Sell or hold? Un­der­stand your in­vest­ment

CityPress - - Business -

Mar­kets through­out the world took a beat­ing this week and the JSE was no ex­cep­tion, fall­ing about 15% from its high in April, so it is not sur­pris­ing we re­ceived many queries from read­ers and Twit­ter fol­low­ers about selling out of their stock mar­ket in­vest­ments – with some ask­ing whether their money would be safer in prop­erty rather than shares.

When it comes to in­vest­ing, it is im­por­tant to look be­yond the im­me­di­ate chaos. One of the prob­lems with in­vest­ing in shares is they are priced ev­ery mil­lisec­ond, so the volatil­ity and price move­ment is ex­tremely ev­i­dent. Price move­ment is, in ef­fect, a func­tion of the price some­one is pre­pared to pay for that share on that day.

When it comes to prop­erty, on the other hand, the pric­ing is far less trans­par­ent. One places a value on a prop­erty based, usu­ally, on an es­tate agent’s rec­om­men­da­tion. That rec­om­men­da­tion would take sev­eral fac­tors into ac­count, in­clud­ing the size of the house, the area and whether the prop­erty was in a good con­di­tion or not.

That would be sim­i­lar to ask­ing an in­vest­ment an­a­lyst how much they think a spe­cific share is worth. They would look at the fun­da­men­tals of the com­pany – in­clud­ing the sec­tor it is in, its com­peti­tors, its profit and earn­ings – be­fore cal­cu­lat­ing a fair price.

That price may be higher or lower than the cur­rent share price. If the an­a­lyst val­ues it at a higher price than its cur­rent price, it would be a buy; if the an­a­lyst be­lieved it was worth less than its share price, it would be a sell.

In the same way, if you were selling a prop­erty and some­one came and gave you a cheeky of­fer well be­low what it was worth, you would be un­likely to sell un­less you were in fi­nan­cial dif­fi­culty. If, on the other hand, you were a buyer and the seller was des­per­ate, you could per­haps buy the home for less than it was re­ally worth.

So you need to look past the noise and ask what your in­vest­ment is re­ally worth. If you are in­vested in com­pa­nies such as Pick n Pay, Stan­dard Bank and Naspers – these are some of the big com­pa­nies trad­ing in the mar­ket – do you think these busi­nesses are at risk?

Do you be­lieve they are a less safe in­vest­ment than a residentia­l prop­erty? Be­cause, ul­ti­mately, what you are in­vested in is the long-term earn­ings of these com­pa­nies. For as long as they are well man­aged, have cus­tomers and are mak­ing profit, their share price will grow over time. Are you pre­pared to sell them at a dis­counted price to some­one else who will make the profit?

Per­son­ally, I like the idea that ev­ery day the chief ex­ec­u­tives and staff at those com­pa­nies go to work for me, their share­holder. Ev­ery day some­one trans­acts at their bank, pays their DStv in­stal­ment or buys gro­ceries, I am re­ceiv­ing a share of that profit as an in­vestor.

Once you un­der­stand share in­vest­ing in that sense – that you are in­vest­ing in com­pa­nies and not “the mar­ket” – you will feel less anx­ious dur­ing volatile mar­kets.

A qual­ity com­pany will make money over time. How­ever, the amount of money will be de­ter­mined by the length of time you hold the in­vest­ment and the price you paid for it.

Con­sid­er­ing that the price has just gone down sig­nif­i­cantly, it may be a chance for the brave to start in­vest­ing. It is also a great time to be in­vest­ing monthly by debit or­der into a unit trust or ex­change-traded fund. Each time the share prices fall, you are buy­ing more shares or more units for the same amount of money.

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