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Finweek English Edition - - MONEY - Marc Ash­ton

t ap­pears that in­vestors spend more than 80% of their time wor­ry­ing about some­thing that con­trib­utes less than 20% to their long-term to­tal re­turns…”

This re­cent quote from Grindrod As­set Man­age­ment is a crit­i­cal one if you’re just get­ting into the in­vest­ment game.

One of the prob­lems we f ind in the in­vest­ment en­vi­ron­ment is that the world has be­come ob­sessed with short-term mar­ket move­ments and a cul­ture of “bub­ble­vi­sion” in­vest­ment com­men­tary on var­i­ous tele­vi­sion chan­nels.

While we tend to get caught up in the hype of the news cy­cle, the two graphs be­low tell a fas­ci­nat­ing story. At the top you have a Stan­dard Bank graph and Mr Price’s at the bot­tom. What novice in­vestors will find fas­ci­nat­ing about the Mr Price graph is the con­tri­bu­tion of div­i­dends over the long term. As the com­pany started to gen­er­ate more sus­tain­able prof­its and there was cap­i­tal ap­pre­ci­a­tion, the div­i­dends grew nicely. The com­pounded an­nual re­turn for the last five years alone has been 28%, if you had bought and held on to the stock.

Now let’s take a look at Stan­dard Bank. The graph shows you that the bank has de­liv­ered in ex­cess of 20% per an­num to­tal re­turn. But the ma­jor­ity of that re­turn has been a com­bi­na­tion of div­i­dends (a func­tion of in­fla­tion) and then the real re­turn on the cap­i­tal. While th­ese terms may sound com­pli­cated to the novice in­vestor, the point that Grindrod As­set Man­age­ment is driv­ing home is that by buy­ing in for the long term and en­joy­ing div­i­dends (share of prof­its) from the com­pany, you will out­per­form those who are ac­tively try­ing to time mar­ket move­ments.

“Div­i­dends not only dwarf inf la­tion, growth and chang­ing val­u­a­tion lev­els in­di­vid­u­ally, but they also dwarf the com­bined im­por­tance of inf la­tion, growth, and chang­ing val­u­a­tion lev­els,” noted Robert Arnott in the Fi­nan­cial An­a­lysts’ Jour­nal.

While an in­vestor may look at th­ese graphs and com­ments and start scan­ning the Fin­week div­i­dends ta­ble for the best pay­ers, re­mem­ber this comment from Wil­helm Hert­zog, who is a port­fo­lio man­ager with as­set man­age­ment firm RE:CM: “In­vest­ing with the goal of gen­er­at­ing the best to­tal re­turn over time, within the con­straints of a given risk pro­file, is a far su­pe­rior way of al­lo­cat­ing one’s cap­i­tal than to in­vest solely for in­come (or, for that mat­ter, solely for cap­i­tal growth). De­ter­min­ing what the best ve­hi­cle is for gen­er­at­ing th­ese risk-ad­justed re­turns should be the pri­mary con­sid­er­a­tion in any in­vestor’s mind, not whether the re­turns are be­ing earned in the form of in­come or cap­i­tal growth.

For those who find the idea of try­ing to pick the next Mr Price or Stan­dard Bank in­tim­i­dat­ing, one of the best start­ing points is to go to one of the big name as­set man­agers like Al­lan Gray, Fo­ord, In­vestec, Coro­na­tion and Old Mu­tual and start off with an en­try-level div­i­dend unit trust. Once you get your feet wet, the cu­rios­ity to learn more about in­vest­ing and in­di­vid­ual stocks will grow.

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