DIY Portfolio Management Programme Support Club

Staff: Charles Hattingh, Colette Spear (daughter) and Jade Spear (granddaughter)

Telephone:011 476-3626Web:Email: (not both)

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Born Loser

Dear Gom,I took to heart your guidance regarding diversification and rand-hedgers in my portfolio construction and at the end of December 2017 designed the following five share portfolio investing R500k in each share:

Cluster / RHedge / Share / Dec 17 / Apr 18
Food / No / Tiger Brands / 460.00 / 389.00
Property / Partly / Resilient / 151.16 / 67.75
Tobacco / Yes / BATS / 829.50 / 687.21
Retail / Yes / Steinhoff / 4.65 / 1.92
Banking / No / Capitec / 1097.96 / 889.12

To 31 March 2018 I have wiped out R827k of my R2.5m investment. Please explain to me where I went wrong.

Kind regards, Born Loser

Dear Born Loser,I can see four problems with your approach:

Diversification does not mean a portfolio of five shares
You are incapable of predicting the future
You did not base your decisions on our “four evidence based decision making process”
Your evaluation period is too short to be meaningful

Taking each one separately:

I would suggest that to properly diversify a R2.5m portfolio one should have at least 12 shares in it. Concentration could result in higher returns but increases the risk. Your first goal in portfolio management is not to lose money so you should prioritise diversification.

I am also incapable of predicting the future. How were we to know ahead of time that the JR Reynolds takeover by BAT was to go pear-shaped, that there were harmful bacteria lurking in Tiger Brands’ factories and some tin-pot show would throw doubt on Capitec’s integrity?

The choice of Resilience and Steinhoff shows that you are not basing your decisions on sufficient, relevant, reliable and current evidence.

A cursory look at the balance sheet of Resilient at 30 June 2017 showed equity of R32bn. The assets of the company are fair valued so this should represent the market value of the share. There were 400m shares in issue. R32bn divided by 400m = R80 a share. Why then did you pay R151 for the share?

In the case of Steinhoff you knew that the financial statements could not be relied upon at the time and that there was no reliable evidence on which to base your decision so why did you throw money at this share?

And, lastly you cannot evaluate a portfolio based on a three month period. When you invest in a portfolio of equity shares you will only know after five years whether or not you have been successful.

Kind regards,Grumpy Old Man

Note: “Born loser” is not one real person but a composite of a number of real people, INCLUDING ME!!!!

What is a billion?

I came across this article in the Citizen:“South African politicians use the word “billion” in a casual manner, especially when our tax money is involved. A billion seconds ago it was 1959. A billion minutes ago Jesus was alive. A billion hours ago our ancestors were living in the Stone Age. Today a billion rands is only about 27 hours and 12 minutes at the rate our government is spending it.”

I understand a billion to be a thousand million, i.e. a 1 plus nine 0’s, i.e. 1 000 000 000.Divide that by 60 to get minutes = 16666667. Divide that by 60 to get hours = 277 778. Divide that by 24 to get days = 11 574. Divide that by 365 (about) to get years =32. 2018 – 32 = 1986, not 1959! I never bothered to check the other information.

Lesson: Do not believe anything you hear or read without fact-checking!

Advice regarding Steinhoff

A big four bank: “Although we don’t think it would be prudent to risk further capital on the stock (Steinhoff) until there is more clarity on the various issues, we believe there is a case to be made for the combined entity to be potentially worth substantially more than the current share price would suggest. We therefore maintain our HOLD recommendation.” The share price has since lost 59% of its value. I wonder on what evidence they based their “belief”.

Gryphon: “We believe that the share offers value at current prices”. 11 December 2017.

Vestact would not advise buying for anyone because it is “far too speculative” – the best “advice” I saw!

Newsflashes

On Sunday 22 April 2018 Colette was not well so I decided to load the Newsflash onto our website. Unknown to me the website connected to an older version – my fault for not checking. Only ONE person wrote to me to point this out. Do I assume that only one person is benefiting from the Newsflashes? I spend four hours each Sunday morning writing them. Am I wasting my time? Or did you see the error but did not bother to let me know as “it’s not the end of the world if Charles makes a mistake”. I am paranoid about presenting accurate information and really would appreciate it if you pointed out errors so that I can get them corrected as soon as possible.

Buy, Hold or Sell

You often see such recommendations from advisors. They make no sense. If you do not own the share, how can you hold or sell it? If you do hold the share, being told to buy it may result in you overweighing the share in your portfolio. Surely a far better system is what we do in our programme. Rank the share as “investment” or “non-investment” grade. If the share is ranked “investment grade”, the recommendation should be to include it in your portfolio. Shares not ranked as investment grade should be excluded from your portfolio.

Kind regards,

Charles Hattingh,

May2018