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Quantifying advisor alpha
Tue, 03/29/2016
The value proposition for advisors has always been easier to describe than to define. In a sense, that is how it should be, as value is a subjective assessment and necessarily varies from individual to individual. However, some aspects of investment advice lend themselves to an objective quantification of their potential added value, albeit with a meaningful degree of conditionality. At best, we can only estimate the “value-add” of each tool, because each is affected by the unique client and market environments to which it is applied. Read more >>
The most underrated financial principle
Tue, 07/21/2015
In the world of finance there are a few themes that are repeated to the point where you really have to be quite creative to add more flavour to the topic. The wonder of compound interest, starting to save early, the impact of inflation and of course “if an investment sounds too good to be true, it probably is” come to mind.  A financial principle that rarely gets discussed though, at least in any meaningful manner, is frugality. Read more >>
Why do we fail to account for the future?
Wed, 07/01/2015
Most of us underestimate the time it will take to complete a future task. This planning fallacy is at work when that little weekend kitchen repair job turns into a month-long saga and it gets worse with more complex tasks. In terms of your financial life few tasks are as complex, or challenging, as saving for retirement. Many of us will set aside our 40s and 50s as time enough to save for retirement, while living the good life in our 20s and 30s, when the sober truth is that there is no time to waste. We convince ourselves that we will save more of our income later in life to catch up on the years of not saving, but that invites a similar cognitive trap: excessive optimism about the future. It also fails to take into account that time allows our money to grow exponentially thanks to the power of compounding. A practical thought experiment to illustrate just how little time we have to save is to think about the long term as a very short period of time. Read more >>
Merits of good and independent advice
Mon, 06/02/2014
Many investors lack the time, knowledge and experience to invest successfully, often encountering diffculties that could have been avoided had they taken advice from an independent financial adviser (IFA) at the outset and continued to listen to their counsel over time. Jeanette Marais of Allan Gray discusses some of the merits of getting financial advice and offers a few practical points to consider when choosing an IFA.  Jeanette recently overheard a !nancial adviser tell a client: ‘I am not here to make you a lot of money. If you want someone to do that, and trade shares back and forth, then I’m not the person; but if you’re looking for someone who makes investments consistent with your risk tolerance and goals, then I can help you.’  This got her thinking about how many people have misconceptions about the role IFAs play.   Read more >>
The beginning of the recovery
Fri, 11/01/2013
The upside of living at the bottom tip of Africa is that we have been relatively sheltered from what has been going on in the global financial crisis. The downside is that we don’t get to meet people who live in Athens, Madrid, Istanbul, Paris, Cairo etc. so we often assume that everything there is perfect and that we alone have problems. This is by no means the case. It’s tough out there; the world has just emerged from the biggest economic crisis since 1929. I had a youngster complaining to me recently that he was struggling to find a job in South Africa. ‘Don’t give up,’ I replied. ‘It’ll get easier as the economy grows,’ which is all you can say, but that is the sad reality of the economic times we live in. There is an entire generation in Europe that is unemployed! There are encouraging signs that the world is healing and that economies have bottomed. Compared to 18 months ago, the economic numbers – and hence the newspaper headlines – are ll improving. Interestingly, this is more the case in the developed world. The emerging world is still suffering the economic aftershocks of the recent withdrawal of investor flows, as well as the emotional trauma that comes with that.  But then, it is simply our turn. For the first two or three years of the financial crisis, emerging markets were shielded, as Dr Ben Bernanke, Fed Chairman, kept them buoyant while the developed world struggled. Now the developed world is improving and this will ultimately drag the emerging world out of its misery. Read more >>
Gene Fama’s Nobel Prize
Mon, 10/14/2013
Gene’s first really famous contributions came in the late 1960s and early 1970s under the general theme of “efficient markets.” “Efficient Capital Markets: a Review of Theory and Empirical Work ’’[15] is often cited as the central paper. (Numbers refer to Gene’s CV.) “Efficiency” is not a pleasant adjective or a buzzword. Gene gave it a precise, testable meaning. Gene realized that financial markets are, at heart, markets for information. Markets are “informationally efficient” if market prices today summarize all available information about future values.  Informational efficiency is a natural consequence of competition, relatively free entry, and low costs of information in financial markets. If there is a signal, not now incorporated in market prices, that future values will be high, competitive traders will buy on that signal. In doing so, they bid the price up, until the price fully reflects the available information.  Like all good theories, this idea sounds simple in such an overly simplified form. The greatness of Fama’s contribution does not lie in a complex “theory” (though the theory is, in fact, quite subtle and in itself a remarkable achievement).  Rather “efficient markets” became the organizing principle for 30 years of empirical work in financial economics.  That empirical work taught us much about the world, and in turn affected the world deeply. Read more >>
Investment Outlook: The Lending Lindy
Wed, 09/12/2012
Our entire finance-based monetary system – led by banks but typified by insurance companies, investment management firms and hedge funds as well – is based on an acceptable level of carry and the expectation of earning it.  In a New Normal economy where lenders dance to the Blue Danube instead of the Lindy, how should we move our own feet?  Carefully, I suppose, and with recognition that historic returns are just that – historic.​  William H. Gross Read more >>
Ponzi Schemes in South Africa
Fri, 05/20/2011
A few years ago an acquaintance, Neville, bragged about how clever he was. He said that he had taken early retirement, cashed in his pension and invested it in a wonderful scheme which was, and would continue to make him extremely rich. He demonstrated how every month, without fail, he was earning 15% on his capital investment of R400 000, guaranteed. He knew it was legitimate as he had invested R10 000 earlier and received his interest payments regularly and on time. Rather than cash in on his investment, he said he had increased it. I advised caution. In fact, I urged him to get out of the scheme immediately. I told him about Ponzi schemes and explained that most investors will lose their capital, guaranteed.  He knew better. He said nobody would dare to steal from him and if they tried they would learn the error of their ways quickly. He would also drive there with his bakkie and load up all their computers and furniture. He talked a big game.  Whenever I saw Neville in the following months he maintained the smug attitude about me being wrong and him being right. “I told you so”, he said many times.  I persisted in my warnings, to no avail. The next time I saw Neville he was much quieter. He let it slip that the investment company had missed a payment or two, but said that he was confident that it was no problem.  Soon after that the rumours started. The main principal of the investment scheme was no longer available telephonically and was hardly ever at the office. The staff had been retrenched.  Neville panicked and in desperation asked my help. It was too late, the money was gone.  Neville is working again and will have to continue to work for many years.   Read more >>