Reflections Of a Young Investor

No asset class or investment has the birthright to of a high return. – Howard Marks

I consider myself lucky to have the close friends that I have, they all contributed to my understanding of saving and investing.

The year 2016 was a very informative year with regards to my own savings habits, I had set some very high targets for myself at the beginning of the year and I missed them slightly. I took some time to try figure out what went wrong and I concluded all the costs that got into my way were avoidable – now that I have identified that it’ll help me to combat those costs during 2017.

A very close cousin of mine will start working this February, she wanted advice on a few things such as buying a brand new car or shopping around for a second-hand one, and whether she should get her own place or rent out a flat. I was reluctant to give advise given I had no idea of her short-term, mid-term and long-term goals. However I suggested she starts a goals driven monthly saving plan, even if she starts with a few hundreds and increases that over the years.

She wasn’t really impressed because she thought I had the silver bullet on all things savings/investing (sorry to disappoint you guys but no one person has the sauce doe, we are all learning here!). Howard Marks says it best – no one person, asset class or investment has the birthright to of a high return. 

At the risk of coming across as immodest, myself and my close friends didn’t have a difficult January because we are always making provisions, always putting away something for those rainy days!

May you all have a prosperous year ahead, remember to pay yourself first (automate this process by having a debit order transaction that comes off as you get paid into a savings/investing account) and spend whatever is left over (spend less than you earn and save the difference). Set yourself some realistic targets, use budgeting apps like 22 seven for assistance to track your spending and investing.

Start now, start today, develop the discipline to save and invest while you are young. Make it a habit!

If I can’t convince you maybe the Oracle of Omaha, Warren Buffett can – Chains of habit are too light to be felt until they are too heavy to be broken. 

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Word On The Street – Hedge Fund Managers Are Not Your Friend

 

“When your wealth manager shows up with the next high cost hedge fund (or private equity or infrastructure or real estate fund, for that matter), you need to ask the direct and probing questions. “Precisely, how much do you make?” is a good place to start. Or when a consultant pitches the next high-flying hedge fund, ask some basic questions, like “how did all your prior recommendations fare” or “how much alpha am I paying away in fees.” Pointed questions force a certain level of honesty – even better, ask for answers in writing to avoid any ambiguity. Too much capital in this industry flows to where it’s good for the advisors, not clients – and that needs to change.”

Andrew Beer, How Some Hedge Funds Have Ripped You Off (Barron)

Bad Times Make for Good Buys.

Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying that “The time to buy is when there’s blood in the streets, even if it is your own.”

He should know. Rothschild made a fortune buying in the panic that followed the battle of Waterloo against Napoleon.-Investopedia

Coming back home and to the present, the social and economic climate do not look positive, an unstable geo-political scene (with Donald J. Trump as the President of the United States), the looming increase in interest rates by the FED, the list goes on and on. One can say that 2016 has been filled with a lot of noise for the investor. Now its 2017 and we press on!

However, I believe that bad times give rise to good buying opportunities in the market. We should get excited when an otherwise good company has a sharp, but undeserved drop in share price. Instead of selling in times like these, you buy some more! Remember the firing of Nhlanhla Nene in December 2015 where they Rand got obliterated and the banking stocks got absolutely hammered? Guess what was one of the best performing sectors in 2016…yes Banking up a cracking 26.2% in a market that was basically flat after dividends.

One of the many important things when it comes to investing is the price you pay for the investment. In fact, this is probably the most important part- The relationship between price and value. It should be the starting point of any investment consideration. Here’s one way to look at at; is it not always a warm, fuzzy feeling to buy that home appliance or your favourite sneakers at a discount when shopping? No need to answer that fam we all know the answer!

The same should apply when you are buying assets that generate a return. The cheaper you buy the product, the more value it shall create for you.

Investing has to be based on reliable estimates of the underlying value of the investment. The level of conviction in the estimate of the underlying value should be great. If there is no conviction, the investor may react irrationally to noise from the market, as a consequence he might lose faith in his investment positions causing him to sell, just when a drop in price should have lead him to increase his position. Thus exposing the investor to destructive exercise of buying high and selling low! Do not be that guy fam!

Of course it is not easy to vary from public opinion, especially during the so-called bearish cycles. It can be quite lonely.

Warren Buffet says this; we simply attempt to be fearful when others are greedy and to be greedy when others are fearful.

It is this sort of unconventional thinking that will bring you investment success. The ability to not panic when everyone is panicking and vice versa. This would mean maintaining unconventional positions against the general consensus.

Howard Marks says it best :

World affairs, economic and corporate performance will rise and fall in cycles. It is a never-ending pendulum that keeps swinging. Market participants also react to these events in a cyclical fashion. Therefore, price swings will usually overstate the swings in the underlying investment. When world events are positive and corporate profits are great, market participants feel good (greedy) and often bid investments at prices that overstate their underlying value. When world events are negative and panicky (fearful) market participants are prone to sell them at overly cheap prices, understating the underlying value of the investment. 

These fluctuations due to world’s events, thus affecting investor behaviour, give rise to assets being sometimes offered at cheap prices and sometimes the prices are too high.

Sir John Templeton puts it quite nicely, Buying when others are despondently selling and selling when others are euphorically buying takes great courage but provides the greatest profit.

