NFB FINANCIAL UPDATE Issue68 June2013
FROM THE CEO’s DESK
I Mike Estment BA, CFP® CEO - NFB Financial Services Group
IN THIS ISSUE Front Page: From the CEO’s desk Center Page: Have I made sufficient provision for death, disability and retirement? Back Page: Retirement investments
recently read a great review from our friend and highly-rated portfolio manager, Kokkie Kooiman, of Sanlam. Kokkie, like quite a few of our leading money men and women, has attended the “Sage of Omaha”, Warren Buffett's, Annual General Meeting and presentation to their clients. I will repeat, for the record, that I firmly believe that provided you understand your goals, accept the risk of volatility and stick to your guns, making investments into “risky” assets likes stocks, property and bonds will outdo both cash and inflation over any meaningful period. The other, often overlooked, basic truth is wherever tax is due, this further reduces the net return. I get reasonably irritated when listening to the radio or watching TV and I hear an advert by our banks, which goes something like: ”Buy a fixed deposit at 5% fixed for a year, no commissions, and no costs”. Unsaid is the fact that whilst their advert doesn't tell a lie, they forget to tell you that whilst you take the risk of the bank folding, they lend your money to their clients at 10% or perhaps more! They also forget to tell you that cash rates (call) often closely track inflation. The only problem is that inflation doesn't pay tax and we do! This implies that without drawing a cent of income, you are losing out in the buying power of your portfolio. If you need income, typical of our retired clients, you might be on a hiding to nowhere. So what, I say! From the above it seems obvious that given a little knowledge, a little time and a little money, we can all retire secure in our wealth as long as we avoid bank deposits! Not so fast, there are a few basics which Kokkie and I agree with as tickets to that game. The basic rules are: 1. Understand the principles of investing. Keep these simple. Understand the investment decision and stick to your guns, letting compound returns do their magic. 2. Understand yourself, your goals and your weaknesses. Avoid greed and fear as they are poor bedfellows of successful investing. Clearly, if the investment is just for the short term, or is a liquidity buffer in case of emergencies, cash is king. Even though interest rates are low, they are positive. Applying money you need inside of a few months to a growth oriented portfolio makes little sense as markets might move into negative territory in the short term, resulting in a loss when you want to use the funds. For the very high bracket tax payer, there are products which produce dividends, but don't have a very volatile price. These might be better suited, giving you the best of both worlds. Both locally and globally, we like to focus on managers who buy top companies. These also go through tough times as the economies of both South Africa and the world go through growth and contraction, but they tend to have top management, capable of swimming against the tide in tough times, and typically leveraging good times. Sometimes these companies are picked up early by great money managers. These add further in the way of extraordinary returns. However, portfolios which focus too
heavily in middle and small cap stocks can get severely punished when markets show weakness as they are very illiquid. Looking at Berkshire Hathaway and other contrarian managers, you will most often see large, quality companies occupying top of the pops status as well as being in the vast majority in overall value. Leaving stock selection up to the professionals is important or requires a keen interest, loads of time and dedication to get right as an individual. It also needs a healthy understanding of Basic Rule 2 above, where fear and greed rule. Taking a good look at top portfolios often shows core, quality holdings with limited changes taking place. These occur typically where something has changed, as change is one of the few constants. This might be where a stock overshoots the manager's expectations and is just too good to be true or where the company or its management changes from the indicated strategy which made the manager choose them in the first place. Top managers know their stocks well. Like Buffett, they also treat the companies as real investments, rather than stock certificates. They visit them, kick the tyres, are trusted investors and even at times have roles on the Boards of Directors. It is also key to realize that the future is unknown, and where someone dictates to you exactly what the winners will be, leave quickly. Buffet's long time partner, Charlie Munger, says “we deal with the future and the future is unknown”. Accordingly they invest in the company and its people, both are tangible, readable and able to adapt to the future. As an example of the compounding of capital, I have asked one of my associates to put together a graph to compare a top money type fund with a balanced mandate fund which is on NFB's list of approved funds. The difference in three years is nice, in five years is less significant (given the big market correction we went through), but look at the ten year numbers. They scream out loud that compounding, quality and patience are always rewarded. Before allowing my ramblings to have you change your call funds to balanced funds, you need specific advice. Please engage with your wealth manager in this regard.
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fortune favours the well advised