selling businesses onto the market, an investor needs to look for opportunities where management believe in their business enough to invest their own money.

    Kind regards

    Ian de Lange

    Permalink2007-11-14, 17:49:46, by ian Email , Leave a comment

    Tell tale signs of a Bull Market

    Its interesting that prices on the local and global markets reached a peak in 1987. Then 10 years later, global markets were steaming again, as Information Technology shares were the hot favourite ahead of the 1998 peak and crash.

    Local markets peaked in 1998 ahead of the spike in interest rates in an attempt to help prop up the weak rand. Up until then IT and financial shares were racing away. Today again 10 years on, we have some signs that the market is not cheap. What are some of these indicative signs.

    1. Firstly the average price to earnings ratio is at 16 times. As we have been saying for a while this is not massively expensive, but not the cheapest its been.

    2. Not a sign in itself, but a problem area is the rise in interest rates. Inflation has not yet been brought under control and there is a possibility of a further rate hike. The general rule is higher interest are a headwind for share prices.

    3. Enthusiasm for investing and trading in shares extending to the broader public. Again this was pervasive 10 years ago and 5 years into the strong bull market lots of investors are outperforming the professionals again.

    4. An increase in new listings. A favourable environment where investors have money and a willingness to part with it WILL attract sellers. It does not happen the other way around. The process behind a new listing is managed by all parties such that the correct volume of shares are issued at the right price to meet the demand and so perpetuate the illusion of value.

    This is the classic sign that market prices have extended beyond cheap value.

    The Alt x board is the most attractive for new companies coming to the market for a number of reasons. There are some 68 shares listed on this junior board, with 19 listing in 2006 and 39 to mid Nov.

    5. A general consensus that says “this time its different”. Perhaps it is , perhaps the whole economy is undergoing a shift with government infrastructure spend leading up to and beyond 2010. In many respects this is not disputed, but often investors can lose sight of the intrinsic value and end up paying too high a price for an asset.

    6. An increase in insiders selling shares. I don’t have any statistics on this, but the information is available with all directors having to disclose their share transactions. More than a handful of top ceo’s have left their positions and I have seen some inside selling from recent listings.

    Allan Gray calculated that of the 229 companies listed between 1997 and 1999, 202 of these provided negative nominal capital returns over the 4 year period subsequent to their listing.

    In almost half of these (111 companies), investors lost more than 80% of their capital with the arithmetic average annual capital return averaging a negative 33% p.a. for the 4 years after listing.

    Many smaller investors are caught up in the story of the new listing. These companies are positioned in the hot sector – i.e. junior mining, construction and related. They are action orientated – virtually all have an immediate plan of action upon listing to acquire something else – this excitement becomes infectious to new investors who invariably end up overpaying and then being disappointed.

    My advice is to be cautious. If you have the ability to buy into a new listing before it comes to the market, make an assessment and look for a staging profit. As it comes onto the market, the price is often full. That’s not to say that it won’t rise in price – invariably it does, but be careful of chasing.

    Use this time to structure a total asset allocation plan.

    Kind regards

    Ian de Lange

    Permalink2007-11-13, 18:00:34, by ian Email , Leave a comment

    Quiet day on the JSE

    The market opened weaker on the back of nervous foreign markets. It then moved up steadily, but still ended the day down 0,47% at 30774. Financials gained 0,9%, but Resources 20 index down 1,47%. Most sectors ended down, but Mobile gained Telecommunications gained 2,89%.

    This was due to MTN gaining 2,95% to 12998c

    Some results today:

    African Bank reported annual results to September with headline EPS up 20% to 268,4c. Dividends were increased 13% to 225c. The company generated profits of R1,3 billion from R1,1 billion. The big expansion drive was the announcement of the purchase of Ellerines, which is says gives the group the opportunity to leapfrog growth and expansion strategy over the next 3 – 5 years.

    Abil has continued to refine its lending, expanding its offerings and lowering cross subsidisation of loans. The result has been a reduction in the overall yield earned on the advances book by 4,6%, but an expansion in gross advances of 41%. Hence greater volume and increased cost efficiency.

    The 41% growth in advances was as a result of sales of 31% (i.e. new loans) combined with extending the average term from 21months to 29 months.

    The Ellerines deal now just requires regulatory approvals. It should prove to be an excellent combination of businesses.

