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    Seed Weekly - Being a Peeking Tom - and what you stand to gain

    Being a successful investor requires the right mindset, specifically the ability to apply long term thinking to situations where the practicalities of everyday life do not make this an easy task. It requires remaining focused on an end-goal, one which most often seems intangible and a long way into the future, all whilst the world around you keeps growing and evolving, appearing much more tangible than the end-goal.

    As an investor, part of the ongoing challenge is disassociating yourself from the avalanche of information at your disposal, which may lead you astray and ultimately detract from your end-goal. The solution does not lie in the avoidance of information, but rather in correctly categorising and processing the information that you absorb. Many times, the information presented to you creates the impression that immediate action is required in order to see yourself through.

    Managing this challenge can be very tricky, as it is not always clear at the time whether taking action will increase the probability of achieving certain long-term goals, or have the opposite effect altogether. Doing nothing can be the hardest (in)action to take at times.

    However, our job is to advise no action be taken about as often as recommending a certain course of action. This should be considered in context. Our job is not to react to every piece of information that becomes available. Our job, in this area, is to ensure that your investment assets are suitably positioned in order to maximise the probability that your long-term goals are met.

    We know that an immediate reaction will often times only take into consideration the latest data point in a long series of data points, so to speak. Following this logic is a good way to reduce the probability of achieving the end-goal of any investor.

    While this may seem like an indictment of the world around us, we by no means want people to live in isolation from information. Missing data points can also cause a skew in the way that you perceive situations.

    It takes time to build towards the achievement of a goal, and attempting to measure the success of a certain investment strategy too frequently may not be the best way to go about it. It is thus important not to peek too often, not every peek will show a peak.

    There is positive and negative information presented to us each day, but not all of this information will prove material in the bigger scheme of things. We have to correctly and holistically place the information we receive into the bigger picture, and make our decisions from there. As the old saying goes, “You can’t see the forest for the trees”. Sometimes, you need to take a step back.

    To us it is far more important to be purposeful in the actions that you take than to be industrious, and constantly making changes to your investment portfolio. In fact, too much action may, if nothing else, increase “friction” (time out of the market, transaction costs and early realisation of capital gains tax) and dampen your long-term investment success. These are best left delayed, as you can earn “opportunity income” on the assets that would otherwise have been used to settle these expenses.

    Our philosophy has always been one of long-term investing and thinking. Our discipline is living by this philosophy. Before we take any action, we ask ourselves whether this will help our clients reach their goals. Based on this answer, we either take the next step or go back to the drawing board.

    Kind regards,

    Stefan Keeve

    ***SEED IS HIRING: Seed is looking to hire a Financial Manager with Business Operations Oversight to the Seed Group of Companies. Please click here to view vacancy.

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2017-09-20, 13:38:10, by Mike Email , Leave a comment

    Seed Weekly - Investment Decisions in Good Times

    Sir John Templeton, the great investor and philanthropist, once said that “the time to reflect on your investing methods is when you are most successful, not when you are making the most mistakes”. This reminds me of the Sigmoid Curve, a mathematical function, commonly applied to business and other activities in life. The curve is used to describe the story of a product’s life cycle, the rise and fall of corporations, and can be extended to personal life, for example describing the course of love and relationships (Charles Handy, 1994).

    Sigmoid Curve

    Source: Seed Investments Research (5 September 2017)

    The curve represents time on the horizontal axis and activity on the vertical axis. There is an initial development stage starting slowly, experimenting and faltering before growing until eventually petering out. Charles Handy pointed out that the key to constant growth is through starting a second curve at point A (good times), where there is time, energy and resources to get the new curve through its initial explorations and floundering before the first curve begins to dip downwards. Although this seems obvious, the message coming across at point A is that all is well and therefore why change a winning formula? Experience tells that the real energy for change comes when one is staring disaster in the face, represented by point B on the curve.

    The Curve in Investing

    The shape of the curve is not new in investments, and is commonly used to illustrate when to buy or sell assets. The investment philosophy at Seed is to take a long term view. Strategy selection within the funds is guided by the structured investment process, including strategic and tactical asset allocation. It is easier to contemplate changes when something is not working rather than when it is.
    Furthermore, looking at the Sigmoid Curve, aside from the concept of taking profit, it seems paradoxical to think long term (buy & hold) and change (point A on curve), particularly because at this point, things are going well.

    Seed Balanced Fund

    Although manager/strategy decisions are made as per our investment process, I carried out an exercise to check at which point on the curve these decisions are made, good or bad times. The chart below illustrates points at which new strategies have been added to the Seed Balanced Fund in relation to the quartile performance of the fund on a rolling 3 year basis. The fund has been in the top or second quartile 92% of the time, outperforming the peer group average across all periods and the CPI + 6% return target, 76% of the time. In general, the additions are predominantly during periods of good performance.

    Arrows represent points at which new strategies have been added to the fund (global property, local high yield property, African equity, China equity, local equity, offshore equity and credit)

    Source: Seed Research & Morningstar Direct (5 September 2017)

    I juxtaposed the same analysis on a shorter-term chart (rolling 1 year) being more volatile and potentially more informative with respect to current experience. The fund outperforms the peer average 71% of the time and the return target 55% of the time. The results are consistent with those above. However, the most recent strategy changes in 2016 only occurred after a period of outperformance (point B – hopefully, lesson learnt. Fortunately, the upswing came shortly after).

    Seed’s decision making continues to follow a structured investment process. To stay ahead, it is important to remain cognisant of the fact that it is just as important to reflect on investments in good times just as it is naturally easy to reflect during tough times.

    Kind regards,

    Tawanda Mushore

    ***SEED IS HIRING: Seed is looking to hire a Financial Manager with Business Operations Oversight to the Seed Group of Companies. Please click here to view vacancy.

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2017-09-14, 10:28:58, by Mike Email , Leave a comment