Indexing as a core building block for your portfolio

Indexing refers to an investment strategy where you buy a basket of shares all at once using one product and the advantages of this are the extremely low investment costs and the simplicity of the product. Typically these products track an underlying index which tracks certain shares. E.g. The Top 40 index tracks the biggest 40 companies by market share on the Johannesburg Stock Exchange.

Indexing makes sense for the average investor who is not interested in following the markets closely but wants some skin in the game. There are many service providers out there like Sygnia who can help you track the average market returns without having to be a stock market wizard.

I was reading Jack Bogle’s Little Book on Common Sense Investing when I came across the following quote from Jonathan Davis, a columnist for London’s The Spectator:

“Nothing highlights better the continuing gap between rhetoric and substance in British financial services than the failure of providers here to emulate Jack Bogle’s index fund success in the United States.

Every professional in the City knows that index funds should be core building blocks in any long-term investor’s portfolio. Since 1976, the Vanguard index fund has produced a compound annual return of 12 percent, better than three quarters of its peer group.

Yet even 30 years on, ignorance and professional omerta still stand in the way of more investors enjoying the fruits of this unsung hero of the investment world.”

“By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”
– Warren Buffett, 1993 Berkshire Hathaway Shareholder Letter

Source:

Jack Bogle’s Little Book on Common Sense Investing

1993 Berkshire Hathaway Shareholder Letter

Investing, the same as taming wild horses!

We are always taught that the more effort we put in the more we will get out of life, but this is not always true.

Take sleeping for example. You can prepare in the right way. Put yourself in a right position and get yourself comfortable but after that you can’t force it to happen right. In fact it works exactly the other way around. The harder you try, the less sleepy you become. Its only when we stop trying that you finally drift off. And before we know it, we waking up the next morning feeling refreshed and relaxed after a good night sleep.

 “No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant” – Warren Buffett 

This is a very similar idea when you are investing for the long term.

A good metaphor for this, is the idea of taming a wild horse. If you think on how a wild horse is tamed. Rather than pinning it down in one place, the horse is let out on a very long rope and put in a big open spacious field. The horse runs around feeling like it has all the space in the world. But very slowly the rope is brought in and the horse adjusts its feeling until it comes to a natural place or rest.

And we looking to do just the same with investing. Rather than to pin down all the bad news article we come across. Rather just let your investment philosophy come to its natural place of rest (watch it play out patiently) because we all know the idea of mean reversion and that’s one certainty I can assure you. Markets will be cyclical and mean reversion is inevitable, therefore providing many opportunities for you and I.

So let go of the idea on needing to achieve results quickly in the short term or have price targets for shares in a limited time period (we always see 12 month targets from many analysts) and instead seek more opportunities where you can buy good quality businesses at a fair price (or even cheaper compared to their intrinsic value if you’re lucky) then sit back, relax, and be present in the world.

Market roundups

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett

Since the beginning of 2016, there has been an influx of articles detailing the post mortem for the year. A lot of it was bad news by the way.

However I thought to myself, a lot can happen within the few days remaining in the year, good or bad. When looking at the recent past highlighted in these articles, very few people, if any could have anticipated what occurred in the coming 11 months, I’m shocked there are still people who think they can predict the future (I must admit that I am a long term Investor, the point of this article is to highlight the unpredictability the future).

As I was reading these articles, I received a picture from a close friend of mine – he tattooed his girlfriends name on his arm and visa versa. He encouraged that I do the same one day, the thought made me uncomfortable. I replied that the future has an infinite range of possible outcomes, and something as permanent as a tattoo seemed like taking on too much risk. Nonetheless, I wish them all the best.

Back to investing, all that is happening now makes me think of something Charlie Munger once said about investing: “it’s not supposed to be easy. Anyone who finds it easy is stupid”. The reason it is so difficult is that investing is future orientated, and the future is unknowable.

When I started investing I thought it was easy, this is evidenced by the single point estimates I used when valuing companies – I must admit I was wrong 99.9% when looking at how differently things played out in comparison to my valuations.

Now as investors, we still have to make decisions even though we are cognisant of the above, we need to manage and control risk and move forward as cautiously as possible. We need to check our emotions at all times. Nothing is stagnant, we have to take shots at moving targets.

So what we need to focus on, is controlling the knowable. Understanding your position. It is true that we don’t really know what will happen tomorrow, but we can at least try to manage what we know.

Being the first month of the year and of course the dreaded cash crunching January, do not let the many emotions that come with these times affect your objectivity when it comes to your investments. Take it easy, chill! And of course the noise churning out from the news won’t help either.

Frequent trading is one of the sure ways to waste and lose money. You get nothing from that, except for balling on those transaction fees, and subsequently making your broker richer.

The basics should always prevail, what I am trying to say is that we should always remember that we are in the business of making profits from the many public and private corporations that are at our disposal. Therefore what we should focus on what is the real returns (dividends and earnings growth) we receive from these corporations. These are the economics of investing.

From centuries of economic history it is clear for all to see that you can rely on adequate returns from the stock market for your investments. And the longer you stay invested, while reinvesting, thus allowing the Gods of compounding to do miraculous things with your hard-earned money, the better.

Therefore, I close by saying keep calm, be cautious and invest on.