“Brought to you by Absa ETFs”

Simon Shares

• The new cabinet is of course a compromise, that's the nature of our political system. But the important departments are markedly better hands (SOEs, treasury & mining).
• New tax-free year kicks off today. R33,000 per year and transfer are now also possible.
• Up coming events;
  • ABSA NewFunds ETF seminars (DBN, CPT, JHB and webcast)

Leverage your investment portfolio

Borrowing money to increase your portfolio is something most investors ponder at some point, but two questions come up. How and what are the risks? The theory is easy, over the long-term equity markets do better than the cost of borrowing, but there is more to leverage then just that. So here are some options, with the risks involved.

• Derivatives such as CFDs;
  • Easy enough. But costs and margin calls are real issues. Keep it small.
• Home loan
  • Clean and simple if you can afford the repayments remembering that when markets collapse interest rates typically rise. Make sure you can make the repayments with higher interest rates and what if your income drops?
• Personal loan
  • Banks don't like lending against shares and again can you afford the repayments? Also unsecured loans typically attract higher interest rates meaning the numbers no longer add up.
• Margin
  • Some brokers will lend against a portfolio with the amounts varying depending on the shares being used as collateral. The risk here is that loan amounts may be adjusted and you may be squeezed out.

Personally I have leveraged my portfolio once. In 2008 I maxed out my bond to add to my portfolio. It worked and I slept well enough but I have no plans to do so again.

On page 10 of his latest annual letter Warren Buffett writes "This table offers the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions." 

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JSE – The JSE is a registered trademark of the JSE Limited.

JSEDirect is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.

“Brought to you by Absa ETFs” 

Simon Shares

• Discovery* (JSE code: DSY) results were top notch and complicated as they always are. I own this stock as the business model really works, but as I have mentioned before the complexity adds risk. Risk I am happy with as most stocks I own have real simple business models.
• JSE (JSE code: JSE) results show HEPS down 6%. But look at value being traded these days. R25billion a day has become a regular feature, last year average was around R15billion. That equals lots of extra revenue in this financial year.
• Mining charter back to the drawing board. Good for local miners (of which we have very few).
• January CPI dropped to 4.4%, interest cuts coming to a prime rate near you? But budget may add to inflation (fuel being the one, not directly but will increase transport costs so food inflation).
• Up coming events;
  • ABSA NewFunds ETF seminars (DBN, CPT, JHB and webcast)

* I Hold ungeared positions

#Budget2018

Firstly I think Cyril Ramaphosa may have played it real smart by letting Malusi Gigaba deliver the budget. He can now spend the next year claiming it was not his budget but a Zuma legacy budget.

Overall not the train smash expected but still lots of tax increases with R36billion of extra tax. Lots of cuts to spending, R86billion over three years and which has to actually happen.

• VAT increased to 15% (first change since 1993), with 19 basic food items being zero-rated.
• Cue everybody suddenly caring about how this will hurt the poor.
• “Wealthiest 30% of household contribute 85% of VAT revenue”. 
• "The Old age, disability and care dependency grants will increase on 1 April 2018 from the existing R1600 by R90 to R1690 and by a further R10 to R1700 on 1st October 2018."

GDP growth 1.5% in 2018 and rising to 2.1% in 2020. I hope they are very wrong on this.

No changes to;

• Dividend withholding tax (DWT)
• CGT (40% inclusion rate with first R40k exempt)
• Tax-free limits (annual or life time)

No Nuclear.

Retirement funds will be allowed to invest up to 40% outside of SA - 30% "offshore" and another 10% elsewhere in Africa.

JSE added 1.25% during the speech, USDZAR 8c and government bonds back at 8%, bond levels last seen three years ago.

For our investments. Consumers being taxed, no surprise. But with inflation dropping leading to prime rate likely heading lower I still like the SA Inc. investment thesis.

Overall - a good balancing act albeit still a tough budget. But could have been much worse and I think Moodys will not downgrade us on the back of it.

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JSE – The JSE is a registered trademark of the JSE Limited.

JSEDirect is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.

