The latest SPIVA for SA is out and it is bleak reading for active managers in South Africa. Around 75% are beaten by the benchmark over one, three and five years.
This means you have a 1 in 4 chance of picking an out preforming fund - very bleak odds.
So here's the question, and it is a real question. How does one pick the winning manager going forward? There most definitely will be those who out preform, some even consistently, but how do we spot them in advance? They themselves will tell you that past performance is no guarantee of future performance, and this is 100% true for a bunch of reasons.
I also know a number of people who chart unit trusts with fairly good success. Either just normal technical analysis or relative performance. Of course tax is an issue here.
If you have a method for picking winning funds let us know.
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300 shows, I haven't been making a fuss because it just feels old, very old. Add to that almost three years as a live radio show on Classic FM, starting from 8 July 2008. It's almost ten years of a weekly (albeit changing) show. We started life focusing outside the Top40 as the other shows seldom ever did anything in the small and mid cap space - then everybody did. So we have evolved over time. The question is where to next? Another ten years (truthfully that scares me). Send me your ideas on what we should or should not be doing.
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When a share is hit by scandal it can take ages to recovery as investors shy away from the stock.
Some like Steinhoff (JSE code: SNH) will never recover due to the seemingly rampant fraud hat happened. Others like EOH may but will stay under 'caution' for a while as will the Resilient (JSE code: RES) stable of stocks. Others such as Capitec* (JSE code: CPI) will also struggle for a while but should shrug it off in time.
Tiger Brands (JSE code: TBS) has held up fairly well since the Listeriosis story broke on the weekend and is only back to November levels. But it could get real bad with almost 200 dead people, but markets seem to not be so concerned with these sort of issues. I remember Pioneer (JSE code: PFG) righting the bread fixing claims, eventually paying a R1billion fine and the share rocketed. In part it is the known vs. unknown. PFG struggled until the fine was agreed on, and TBS could well see its share price struggle until some sort of finality is reached - and that cold be years.
The concern is perception and some potential investors will stay away while existing holders may head for the hills and this means less buyers for the stock so less/slower upside.
Your strategy needs to ask if the scandal is terminal, long-term or merely a passing fad? Then remember if it is time to panic, panic quick.
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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.
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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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.
GDP growth 1.5% in 2018 and rising to 2.1% in 2020. I hope they are very wrong on this.
No changes to;
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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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?
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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;
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I think we're missing a point with this latest Viceroy report on Capitec. Sure we're proud of the business and if you're a shareholder you've made amazing returns. But we seem to be circling the wagons and shooting the messenger rather then actually discussing the merits of the report.
Two important thoughts to ponder.
What if Viceroy had published their Steinhoff report before Steinhoff admitted to their fraud, would we have believed them? Simple answer is no and we would have looked stupid when the company admitted the fraud.
A fund manager does their research in a company, decides it's a great sock. They buy it and then they go out into the world promoting the stock - talking it up in the media and notes to clients. How is this different from what Viceroy is doing (aside from Viceroy shorting rather then buying)?
Here are some others who have been asking questions about Capitec.
*I sold half my Capitec shares at R911.00 yesterday.
A last point is that with Capitec exposed as the Viceroy target suddenly the other contenders (Resilient stable, Aspen, etc) are now all forgiven. But hold on, when we were unsure who was next the market sold these stocks off aggressively - this tells us something important. It tells us the market is not confident about these stocks and we should take that warning seriously.
Here's a Periscope video I did just after the news broke.
Here's the Hebalife video.
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This week Simon chats to Chris Rule from CoreShares on their soon to be listed Global Dividend Aristocrats ETF. It uses dividends as a quality metric rather then searching for yield and much like the MSCI World ETFs we have locally it is concentrated in the US at 53% with Europe making up another 22% but it is light on tech.
You can book for the events here.
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"Everybody has a plan until they get punched in the face" Mike Tyson
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Every year the first JSE Direct of the year is our annual predictions show. Marc Ashton, Keith McLachlan, Small/Midcap fund manager at Alpha Wealth and Just One Lap founder Simon Brown review their predictions from the previous year and make their top three predictions for 2018.
They then also make a call on the Top40 and ZAR/US$ for the year.
You can find the 2017 edition here.
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The asymmetrical nature of investing is a huge boom to investors. A share we own can go to zero with a 100% loss, but the flip side is that it can up go up multiples of 100%. So even the occasional loser doesn't derail a diverse quality investment portfolio.
The two key points, diverse and quality. If you have only one stock you're at massive risk and if you have a basket of dogs then you're still in serious trouble.
But a collection of quality stocks can survive the occasional blow out as they others run and we only needs a few real winners to make it all work and market beating.
Now in an ideal world we'll never see a 100% blow out because when it's time to panic we'll panic quick, right?