    The share price fell 1,5% to 3470c. This gives the company a market capitalisation of R17,2 billion.

    Telkom issued a trading update saying that it will release its interims to end of September on the 19th Nov and further to previous cautionaries, the headline EPS is expected to be between 14% and 20% lower than the prior period. This is due to aggressive marketing, increased investment into the group to improve reliability and customer service, higher depreciation etc. The share price fell 1,4% to R177.

    BHP Billiton released a statement indicating the benefits that will arise with a merger with Rio Tinto. One of the benefits includes a possible US$3,7 billion per annum in quantifiable synergies achieved through efficiencies.

    BHP Billiton approached the board of Rio, but to date there have been no discussions and hence Billiton publicising the reasons and benefits for wanting a merger in order to drum up support from shareholders.

    BHP Billiton has spent a lot of time on the proposal to Rio Tinto. It has covered the anti trust implications and believes that these don’t present a significant barrier to completing the transaction.

    Billiton shares lost just 176c to 22736c.

    Esor is one of the new listings batch. It reported excellent interim results for the period to end of August. Headline EPS up 205% to 8,4c. Today it was announced that 4 directors each sold shares worth R11m each. The share price fell 2% to 900c.

    Investor should watch the director activity in new listings but in any event the mere listing of shares is a selling of a portion of ownership to a generally receptive audience of investors.

    Note : I will be in CNBC Africa on Tuesday 13th at 9:00am chatting about local markets.

    We have a handful of seats open at our retirement presentation on the 20th in Jhb and 22nd in Cape Town at 10:00am. This will be of interest of you are nearing retirement or already in retirement, and looking for guidance for your related investment planning. Please mail me on ian@seedinvestments.co.za if you are interested as we are finalising in the next 2 days.

    Kind regards


    Permalink2007-11-12, 20:10:21, by ian Email , Leave a comment

    The 'ol dollar

    While US Treasury Secretary tries to talk up the US dollar, the greenback falls to multi decade and all time lows relative to other currencies. The same goes for its relative buying power against real assets such as an ounce of gold. The US dollar is not alone; it’s in good company because most currencies depreciate against real assets over time.

    No currency has any real asset backing. Gold backing for currency issuance fell away in the 1970’s. Know is known as fiat currency or money, i.e. money backed by government demand for it as legal tender in payment of liabilities.

    With no intrinsic value, currencies free float against one another. Some countries have instituted currency pegs and then also management around these currency pegs. Bermuda and Bahamas fix their currency 1:1. The Hong Kong dollar is pegged at HK$7,80/USD and the Chinese renminbi was pegged at yuan8,28/dollar, until July 2005 when it has been managed. The Chinese currency continues to appreciate against the US dollar, but in a managed way, i.e. not open to full market forces.

    With no intrinsic backing, a currency is always defined relative to another – i.e. dollar versus the euro, rand versus yen, dollar versus.

    For real assets denominated in the world’s currency like US dollars, no one discusses how one thousand dollars is buying less and less ounces of gold. Rather everyone sees Gold GOING UP.

    The US dollar has been declining relative to multiple other currencies for many reasons. The removal of gold backing, the extent of issuance due to the fact that it remains the world’s reserve currency are 2 big factors. Then again the quantum of private and public debt that the US has created has made holding paper issued by the US government less attractive relative to other currencies and other assets.

    Because governments have no obligation to redeem paper currency for specie (i.e. hard and real assets), there is no real apparent penalty for governments running the printing presses. This is exactly what governments have been doing resulting in what is known as competitive devaluation of currency in order to be able to compete on the exports.

    While interest rates tend to only partially compensate a holder of currency, the real long term risk is not being adequately compensated for the ongoing rise in the total quantum of paper in issuance versus real assets – in other words inflation of goods. This is very apparent in the decline in the buying power of a US$ or a euro, or a South African Rand.

    At the 2005 World economic Forum in Davos, Bill Gates was quoted as saying “The ol’ dollar, its gonna go down”. He was in the company of his friend Warren Buffett who also bet against the US dollar. 2005 was positive for the US dollar, but it’s been negative ever since.

    Never easy to identify one currency that will outperform another, but it is important to recognise ongoing currency devaluation and the long term negative impact on wealth. All investors need to plan for this in their asset allocation.

