In­vest­ment les­sons of 2018

Mis­takes are in­evitable, but it’s im­por­tant to ask what was learnt from them


AS AN event­ful year winds to a close, it’s a good time to re­flect on the in­vest­ment prin­ci­ples of which the tur­bu­lent mar­kets in 2018 have once again re­minded us.

When stocks trade at high mul­ti­ples, there is lit­tle room for dis­ap­point­ment.

The list of FTSE/JSE All Share In­dex stocks trad­ing at more than 50 per­cent be­low their five-year highs runs into the 50s. Of these, seven are trad­ing at more than 80 per­cent less. That is hard to come back from if you bought in at the top. Although not true for all of them, some of these shares traded at high mul­ti­ples (well over 20 times – in some cases, over 40 times) be­fore the de­cline. This im­plies that ex­pec­ta­tions for them were also high.

Shares can trade at high price/earn­ings (P/E) ra­tios for a long time, but when these val­u­a­tions un­wind they sel­dom do so in a mea­sured fash­ion. Manag­ing over­all and in­di­vid­ual ex­po­sures to the highly rated stocks in your port­fo­lio by trim­ming along the way may make you feel like you are miss­ing out in the short term, but it could save you some pain in the long run.

In­fla­tion should mat­ter, not mar­ket in­dices.

If your start­ing point is to beat the in­dex, you could re­gard hold­ing large po­si­tions in the big in­dex con­stituents as low risk, with lit­tle con­cern for over-val­u­a­tion and ab­so­lute risk. If your start­ing point is beat­ing in­fla­tion by a large enough mar­gin over the ap­pro­pri­ate pe­riod, your mind opens to de­bat­ing the down­side, as well as the up­side in in­di­vid­ual stocks. You also be­come more will­ing to as­sess other as­set classes, for ex­am­ple gov­ern­ment bonds at yields of more than 9.5 per­cent and longer-dated ne­go­tiable cer­tifi­cates of de­posit at 9 per­cent. The right level of ab­so­lute re­turn over the right pe­riod should mat­ter most. Ide­ally, every de­ci­sion should im­prove your chances of achiev­ing that.

Mar­kets re­act very quickly to news – and not al­ways ap­pro­pri­ately.

If we be­lieved the mar­ket, the mere ap­point­ment of an in­terim leader was enough to undo all the struc­tural dam­age to the South African econ­omy over the prior decade. That was Ramapho­ria ear­lier this year. It was a per­fect il­lus­tra­tion of short-term over-re­ac­tion that was in con­trast with the longer-term re­al­ity. It takes a long time to turn around a com­pany or coun­try, and in­vest­ing based on news is not al­ways wise. It is far bet­ter to bear long-term val­u­a­tions in mind, rather than short-term sen­ti­ment.

It’s im­pos­si­ble to time off­shore in­vest­ments.

The rand started 2018 off with a 20 per­cent rally, only to de­pre­ci­ate by over 30 per­cent in the se­cond half of the year. Most in­vestors felt less in­clined to take out money at R11.50 than at R15.50 (the two ex­tremes we saw this year).

The les­son here is that off­shore in­vest­ments should al­ways be a part of a di­ver­si­fied strat­egy. You should be work­ing to­wards al­lo­cat­ing a per­cent­age of your port­fo­lio off­shore over time, rather than try­ing to time when to make large ad­just­ments. This will serve your long-term re­turn bet­ter.

Proper di­ver­si­fi­ca­tion al­ways im­por­tant. is

The role of di­ver­si­fi­ca­tion is to have parts of your port­fo­lio be­have dif­fer­ently over time, while still con­tribut­ing to longterm re­turns.

The aim is not to im­prove the level of ex­pected re­turns, but rather to con­sis­tently pro­vide a more ac­cept­able out­come – a bet­ter chance of achiev­ing what is re­quired – over time. This means get­ting the ba­sics right in terms of as­set al­lo­ca­tion (re­gion, as­set class and sec­tors). It also means that, from time to time, you will have to live with parts of your port­fo­lio (for ex­am­ple, JSE-listed eq­ui­ties over the past year) not per­form­ing as you’d like them to in the shorter term. Dur­ing such times it is im­por­tant to stick to your long-term plan.

What di­ver­si­fi­ca­tion is not is tak­ing an all-or-noth­ing view on off­shore ver­sus lo­cal, in­vest­ing in a bas­ket of high-P/E shares re­gard­less of their sec­tors be­cause ev­ery­one else owns them, or con­versely in­vest­ing in a bas­ket of “cheap” shares with poor bal­ance sheets, tak­ing com­fort in the low P/E ra­tio of your over­all port­fo­lio. True di­ver­si­fi­ca­tion re­quires a con­sid­ered ap­proach, lots of de­bate and en­quiry, and the insight to con­struct an all-weather port­fo­lio. It is far from a box-tick­ing ex­er­cise.

Mis­takes are in­evitable – stay hum­ble and learn from them.

The list of price de­cline ca­su­al­ties in port­fo­lios this year seems long. But, in re­al­ity, in­vest­ing in shares is al­ways ac­com­pa­nied by uncer­tainty, im­per­fect and in­com­plete in­for­ma­tion, a range of pos­si­ble out­comes and in­evitable mis­takes along the way. What made this year feel worse was that the JSE’s re­turn was low. (In fact, re­turns only start edg­ing away from in­fla­tion with some mar­gin when look­ing be­yond five years back.) A bull mar­ket com­pen­sates for in­di­vid­ual mis­takes, but a flat mar­ket high­lights them.

The im­por­tant ques­tion to ask is what was learnt from these mis­takes or, if they were avoided, why they were avoided – was it luck or the out­come of a con­sid­ered in­vest­ment process? If it was due to process, we need to spend time de­ter­min­ing how to ap­ply this even more thor­oughly in fu­ture, to fur­ther min­imise mis­takes.

Anet Ah­ern is the chief ex­ec­u­tive of PSG As­set Man­age­ment.

| Pix­abay, African News Agency (ANA)

RAMAPHO­RIA at the be­gin­ning of this year was a per­fect il­lus­tra­tion of short-term over-re­ac­tion that was in con­trast to the longer-term re­al­ity, while the num­ber of shares on the JSE trad­ing at high mul­ti­ples be­fore they de­clined shows that ex­pec­ta­tions for them were high.

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