Own the Company, not the Price

“Know that you own a company. Not the economy, not a share price, not politics, not the global view, not the Fed, not the ECB, not negative yielding bonds, not Twitter finance, not 24 hour business TV, and the list could go on.


 

To market to market to buy a fat pig Up, up and away. One of the contributing factors was a really positive retail read from the UK, and this was post the British referendum vote. Bidcorp for example caught a bid and rallied nearly 7 percent. Another stock that caught a bid was Standard Bank, that was on the release of their results which as you can tell, were well received. Stocks as a collective rallied 1.3 percent, financials added 1.88 percent. Over the last year our equities market is up around 6.5 percent, it is tough out there! Except for a couple more medals in Rio, looking good on that score. Hey, and lest we forget, the Proteas and the Springboks getting involved in the same weekend, plus another potential gold medal at 2:15 on Sunday morning early, what a treat sports lovers.

There was also a set of results from Truworths, the stock was axe poled, down 8.2 percent by the close. Year to date the stock is down around seven and a half percent, before yesterday it was about breakeven. Of course they are pretty generous on the dividend front and always have been. with a high profile UK purchase, a softer looking pound doesn’t bring with it stronger Rand profits, as it was supposed to, not so? And with long time CEO Michael Mark having to return after decades at the helm, with the sudden resignation of Jean-Christophe Garbino at the end of last year, there seems to be a void that needs to be filled.

I like the business (Truworths), I like the prospects for retail in South Africa as a whole, a lot does depend on the outlook for rates. And in the end, there is an element of government policy that leads to higher gross fixed capital formation (the baking of more pies), by way of improved confidence. In other words, making sure that in the words of “number 2” that there isn’t a strike by private capital. If we sit somewhere in-between, as we do now, then cash just sits around and does nothing. There is a lot of cash sitting around doing very little other than earning interest that is about the same as inflation. In other words, nothing. Yet investment decision makers are reluctant to do anything for the time being. Call it a stalemate.

Over the seas and to the West of where we sit, stocks in New York, New York, a piece of land (Manhattan) in which the Dutch swapped 60 guilders (1000 bucks about in 2014, even accounting for inflation) with the Lenape native Americans. Worst deal ever. The Dutch swapped Manhattan for Run Island (which contained Mace and Nutmeg) with the English, possibly the worst deal of all time. Nutmeg and Mace were more important than fur trading back then. If the US hadn’t adopted economic freedoms for all and sundry, life would certainly be VERY different today from what it was back then, no doubt about it. The ability of the free Western world, unshackled from kings and queens and autonomous powers has everything to do with it. Strangely, if you encourage people to make money, rather than taking it away from them, society as a whole becomes more prosperous. Who would have thought?

Wal-Mart reported revenues for the quarter slightly ahead of analyst expectations (at a whopping 120 billion US Dollars), which saw the share price rise 1.88 percent. Nice. Whilst costs are ticking up in the US, with wages rising and spend on stores to make them look better, the outlook is less certain, competition on all fronts. Let us just say that Wal-Mart doesn’t employ the department store employee, Wal-Mart is where people go for the basics and not to spoil themselves. After all is said and done, the stock trades at 16 times earnings, the market cap is 231 billion dollars, the annual revenues are approaching half a trillion Dollars. Wal-Mart’s annual revenues are now bigger than the entire economic output of Poland. Just saying.


 

We have been speaking about this for a little while now in the office, is too much information hurting your investments and your investment approach? Firstly, I think that many people invest in equities with exactly the same goals. It is simple, if you are assuming more risk than the next person, you expect to be rewarded above the risk free rate, or definitely above the cash rate. The risk free rate being government bond yields. In a South African context, you are setting the bar quite high. I am no expert on the bond markets, I do know that the ten year is currently benchmarked against the R186 (a specific issuance by Treasury) and that currently yields 8.41 percent. Interest is of course taxable, so one should definitely take that into account when measuring yourself against other asset classes.

You can, at a stretch, get around 6.5 percent on cash rates, those obviously have a term attached to them, from the Postbank to Standard Bank. Daily Money Market call rates, as per the Standard Bank website is around 6.17 percent if your balance is less than 100 thousand Rand, 6.7 percent above 20 million Rand. We have a fair idea that the cash rates in Msanzi are around six and a half percent, the ten year bond, the so called risk free rate yields a rather high 8.41 percent. The question then is, what return should you expect in equity markets for the risk you assume. There is risk that you are assuming on government bonds here in South Africa, it is not risk free. Nothing in life is risk free. I recall an interview of some bond investor who kept a Russian Imperial Bond certificate framed in his office, to remind him of this.