    Have a great weekend


    Ian de Lange

    Permalink2007-11-09, 15:38:26, by ian Email , Leave a comment

    BHP Billiton moves markets

    The weaker global markets naturally held the JSE back for most of the day. Then is came – news that BHP Billiton would look at buying Rio Tinto. This pushed up Rio Tinto shares in London and naturally Anglos which on the JSE ended up over 10% higher.

    BHP Billiton shares fell back 4,33% to 22960c.

    Bloomberg were saying that such a purchase would be the biggest ever with Rio Tinto with a market cap of around $165 billion. A combined group would control one third of the mined iron ore market and be a massive supplier of coal and copper.

    BHP Billiton ceo is now South African Marius Kloppers with Chip Goodyear having just stepped down. Rio board have rejected, but BHP Billiton is an aggressive company and may pursue. With an already tight concentration across 4 main large companies, such a deal will attract anti trust issues.

    Rio Tinto plc in London traded up 22% to 5341 pence. They are trading up 26% in New York (the ADRs). It’s a big cash generator, as are all these large mining companies, generating profit of $7,44 billion last year.

    Anglo shares in UK gained almost 12% to 3550p. This gives it a market cap of GBP47 and a trailing price to earnings ratio of 14,2 times.

    A proposed deal like this raised the investor enthusiasm for other mining shares including London listed Xstrata (also headed by South African) and also Lonmin.

    Volumes on the JSE went through R18 billion traded with Anglo just under R5 billion.

    Billiton traded R2,4 billion. Invariably traders sell the acquirer and buy the acquiree on the assumption that the deal is better for the latter. Often this is the case as buyers overpay. Today’s wide disparity in price moves may well settle down as the actions of the respective companies becomes clearer.

    Its exciting times for mining companies and their investors.

    Have a great evening

    Kind regards

    Ian de Lange

    Permalink2007-11-08, 18:00:43, by ian Email , Leave a comment

    Sharing Investment Philosophies

    Many people associate the words finance, investments, shares, etc. purely with numbers and science. While there is no doubt that one needs to be proficient with being able to analyse numbers, there is more to being a successful investor than purely being able to analyse numbers. Some of the wisest words came from my finance Professor when he began our honours year with the following comment, “finance is a social science”. This was of massive concern to most of us, as we had always believed that the only thing that mattered in finance was numbers and science.

    When probed a little further our Professor went on to say that as finance involved humans (and all humans are social mammals) there had to be a social aspect to finance. We all know, and have heard, how emotions often hamper investment returns, but this is not the only human trait that needs examining. Another one is investment philosophy.

    Everyday we encounter other people with widely varying philosophies, be they on life, love, work, or investments. In order to build successful relations we generally need to surround ourselves with people who have similar philosophies to us. How often have you seen or heard of someone who left a job because their co-workers “didn’t share the same vision” as they did or where two people broke up because they “had different priorities in life”? Probably fairly often. While differing ideas on how to implement a philosophy should be welcomed (as it helps to achieve the optimal method) vastly differing ideas on where the goal posts should be will almost certainly end up with the goal posts not being put in the correct place.

    The same merging of minds needs to occur when getting someone to look after your money. With investing we sometimes don’t have a clear idea of what our investment philosophy is, nor (I argue more importantly) what it should be. We are bombarded with different stories as to how different ways of investing will produce superior results, or why we should choose one philosophy over another. Getting suitably educated on how to invest is first prize. Second prize is getting someone who is versed in the various investment ways, and who you trust, to assist you in creating a strategy that is clearly defined. This is important.

    You need to be confident that the people entrusted with looking after your investments have your best interests at heart. You also need to ensure that those managing your investments have the requisite skill and competence. Once a strategy is agreed upon (which all parties are comfortable with) then there is scope for vigorous debate as to the ideal way in which to implement the strategy.

    Feeling comfortable with your personal investment strategy is important especially when the investments don’t perform as expected (and this WILL happen some time or the other) as you will then be less prone to let emotion rule your decisions (and inevitably hamper your investment performance).

    As sure as day follows night a sub-optimal investment strategy will, over time, produce sub-optimal results. The optimal strategy, where not everyone agrees that it is the best strategy, will also more than likely result in sub-optimal results over the long term. The simplest way to ensure that you obtain the best investment results is to marry a successful strategy with buy in from everyone involved.

