Sunday 30 December 2018

Too Proudly South African

While reading my latest book (see previous post), I have been forced to think hard about all the biases we fall victim to. One that springs to mind is Home Country bias. 

In short, we overweight investment in our home country. There are a few reasons but the primary one is familiarity. We invest in what is familiar. This is obvious. Others include cost, limited access to other markets and retirement regulation (Regulation 28 in South Africa). 

I wrote about this in August 2016. My own allocation sits about 50% in SA and 50% offshore. Back in 2016, I wrote that South Africa makes up less than 1.2% of the MSCI World Index (basically the world stock market). 50% is a massive active bet. 

I used to believe that you need to fund your liabilities with ZAR. I am not sure if I believe this anymore. Granted many SA-based offshore funds don't pay dividends but you can buy individual stocks or US-based ETF's through Easy Equities and/or Interactive Brokers. Other arguments against are volatile exchange rates, withholding taxes and cost to repatriate. The only one that really concerns me is volatile exchange rate but that is a post for another day. 

The point of this post is: My investment time horizon is over 30 years but I am making a massive bet on South Africa. I am optimistic about South Africa's future but is a 50% weighting relative to (less than!) 1.2% too optimistic?

What about you? Do you know you global asset allocation? Chances are that if you have only an RA and company pension fund, it ain't over 25%! (You have Regulation 28 to thank for that).

Thursday 20 December 2018

Greatest Investment Book I Have Ever Read

Move over The Intelligent Investor and any of John Bogle's books. I think I have found the greatest investment book of all time. Look, I am only a quarter of the way through but it will seriously have to disappoint from here to lose its title.

I like everything about it except the title. The Behavioural Investor sounds a bit bland. The book is anything but that. Daniel Crosby (the author) wrote another one of my favourites. That one is called You're Not That Great. It is the antidote to all those terrible self-help "yes, you can" books. I'd recommend reading it before tackling The Behavioural Investor.

In short, we are not built to be great investors. Far from it. Left to our own natural devices, we are rubbish investors. On top of that, we tell ourselves that we are the exception. We are the special one. We can (and we think will) beat the market. Even with irrefutable contrary evidence, we will continue to believe so. The truth is just an inconvenience.

I'll share more once, I have finished it.

Monday 17 December 2018

Back by popular demand

I am back. A total of 2 fans asked me to write again. It's tough being an A-list celebrity.

I really need to get around to writing Forget the Noise 2.0. A lot of my thinking has matured since 2016 (when I wrote the book). South Africa certainly hasn't let us down since then... frankly, it is one clown show after another. Clowns are generally harmless unless they are from Stephen King's It. [cue childhood nightmare moment].

I really hope our clowns are merely part of a circus act. At some point the circus leaves town and every one gets on with their lives. I pray that post elections 2019 this will happen. I guess time will tell.

Unfortunately, clowns are a worldwide phenomenon. One currently lives in the White House but that is a story for another day.

Until I write again...

Diversification sucks

Diversification is not putting your eggs in one basket. Basically, don’t bet your house on any one investment. Many asset managers tell you not to “over diversify”. They can rotate in and out of stocks at the right time. They like to throw the term “tactical” at these times too. I have this super cool article to share with you. It was sent to me a good friend. Full disclosure: he works at an asset manager but certainly never says tactical nor rotate. We just couldn’t be friends if he did. :)

The article is tongue-in-cheek. It highlights all the “bad” things that come with diversification. In the end, however, we see that we can’t win all the time on every investment at the same time. We need an appropriate strategy that we are able to stick through good AND bad times. The articles says it best:

This is why investing is not easy; why successful investors know they have to remain focused on the long term. Owning a diversified portfolio of index funds sounds simple enough, but we are so prone to get in our own way. Hear this: the single worst thing you can do for yourself in an environment like this is to start making changes to your investment policy. (By the way, if you change your investment policy based on market performance, you don’t actually have an investment policy). You don’t need to have the “right” asset allocation (such a thing does not exist), you need to KEEP THE ONE YOU HAVE. If you have thoughtfully constructed a diversified portfolio of investments, nothing is wrong with it. The only thing you can do to make things worse for yourself in the long run is to change your allocation in response to weak performance from certain assets. Don’t do it.

Link to story:

Can I help you?

I always knew investment costs were high but I was surprised at how high.

Without any advisor fees, many “low-cost” options are well north of 1.50% (ex VAT) per annum. If we add advisor fees and then add platform fees the costs become very concerning. Cost ratios of 3% and above are not unheard of.

Why is this a problem for Forget The Noise?

I love dividends. I like portfolios with a dividend yield of 4% to 5%. If I subtract costs of 3%, then I am left with practically nothing. I am not happy. This is why I keep harping on about costs.

What is the problem?

There are two many “helpers” in financial markets and they all charge a service fee. Here are just some examples:

  • Active fund manager who actually manages the money (usually very poorly and at high cost)
  • Financial advisor (upfront and annual fees)
  • Platform fees (where the investment “lives” and they charge an annual admin fee)
  • Fund of fund managers (they choose active fund managers and create a fund on top of that)
  • DIMs managers (not quite sure what value they add but they supposedly “help” advisors choose funds and… of course… they charge fees)
  • Qualitative fund appraisers (they assess funds and again charge a fee)

I am not saying the above are terrible people. Most of the ones I have met are smart and friendly. I am just saying the maths does not work in their favour. In their defence, they will say the “alpha” (fancy word for value) they generate justifies the fee. I disagree but don’t want to wade further into the active/passive debate. I’ll just ask that whatever investment vehicle or person you use, that you carefully consider the costs involved.