Behave and Save

“By saving say 10% of your income you create a very handy buffer so the next time you have an emergency, instead of tapping into your savings (or worse into debt) you can just divert that buffer to the emergency expense. Another benefit is that you get used to living on less, so if the unthinkable happens where you no longer have a job, your savings last you that much longer. A more rosy alternative is that living on less gives you the freedom to change from the job that you are not too keen on?”


 

To market to market to buy a fat pig After a red start to the day the All Share finished the day in the green, up a little over 0.5%. Banks recovered from being down over 1.5% to finishing in the green for the day. Most of the gains though came through our dual listed stocks. Aspen has had a resurgence since around lunch time on Monday. Bright pointed out that it might be a coincidence but he was on CNBC Power Lunch on Monday talking up Aspen and the management team, you decide if Bright is a market mover!

Leading the charge for a green close was Naspers up almost 2% and within a whisker of it’s all time high, currently sitting at R 2 537 a share. The 5 year return on the stock is an amazing 453%! I remember when it crossed the R1 000 mark in late 2013, there was a stir because a share on the JSE was trading above R1 000 but more because Naspers had been trading at R500 a year before. Rapid share price appreciate scares most of us and for good reasons. Bubbles are a real thing, the dot com is still recent history. Sasha sent images to us from the Tulip museum in Amsterdam, it is unbelievable how high a price of a plant got. Near the peak of the bubble a Tulip bulb was worth around 200 times its weight in gold! Around 21 years worth of wages for a carpenter! In the case of Naspers, our brains struggle to comprehend the size of the Chinese population and the exponential growth of the internet.

New York, New York Another record high for the Nasdaq along with the conquering of the 6 000 mark for the first time in its history, closing the day out at 6 025. The S&P 500 was up 0.6%, The Dow more than that with a gain of 1.2% thanks to big players having good results. CAT was up around 8% after crushing expectations, they only had 3% growth in revenue but thanks to restructuring and increasing efficiency, their profit number was almost double what it was last year. CAT is a nice indicator of what is happening in the primary sector around the world. No surprise then that Oil & Gas in North America showed good results. Also doing well was the construction industry in Asia/ Pacific. The growth for CAT came more in the sale of aftermarket parts instead of the sales of big machines, generally pointing to companies still being cautious.


 

After reading this blog piece (How Much Money Do You Need to Retire?) and having a number discussions with clients and people “in the know”, my conclusion is that being financially free doesn’t require a complex strategy. The first and most important rule is spend less than you earn, sounds simple right? The second rule is avoid blowing up financially by taking too much risk. Do those two things and then as time goes by, you can’t help but be financially free. We have little control over what we earn, we can control what we spend and what we own though, so lets focus on that.

The greatest threat to rule number 1 is Lifestyle Inflation, where your monthly expenses tend to grow inline with your raise each year. Spending less than you earn has the obvious benefit of allowing you to save, there are some less obvious benefits though. By saving say 10% of your income you create a very handy buffer so the next time you have an emergency, instead of tapping into your savings (or worse into debt) you can just divert that buffer to the emergency expense. Another benefit is that you get used to living on less, so if the unthinkable happens where you no longer have a job, your savings last you that much longer. A more rosy alternative is that living on less gives you the freedom to change from the job that you are not too keen on?

How do you avoid blowing up financially? It all comes down to controlling your risk. The reason why we have insurance on our cars and houses is so that we don’t blow up financially when low probability things happen to us. One of the many reasons why the middle class has been able to emerge is thanks to insurance spreading risks among society. So those risks are taken care of. More relevant to our conversation is the risks around asset allocation, which generally goes wrong with people taking on leverage or going “all-in” on one investment.

As Buffett said:

“If you don’t have leverage, you don’t get into trouble. That’s the only way a smart person can go broke. I’ve always said if you’re smart you don’t need it and if you’re dumb you shouldn’t be using it”

 

Basically he is saying is, “be patient, you don’t need returns of 50% a year to be wealthy.” Compounding returns is an amazing tool that gets more powerful over time, so stay in the game (don’t blow up) and let time and compounding do the rest for you.

Being financially free or wealthy looks different to everyone and if it was easy to get there, everyone would do it. Getting there is probably easier than most people think though, particularly if your starting point is in the ranks of the global middle class.


 

Linkfest, lap it up

Netflix reached an all time high last night thanks to the news that they are getting a presence in China – Netflix is going to China. The share was up around 6% but this is still very early days and they are using a third party provider to stream the content. Progress none the less.

The French election was the market moving story for Monday and will be again on Monday 8 May. If you don’t know what each candidate stands for, here is a nice breakdown – France: Macron vs. Le Pen to Decide Fate of EU.

This is a fairly emotive issue at the moment and will probably come to the fore again when Trump announces a tax overhaul. It is the issue of inequality and rich v poor – Its Awesome Being Poor Today!.


 

Home again, home again, jiggety-jog. The Rand was weaker out of the gates this morning, getting to the $/R 13.15 levels but stabilised at that level. The All Share is green lead by the dual listed stocks. Later today we get oil inventory numbers out of the US, not too important for investors but more important for consumers. Will we see tax news from Trump? If we do see some news expect a reaction from the market.


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

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