    While always tempting to rush straight in to an investment, our advice is to take some time to develop your investment strategy. If investment strategy and management is an area that you prefer counsel on, then feel free to contact Ian at Seed Investment Consultants ian@seedinvestments.co.za.

    Have an excellent day!

    Mike Browne

    Permalink2007-11-07, 16:32:58, by Mike Email , Leave a comment

    JSE Statistics

    The JSE share price touched a new high again today at R90. This prompted me to look at some of the stats on the market that the JSE produces on a monthly basis. Looking back over the last few years its interesting to see how the total values have escalated.

    First how big is the local JSE. Well in US dollar teems at the end of August the total market capitalisation of all companies was USD777,425 million, or USD0,77 trillion. At R6,5 to the USD this is R5 trillion. The JSE calculates the market cap of all securities listed in Rand terms at R5,8 trillion.

    SA total GDP at current prices is around $275billion or R1,78 trillion, so this gives an indication of the market cap relative to the US country’s gross domestic product.

    Year to date both the main board and the Alt X had 36 new listings. This has escalated in recent years from the last listings boom in 1997/ 1998. IN 2003 there were just 8 new listings. 17 in 2004 and 19 in 2005.

    Trades on the JSE has increased dramatically over the last few years – from 3,2 million in 2003 to 7,9m for 2006 and just over 8 million for the 9 months of 2007. Naturally the value of these trades has escalated from R754 billion in 2003 to R2,1 trillion for the year to date.

    Foreigners were large net purchasers of shares in 2006, recorded as R73 billion. For the year to date this comes in at R63 billion.

    The JSE has benefited enormously from the boom in commodity prices. I listened again to Jim Rogers interviewed on Bloomberg. He remains upbeat that commodity prices are still in a long term uptrend, looking for oil to break $100 and even eventually $150/barrel.

    Brent crude was last trading at $92/78/barrel. US light crude for December delivery however jumped to a new high today at $96/barrel.

    Gold has pushed through the $800/oz level and today at $821.85/oz as the US dollar remained weak against major currencies. As the rand price of gold moved up, so Gold shares gained 2,3% today as Anglogold gained 4,3% to 29210c and DRD Gold up 5,4% to 583c.

    Kind regards

    Ian de Lange

    Permalink2007-11-06, 18:03:53, by ian Email , Leave a comment

    Relying on market averages can be misleading

    Because of the quantum of investment information, it’s normal that investors have created short cuts or heuristics to decipher and interpret the detail, often in order to make quicker decisions. One is using averages to make decisions. While this may work many times, it can lead to erroneous conclusions.

    A heuristic are rule of thumbs or educated guesses in order to rapidly lead to a solution that is close to the best possible answer. Unfortunately in many cases these short cut rules lead to the wrong solutions.

    One example that I come across fairly often when working with investors is how the averages or the perception of averages affects their own thinking and biases. This can be observed in many different scenarios.

    • The daily newspaper reports that the local JSE has just reported a new high. An investor believes that its unwise to invest at all based on the report of how expensive the market is, forgetting

    o That the average is not fully representative, i.e. It has a large skewness to certain categories.
    o That within a total market there will ALWAYS be expensive shares and cheaper shares.
    o That the average is a nominal price value and does not take into account underlying value.

    • Again an investor may say, I can’t invest into a unit trust because the personal finance pages tell me that all perform badly against the market.

    But again merely dismissing all of them because of some negative perception about the average will not solve the problem.

    • An investor may say, I can’t put my money into hedge funds because I don’t understand them and it’s too risky.

    There is no doubt that it’s important to gain an understanding of whatever you invest into, but don’t dismiss something out of hand because of a perception.

    There are some excellent managers with very understandable processes, but because they fall into a certain category for a period of time that category may be tarnished in the popular media.

    In fact often it’s the popular media itself which latches onto the short cuts in order to publish stories. Serious investors don’t place too much credence in these stories. Instead they do the necessary homework, have a process and work at it.

    Kind regards

    Ian de Lange

    Permalink2007-11-05, 17:34:19, by ian Email , Leave a comment

    Some psychological points on investing

    While much economic and financial theory rests on the belief that individuals act rationally and consider all information in the decision making process, there is a lot of research in recent years that indicates that this is just not the case. In fact when it comes to investing, acting irrationally is more the norm than the exception.