A last word on the asymmetry of trading (as apposed to investing). We have no real floor on loses as we also have no real floor on gains. So it is not asymmetrical and so we have to make it so by being ruthless with stop losses. I have long said my trading success is due to my always taking the stop immediately no questions asked.
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Our signature yearend JSE Power Hour presented by Just One Lap founder, Simon Brown.
Simon looks at what he predicted last year before embarking on his 2018 predictions that include;
Twitter poll for tonight's JSE Power Hour presentation ~ What's your expectation for the Top40 in 2018?
Time for my annual poll ..
What's your expectation for the Top40 in 2018 ?#JSE— Simon Brown (@SimonPB) December 4, 2017
Markus Jooste has also quit Stenihoff (JSE code: SNH), Star (JSE code: SRR), PSG (JSE code: PSG) and Phumelela Gaming (JSE code: PHM) boards.
Steinhoff CFO and Star CEO Ben la Grange has quit as CEO of Star, but seemingly stays on at Steinhoff, for now.
It's an oldie but it always true. Where there's smoke theirs fire and locally that is Steinhoff. Forever people have been in one of two camps on this stock. They either loved it or didn't understand the financials and stayed well away. I have always been in the latter camp and recently the warnings have gotten dire and now the CEO is out, results delayed and an investigation by PwC to try and understand exactly what's happen.
Now hindsight is easy, but there has been a lot of smoke around Steinhoff for ages, enough to scare away any investor one would think. I warned as recently as a month ago about this.
For traders the lesson is simple. Don't try and catch falling knives. Sure sometimes it works but when it doesn't you blow up.
Wiese took some R122million SSF exposure in early November at 6146c. This is why we largely ignore director buying.
The company did a share buy back also in early November for about R4,8billion, now worth R1.2billion.
Also a lot of hating on ETFs as Steinhoff was 2.35% of the Swix (which is a truly horrid index) and 1.88% of the Top40. Frankly active fun damagers who liked the company probably had a lot more.
The 7th largest stock in the South African SWIX index is currently down 61% amidst accounting irregularities and resignation of the CEO. pic.twitter.com/NEqwrsBGwo
— Delphine Govender (@Delphine_DG) December 6, 2017
Of course everybody now wants to know if it is time to buy? The answer is no because we simple know nothing except that what we thought we knew is not true. Never blindly buy something where everything is simple unknown. Some saying they have 2500c odd value in Star, PSG & Kap, but then they also have debt that is likely about the same.
Viceroy Research has published their report in Steinhoff and it makes for scary reading.
Lastly, what to do if you hold Steinhoff? Sell. The 'it can't get worse' trope is a lie. It can get worse, it can go to zero.
Trading is often very lonely, sure there's the people on Twitter or WhatsApp group you chat to - but mostly that's wild and wooly and not really any support. Your friends and partner are likely not much help either as frankly they don't truly get what you do or the pressures involved.
So we need a trading buddy, not just to keep us sane - but also to keep us honest and help us when we need it. we can use them to vent as required but even more importantly we give them access to our trading account for two reasons.
The real hard part is finding this trading buddy. Check around your circle of friends, try Twitter and other forums and be very selective when choosing.
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I want to aim this mostly at the newbie traders. Those who've been flirting with the idea of trading for ages. Maybe you've tried your hand at it but failed or perhaps you haven't dipped your toe into the water as yet.
Trading is not hard, the psychology is hard, but there are ways to deal with that.
First find a strategy you think makes sense, then start working on it. Test it with hundreds of back tested paper trades. Tweak as required and test again, rinse and repeat until you have something that seems to have a profitable edge. This may take you weeks of manual work - that's fine.
Then when you have something that seems to work, start with a small amount of money. Small as this will help reduce the stress.
Set the rules and risk management and get trading. Track your performance, your perfect trades and keep a journal. Importantly change NOTHING about the system. Ideally you should trade the exact same system for the entire 2018. If it is losing money badly, then your testing was bad. But by the end of 2018 you'll ideally have a working trading strategy and you can start increasing the portfolio size.
Point is start and have modest expectations. Aim to break even in year one - that's winning.
Online resources;
My grandfather introduced me to markets in the 80's and one of his key sayings was "when it's time to panic, panic fast".
When bad news breaks (yes we looking at you CIL) and a stock crashes the immediate response is that it's too late to do anything. Maybe, but often times the will be continued weakness because news and response is not instant. It takes time for everybody to respond. The bigger issue is if the news markedly changes a view and saying the damage is done is not an answer.
This is especially true if the issue is management related and also in cyclical and small/mid cap stocks.
Importantly I am not talking about panicking when the market crashes. This is about exiting a stock forever and moving on until it proves its bonafides again. Selling crashes is nice in theory but never works. Stocks are different because they can go to zero worse case or spend years, decades, forever languishing around little or nothing.
