Ben Temkin
31 October 2008
column
Johannesburg — THE Private Investor portfolio has become hypnotic. Each day I wait anxiously for the download of the stock market prices and, subsequently, the portfolio's index.
My hypnotic daily fix is somewhat absurd. I should let the market prices of the investments look after themselves and remain concerned only with major changes in the investment fundamentals of the counters themselves.
I realise the hypnotic attraction is because of the global economic turmoil. The portfolio's daily progress is a microcosm of progress through the world turmoil. Over the day (Wednesday), the index rose to almost 75. This reduced the paper loss by R3000.
The improvement in the index was, of course, the result of better much larger investment fundamentals here and elsewhere in the world. There was some comfort, for example, that the JSE looked healthier on Wednesday and that our inflation rate was a bit lower.
The US Federal Reserve reduced its interest rate by half a point to 1% to try to spur a revival of business activity. The horse didn't gallop: the US markets couldn't sustain a promising rally although, because of the US interest cut and other reasons, European and Asian markets had a good day.
On the day, there was little to indicate the global economy would speed up or that a recession will be averted.
The Private Investor portfolio is premised on the view that the companies whose shares it holds will, over the long term, improve growth in bottom-line earnings per share. This growth may not be steady and there may even be negative blips.
Having over the years watched even blue chips such as OK and Glen Anil self-destruct, I realise that companies are not immortal and that their deaths are sometimes quick.
Perhaps part of this daily hypnotic fix on the portfolio's index is to ascertain that its constituents have not been fatally wounded.
There's not much fear yet that SA's economic growth will turn negative. But much of the growth we expect is based on infrastructural growth and continued demand for minerals.
In SA, many businesses are suffering from recession. They still have the operating assets they use to generate sales. These assets are still at balance sheet values. These values don't have to be accounted at fair value, nor should they . These balance sheet values have, however, been impaired because their returns have been impaired: sales have reduced and margins have been cut.
These businesses can possibly stave off losses by, for example, closing plants, reducing inventories, reducing their transport fleets or closing some of their outlets. In reality, these actions reduce the value of their assets. But many of these measures may lead to financial suicide. In a recession, if they don't act, but keep their assets operating but dysfunctional, financial suicide may be even more probable.
There is a high probability that many good companies don't know yet that their assets are already being impaired by economic recession.
And even if they do, there are few if any remedial measures they can take. They have to ride through the storm, and so, I guess, does the Private Investor portfolio.
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