    Two well known professors who studied investor psychology are Amos Tversky (deceased) and Kahneman who originally described “prospect theory” in 1979. They found that contrary to popular belief, people placed different weights on gains and losses and on different ranges of probability. I.e. individuals are much more distressed by prospective losses than they are happy about equivalent gains. I.e. there is an asymmetry of emotions, and this impacts ones investment process.

    Professor Statman is an expert in the behaviour known as the “fear of regret”. Investors deciding whether to sell a share are typically emotionally affected by whether the share was bought at a price more or less than the current price. Investors prefer not to sell a share on which they have to report a loss.

    Also many investors find it easier to buy a popular share and so also rationalise if it’s going down, since everyone else owned it. Conversely buying a share with a bad image is harder to rationalise if it goes down.

    Then investors invariably place too much weight on recent performances and experiences and extrapolate this into the medium term. Professor Shiller found that at the peak of the Japanese market, 14% of investors expected a crash, but after the crash the percentage expecting a further crash increased to 32%. Ok in that instance they were correct.

    People are overconfident in their own abilities and especially where they have some knowledge. We see this all the time where some investors have some inside knowledge of the company where they are employed. With a small amount of knowledge (and having done no comparative analysis of the universe of available options), their confidence in their own investment ability and their specific investment holding is boosted.

    Extending this further, many investors frequently trade on information that they believe is superior and relevant, which in actual fact it’s not and fully discounted into the prices. Remember when you are buying into a share, there is someone on the other side selling. Both have strong convictions that they have superior knowledge.

    The psychology of investing is not only interesting, but very relevant.

    Have a great weekend


    Ian de Lange

    Permalink2007-11-02, 17:57:57, by ian Email , Leave a comment

    Managing your Investments

    I have often found these days that when I talk to friends and acquaintances about their investments, there is a sense of confidence in their ability to consistently make money. When faced with their side of the story it is easy to understand why they believe that they know what to do:

    “My share portfolio has tripled over the last four years. I started with R 200 000, and it’s now at R 600 000, and I haven’t added a cent since I started it!”

    “My shares have gone up 50% since I started investing in the stock market at the beginning of the year, whilst the ALSI has only done 29%, I am doing well!”

    These investors have both done well, there is no doubting it. There are, however, a couple of questions that should be asked:

    To the first investor one should find out whether they have been benchmarking their portfolio, and constantly monitoring it. While tripling your money (200% return) over four years is nothing to be sneezed at, if you looked at the ALSI over this period you will see that it has done 258%, while the average unit trust General Equity fund has done 248% (after fees). By just selecting an average manager your R 200 000 initial investment would have grown by an extra R 97 000 (to R 697 000), while the best manager would have turned your R 200 000 into R 858 000 over this period! Here the investor is looking at their absolute returns, while note should be made of relative performance.

    The second investor has clearly done very well both on an absolute basis (good positive return) and relative basis (outperforming the benchmark, and beating the best General Equity manager by over 7.5%). This person is generally the one who is harder to convince that he is not necessarily a rocket scientist…

    You may argue that this investor has superior skill. I would argue that his portfolio has been correctly positioned over the past 10 months, and that you should delve deeper into the portfolio holdings to find out how this performance was achieved. There is the possibility that he is the next Warren Buffett, but more likely than not there is acute level of risk in the portfolio. By buying a highly concentrated basket of shares you should be able to outperform the general market over certain periods of time, but you should also be cognisant of the fact that your risk of losing capital is heightened when you are over exposed to a certain factor (Rand/Dollar exchange rate, oil price, interest rates), or segment of the market (Construction, Technology).

    Remember that just because you haven’t been adversely affected by your concentration risk, doesn’t mean that it isn’t there! A skilled manager’s fund may exhibit these risky characteristics but they have most likely deliberately done this, and have systems in place to monitor the risks, and ensure that they don’t become too large. Even then, professionals sometimes get it wrong.

    Investors should at all times be aware of where their hard earned money is invested, how their investments are performing, and where their risks are. Getting a proper idea of how your investments will perform in a variety of market conditions will help you position your portfolio more effectively, and ultimately probably result in a more assured retirement. It can be a time consuming job, but needs to be done on a consistent basis.

    Enjoy the rest of your week.

    Kind regards,

    Mike Browne

    Permalink2007-11-01, 20:25:29, by ian Email , Leave a comment