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Brait (JSE code: BAT) has valued their UK New Look business at zero. They paid R37billion just under two years ago. Woolies* (JSE code: WHL) and Famous Brands* (JSE code: FBR) both struggling with big deals and now Firstrand (JSE code: FSR) spending some R20billion buying Aldermore.
How many big deal really work? Sure they work eventually, but at what cost and never as management promised.
I suspect it has two key problem. Firstly they buyer typically over pays in their eagerness to get the assets, this is especially true when the target is listed and the premium has to be agreed on by shareholders and is hence usually 20%-30% or more. Secondly merging two business is never easy. Some easy wins such as centralised costs like HR can be lowered, but actually extracting value a lot harder. The third of course is the ego of management. Who wants to be boss of some regional business when you can be a global titan over seeing a vast network of losses?
My memory says very few ever work very well. Have you got some examples of large deals working? SABMiller worked, BHPBilliton* (JSE code: BIL) worked. Any others?
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Your trading system is one of the least important parts of a successful traders arsenal. Yes you need one and yes it need to be profitable. But it is not what is going to make you the money. That will be your discipline, your money and risk management - this is your trading edge.
So stop trying to find the best system in the world. Stop tweaking your system every tine it loses some money and stop jumping from one system to another.
Find a system that makes money, test it and learn to trust it. Become the absolute pro at the system and then trade it; unemotionally and with discipline.
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Every trader will at some point have a drawdown when a string of losing trades sees your once lovely equity curve head south. Or worse an ugly equity curve get even worse.
Typically the gut response is to either; change system, tweak the system, reduce trade size or just panic. None are a good idea.
August saw me have a horror week with four large loses (within system expectations, but not expected all at once). My immediate response was some Amazon shopping but then I got into my drawdown mode.
First I check every trade to make sure I did everything right. Now every trade I do is marked for a 'perfect trade' but I double check. I also go back to my initial system checking and see if this was expected. I use the Mark Douglas method of system testing and this process is very important. Firstly it gives an expectation of what the system can deliver, tests if it works and also shows what sort of drawdown you can expect.
The point is drawdowns are a part of trading and veery trader will have many of them over a life time of trading. We need to expect them, manage them and not have a knee jerk response to them.
I was interviewed by Duncan McLeod from TechCentral on local and offshore tech stock, interview below or here.
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A recent flurry of emails from people shorting stocks and getting burnt. In particular shorts on Capitec*, Naspers and Kumba. A side note that emailing me is a form of confirmation bias as the emailers wanted me to essentially confirm they were right and the market was wrong.
First rule is don't.
Second rule is don't short on fundamentals. Short on price action, if you want coupled with fundamentals. But don't just decide a share is expensive so now it must go down, it can get way more expensive.
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The first question no new trader asks is which time frame should they be trading in. Typically one starts looking at daily charts but quickly drops to shorter time frames because we want the rush that comes from each trade and we get more at shorter time frames. Yes trades happen in all time frames, but it's our ability to manage and profit from them.
But truthfully can most people manage an intra-day time frame unless this is all they do? Markets is pretty much my life and an hourly chart is still tricky for me as I miss some entries (stops are automated so that no problem).
Shorter time frames;
Forget about getting a rush from trading and find a time frame that works for you and potentially use multiple time frames. Start with a weekly chart, if you get a tigger wait for it to confirm in the daily chart.
Now if you not using technicals but more about price then tie frames become less of an issue, but you're then having to watch the market consistently hence no other day job or trade at night.
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Why does everybody hate highs? If we're an investor highs are a great thing as it means we're richer then before?
I once had a trading system that one of the rules buy new twelve month highs, and it made money.
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Remember Greece? I don't mean as a holiday destination, I mean as the country who's debt levels caused years of panic that were going to crash the global economy? This peaked in 2015 with elections in January 2015 and then in July a referendum saw voters reject the European Union proposed bailout leading to new elections in September 2015. Yet two years later Greece is pretty much never spoken of? The debt had not magically disappeared, rather it is being 'managed'. The struggle remains real for ordinary Greeks and no doubt the politicians continue to do whatever politicians do.
The point is the word is full of one crisis or another and the media will always make the crisis seem way bigger then it often is. If it bleeds it leads is the old newspaper adage and a financial crisis in an EU economy is always going to lead with plenty hysteria thrown in for good measure.The truth is the Greek debt crisis never really mattered to the rest of the world and I did a JSE Power Hour on this in June 2012.
Now don't get me wrong, we will have another global financial crisis - of that I am certain. But what will trigger it and when it will happen I have no idea. So as long-term investors and short-term traders we ignore all the hype and fear mongering. We focus on what we know and can control. For investors that means buying quality at prices we like. For traders - trade the price and ignore the noise.
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