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South Africa: Distorted Strategic Thinking On Markets
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Business Day (Johannesburg)
COLUMN
12 May 2008
Posted to the web 12 May 2008
Bryan Hirsch
Johannesburg
WITH all the uncertainty locally and internationally relating to currencies, markets, commodities, politics, and inflation and, and, and ... I do hope that I am able to resume my role as a financial adviser and financial nanny soon, as I spend most of my time now being a financial shrink!
The uncertainty in the marketplace is causing investors daily mental anguish. Investors reali se that a growth investment strategy is long term, but few are happy to see an investment portfolio drop in value, even if it's only on paper.
A few days ago Warren Buffet, the world renowned guru, suggested that it might be time to be looking at the great opportunities that have presented themselves.
In the short term no one is able to predict the trend of markets. The reason for this is there appears to be no end in sight to the flow of bad news. Our market appears to be looking strong, but investors may not reali se that seven stocks make up more than 60% of the all share index and it is these few stocks that are holding the market up.
Financial advisers will confirm investors always commit to a long-term view, but deep down they know their clients want positive results instantly.
All want to buy a share today and see it stronger tomorrow. The chances are that the share will be lower tomorrow because of volatility. The time to buy is when an asset is looking cheap and reflects good long-term value.
If you are the type of investor who has made an investment and does not follow that investment on a daily, weekly or even monthly basis then you do have the stomach for the market.
Typical behaviour by investors is to buy at 9.30am and phone their broker at 4pm hoping that the share is stronger.
If the share is weaker, their immediate reaction is: "Why didn't I wait until this afternoon, or even tomorrow?"
I question this strategy and urge investors to rethink. If you have identified value and bought a share and that share is now lower, there is an opportunity to buy more at the lower price.
Who can predict how the rand, dollar, sterling or yen is going to perform in the short term? There are few short-term experts.
The choice of currency should always be determined by how you intend to benchmark firstly the performance in the currency you have chosen and then revaluing it in rands.
Dollar investors in European markets have shown good returns because of dollar depreciation, coupled with the returns achieved in the investment itself.
European investors in US markets may have done well in the investment, but, when converting back to the currency, have shown poor returns because of the strength of the euro and the sterling.
It's not just a problem for South Africans. It must be part of your strategic plan to diversify globally because of the vast range of additional opportunities.
Returning to my experiences as a financial shrink, below are my interpretations of how some investors assess performance of their investments in equities against their performance in property. These are my findings.
For example: R1m is invested in the equity market and the value some years later is R3,5m . The market weakens and the portfolio drops to R2,8m . Instead of the investor being pleased that their R1m has grown to R2,8m , they are rather disappointed because they feel that they could have cashed in at R3,5m and their mindset feels that they actually lost 20%.
By comparison the same R1m is invested in property and they sell it for R2,8m . All you will hear is what a fantastic investment they made.
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What you won't hear is that perhaps they could have sold their property eight months earlier for R3,5m but now that property prices have fallen all they have been able to get is R2,8m .
With equities investors look at top price and with properties the actual sale price. Both asset classes are growth assets and will have their ups and downs.
My advice is to understand the long-term nature of a growth portfolio. Don't worry about daily headlines. Just stick to your original plan and then you won't need a financial shrink.
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