That still doesn’t answer the question, what is the acceptable return for equity investors? Time frames are all different for all individuals, we are all at different stages in our respective lives, I saw a financial house advertising on Twitter that you have 2 salaries, the one you earn now and the other one that you earn when you are likely to draw down on your investments. Delaying the draw downs, i.e. contributing more over time has a double compounding impact, it gives the ability for your funds to grow more at the end. Compounding interest is certainly one of the modern wonders of the financial world. The differences are pretty huge though, when it comes to compounding interest. If your 1 million Rand manages to return 10 percent per annum, you get 2.6 million Rand after 10 years, if you compound annually. The difference, if you add an annualised 2 percent per annum is half a million Rand, the amount at the end of the ten years is 3.1 million Rand. An 8 percent per annum annualised return over ten years sees your ending amount at 2.158 million Rand.

Now this is where it becomes trickier, if you add 5 thousand Rand per month to the million Rand and you get a 10 percent per annum return, you end up with 3.645 million Rand after ten years. The answer that we are looking for is definitely open ended, I cannot produce with any degree of confidence a glossy piece with all the projected ending amounts. Nor should you accept that from any financial house, the truth is that nobody knows what the future holds. We could quite easily end up with a scenario where the market doubles every 5-6 years, the 12-14 percent per annum scenario.

Here is the caveat, you do not have to own the market. You can pick and choose at will, the companies that you want to own. Owning the market will get you market returns, which is far better than being a consumer that blows every last cent of disposable income in the hope that a golden parachute appears from somewhere. The single greatest mistake that many retail customers make is selling stocks when the price performs badly (bad economy, poor sentiment, etc.) and buying stocks when the price goes up sharply, hoping to not miss out. Many chasing their tails forget that they don’t own a share price, rather they own a share on future profits of the business that they now OWN and have paid a price today that represents that reality today. If you can distinguish between the two (and I have learnt that not all of us can), then you are more than half way there.

Next, I am going to give you a simple scenario on whether or not you think that this is a good investment. For the purposes of this exercise, we are also going to use leverage, i.e. borrowed money that the bank is willing to take on the risk of lending the money to you. Let us presume that the starting amount is 500 thousand Rand. Over a 5 year period, you will pay in interest and capital 673 thousand Rand. You would expect at the very least to earn an inflation (6 odd percent) plus return, right? It is a travesty to learn that your original “investment” in this case can only realistically sell for somewhere in the region of 160-170 thousand Rand. You wouldn’t be surprised then to learn that I am talking about a motor vehicle. Of course a motor vehicle is a tool, it provides you with the transport to and from wherever it is that you are going. You could take public transport, you could rely on lift clubs, you could make a whole number of choices.

I think the only point that is worth making is that it is far easier to spend than to invest, even if we know that it doesn’t make financial sense. Having a long term savings goal is far better than not having one at all. In conclusion, investing in equities is always going to be hard. Your earth may be shattered from time to time, take it in your stride. Know that you own a company. Not the economy, not a share price, not politics, not the global view, not the Fed, not the ECB, not negative yielding bonds, not Twitter finance, not 24 hour business TV, and the list could go on. If ever you feel like this is hard and it is tough to stay the course, know that the gains that will transpire in the future were hard earned. Warren Buffett saved and went from 6000 Dollars net worth at age 15 to 1 million Dollars at age 30 to 1 billion Dollars at age 56. By the time he was 83, he had clocked 58.5 billion Dollars. Don’t get defensive too early, that is also another lesson once you have built the base aggressively. Check it out courtesy Dataviz, how much was Warren Buffett worth at your age:


 

Linkfest, lap it up

In the spirit of setting records, this is a milestone that markets have been anticipating since the dot com boom at the turn of the millennium – Amazon may beat Apple to become the first $1 trillion tech company. As shareholders of all 3 of these businesses, I hope that one of them reach the milestone in the not too distant future.

I didn’t realise that this could be a problem, currents in the pool could have shaved fractions off some swimmers times – Researchers believe certain lanes in the Olympic pool may have given some swimmers an advantage.

A longtime Apple follower and blogger on all things statistical, Horace Dediu has concluded that Apple would be the first company to reach 1 billion paying customers. And lending credence to the idea that the services business will some day be the biggest in the world. Imagine that, one billion customers possibly paying one dollar a day, 365 days a year – Counting Apple’s Customers.


 

Home again, home again, jiggety-jog. Stocks are mixed to better here in the city built on gold. The Rand is weakening a little again, stocks are up, the commodities complex is looking mixed.


 

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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