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So the rand’s ranked, the economy’s bombing and you have no idea where to put your cash? Investing in turbulent and uncertain times requires a return to old-fashioned investment principles.
“Assess your risks and act accordingly,” financial publisher and entrepreneur Alec Hogg told a recent Gordon Institute of Business Science forum. Investors looking for a safe harbour should follow a back-to-basics philosophy, as advocated by Warren Buffet of multinational investment conglomerate Berkshire Hathaway.
Developing markets, turbulence and South Africa country risk
South Africa and other developing markets, such as Brazil, are experiencing equally unsettled times. A distinguishing factor of developing markets, Hogg explained, is that “politics trumps economics,” and has the potential to overshadow any economic stability that may have been established.
“As a young democracy, it is expected that South Africa will experience turbulent times. But as an investor, it is important to seek out places that offer more stability, where currency risk is taken out of the equation,” he said.
Household savings and investments
Citadel Chief Strategist Professor Adrian Saville, told the Forum that while savings and investment are critical for economic growth, the savings rate of South African households is essentially zero: “The power that sits in the compounding engine has been abandoned by the South African household. It is incredibly important that we get out of the consumption trap, and especially the debt-led consumption cycle.
“Every country that is affluent today started out poor. Savings is a learnt behaviour,” Saville added.
Hogg advised households to be aware of the decline in the value of commodities and the deflationary impact this would have on currencies whose economies are underpinned by resources, such as South Africa’s. He said it is important to take money offshore away from this long-term deflationary risk and suggested a low cost S&P’s 500 tracker fund as a good source of diversification.
The importance of equities as an asset class
Saville pointed out that tax and inflation are the chief enemies of investment growth, and that equities are the only asset class that are a proven inflation beater.
Equities are the only asset able to leverage off human ingenuity, and thus have unlimited potential, Hogg said.
Banking and shares in financial services companies are especially appealing as the sector leverages human ingenuity, and harnesses the power of compounding.
When evaluating a company and making an investment decision, investors must remember they are buying the company itself, and not just the shares, he continued. “The intrinsic value a company rarely changes,” Hogg said.
Investors need to be able to distinguish between noise and news in order to make informed decisions. Hogg added that in order to do this, it is necessary to form opinions based on a wide variety of official as well as unofficial sources, and not only from annual reports and share prices.
Hogg stated that he supports a value investing stance as highlighted in his recent book How to Invest Like Warren Buffet: “Once you have evaluated a company and bought its shares you hold it for the long term. There must be no punting, trading or watching the share price,” he said.
The world is transforming – the fourth industrial revolution
Hogg explained that one of the reason for the turbulent investment environment is due to the fourth industrial revolution. While investors should look to place their money with companies whose businesses they understand, “the world is changing dramatically and as an investor it would be remiss to not educate yourself and invest in human ingenuity.
The emergence of the fourth industrial revolution, a concept that includes integrated economies, mechanisation and automation and builds on the digital revolution of the last century, was put forward at the 2016 World Economic Forum gathering at Davos. The movement is characterised by an availability of technologies including the Internet of Things, robotics, artificial intelligence and 3D printing that is revolutionising industries across the glob.
Driverless cars, and companies such as Uber and Airbnb, which successfully apply the concept of the sharing economy, prove “the fourth industrial revolution is with us and will transform everything around us. It is important to place your bets in the right place. There are massive and dramatic dislocations,” Hogg said.
India is a “sure bet” as an investment destination as the country had effectively transformed itself into a market-driven economy.
Hogg emphasised that South Africans are able to absorb and adapt to change: “If we unleash our human potential, we can succeed in this new environment.”
» City Press is a media sponsor of the Gibs forums.