Simon Shares

• Market continues to wait for president Zuma to go. It is taking time but ejecting a leader usually does take time and markets are patient and way more interested in what is happen in the US with inflation data out after I have recorded this podcast. This will likely be the driver for now. When Zuma eventually goes, and he will go, then market can move on that info. It is messy (as politics usually is) but it just a matter of when, not if.
• Oceana (JSE code: OCE) CEO quits to buy their boats?
• Resilient, Nepi Rockcastle, ForstressB & Greenbay (JSE codes: RES, NRP, FFB & GRB) continue to flounder after 36One report surfaces. Was it leaked? Does that matter? Resilient have responded via SENS and a conference call and a FAQ - now the market gets to vote. http://resilient.co.za/faq.htm
• New African property ETF.
• RA, pension or provident fund by Carina Jooste.
• Up-coming events
  • JSE Power Hour: Kick off 2018 with ETFs and tax-free investing

Avoid the big losers or risk your portfolio

A -60% return requires a +150% to beak even. A -80% return requires +400% to break even. Think about that. Saving that last 20% on the downside is worth a 250% smaller return on the upside.

— Ari Paul (@AriDavidPaul) February 13, 2018

Trading is really probability and all we have to do as traders is enter on time and then ensure no large losses. If we avoid the large losses those small profits and losses will cancel each other out and the occasional large winner will make all the profits. But we have to cut the large losers or else we go bust.

So why do we hang onto our losers?

• Fear of the pain - we want the thrill of winner because then we're winners.
• Fear of being wrong - measure by what you control (perfect trade challenge).
• Fear of the money being gone - trade smaller size.

We Get Mail

• Ruan
  • I am new to CFD trading and I see that with CFDs you qualify for dividends. How does it works?
• Manoj
  • I am considering investing in the new CoreShares Global Dividend Aristocratic ETF that will launch on 22 February. However, I would obviously want to make sure that I am buying the share at fair value or at a discount. How would one ascertain whether the price is at fair value or a discount? Normally, one can use the P/E ratio to ascertain value. But, in the case of an EFT, this ratio is not available. Additionally, I am nervous about committing to purchase the ETF during the book build that ends on 15 February because I don't know the launch price. It this nervousness justified?

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JSE – The JSE is a registered trademark of the JSE Limited.

JSEDirect is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.

Simon Shares

• Dual CEOs at Investec (JSE codes: INL / INP)?
• Market sells off and rebounds (a bit) and we're in correction territory (down 10%).
• The falling property stocks of Resilient, Nepi Rockcastle, ForstressB & Greenbay (JSE codes: RES, NRP, FFB & GRB) continue to trade down at the low levels they hit when Viceroy concerns initially hit the market in early January.
• Capitec* still under fire from Viceroy and share likely to be subdued for a while.
• Brimstone (JSE code: BRN) has sold down their stakes in both Tiger Brands (JSE code: TBS) and Life Healthcare (JSE code: LHC). Now what will they do with the R750million cash?
• Stress free tax year
• Up-coming events

* I hold ungeared positions.

Section 12J (S12J)

Introduced in 2009 this enables a tax payer to invest into a startup (via the S12J fund, Section 12J Venture Capital Companies (VCC)) and claim it as a deduction on their tax return effectively reducing ones income by the amount invested. An important point is that the investment has to be held for 5 years or income becomes taxable.

In theory nice but with some buts;

• Firstly investing in startups is high risk - of course it is.
• That said you can invest in lower risk and more mature companies, know what you're investing into.
• Exiting at the end of five years may be a challenge. How does one sell a stake in a startup? They could list but if not liquidity is going to be a potential problem. Check how the fund plans to manage this and how it has worked in the past.
• Check the numbers very carefully. I've seen a lot S12J companies working the returns off R550k when you made a R1million investment. The theory is that they include the R450k tax saving into the return. Sure, but where did the R450k go?
• Know what you're investing into. This is much harder then listed investments as they're startups and we have limited information and hence valuations are hard.
• Get to grips with all the fees, all of them, in lots of detail.
• Quality and track record of the VCC managers.
• Bottom line is that there are good and bad in S12J. Make very sure you know which you're getting into.
• Lastly, saving tax is never a good enough reason on its own for an investment.

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JSE – The JSE is a registered trademark of the JSE Limited.

JSEDirect is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.