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The pitfalls of DIY investing

1 Nov

Author: Hannes Smuts

Publications: PSG Konsult

Date Published: 1 November 2013

This is a warning. Yet, regular readers need not fear: this is not an alarm bell sounding the dangers of another investment scheme promising unrealistic returns. For most, the name Herman Pretorius should ring a bell. Obviously that threat remains ever present, but there is a much more subtle trend that needs to be recognized. We call it DIY investing. Let me explain:

Hardly a day goes by that people with funds to invest are not bombarded by advertisements and other communication prompting them to manage their investments themselves. The nature and content of these ads might differ, but the message is the same: you do not need the input of an investment professional to invest on the stock market or to guide you towards a sensible investment plan tailor made for your unique situation.

Does the following sound familiar? Cut out “the middleman” and become a stock market entrepreneur (more likely millionaire) – we will give you 3 share tips to start your millionaire portfolio. Such exhortations appear continuously on television, in the printed media and via electronic communication.  Interwoven into these campaigns is the emphasis on the relative ease with which one’s affairs can be conducted online.

On the face of it DIY investing has become child’s play. The perception is created that most people can manage their own investment affairs without incurring the “extra costs” of a professional investment advisor. The message reverberates: professional advice has become too expensive and redundant. Do your investments, including purchases of unit trusts, online! Oh yes, and if you want to save even more money, skip the asset manager (and his unnecessary fees) as well by going for a really “cost effective” index tracker.

It is to be applauded that technological advances during the last decade have opened up new avenues for making informed investment decisions. However, it is the way this is being portrayed, combined with the inherent lurking risks, which need to be addressed.

We have identified mainly two dangers. The first is that DIY investment encourages short term thinking. The second is that it almost certainly does not address the risks created by investor behaviour.

Markets that generate positive returns, especially during a long upswing, are known as bull markets. Statistics have shown that bull and bear markets lead to irrational investor behaviour.

Think back to the bull run in the residential property market between 1995 and 2006. For a decade, returns were not only around “20% p.a”., but also a dead cert. The natural consequence was that everyone and anyone that could, started trading in property and made money. When finances were discussed around the braai fires reassuring remarks abounded such as: property prices don’t drop – they might move sideways, but never down!

Investors conveniently ignore the past which would have taught them that property is as cyclical an asset class as other growth assets. The rest is history: the property market contracted by as much as 30% to 40% in a year and many speculators were left stranded. It took years for the residential property market to show signs of recovery and guess what: most “investors” now believe it’s a bad investment.

What has this sad story got to do with cheap and convenient DIY investing?

Generating good, inflation beating investment returns in South Africa (and even abroad) has been fairly easy for the last 10 years. The reality is that these returns were driven by a rampant bull run on the JSE. Therefore one cannot really blame those who have ventured into DIY investing and for spreading the word about their successes.

Reality is that most investors who have been in the markets during the last 10 years have yet to experience the pain and frustration of a bear market. Unless they have a good understanding of the risks involved, and in particular the interaction between risk and reward, they will be well advised to use professional investment advice.

But you do not have to take only our word for it. In a recent article on 21st Century Megatrends, well known future-scenario planning expert, Clem Sunter, suggests that retirees will still need “an astute financial adviser”, otherwise, as he puts it, it becomes a race between poverty and death.  This remark should not be limited to retirees.

Note: This article does not constitute formal advice. Past performance is not indicative of future returns. Always remember the prudent way is to consult your stockbroker before investing.

Hannes Smuts is a senior portfolio manager at PSG Hermanus Portfolio Management & Stockbroking.

Inflasie – Geslepe Sluiper

14 Jan

Author: Hannes Smuts

Publications: PSG Konsult

Date Published: 14 September 2013

Tydens ‘n onlangse gesprek oor hoe duur alles geword het, vertel ‘n kollega dat hy in 1981 R13 700 vir ‘n Mercedes Benz 200 betaal het. Vandag  kos ‘n soortgelyke motor sowat R550 000.

Veral ouer lesers sal waarskynlik elk hulle eie stories hê oor die vernietigende effek van inflasie op die koopkrag van geld. Ek kan byvoorbeeld terugdink aan my dae in standard vyf (1975) toe ek ‘n behoorlike worsrolletjie en ‘n koeldrank of ‘n tjoklit by die snoepie kon koop met 20c. Verder onthou ek dat my ouers in 1977 ‘n huis gekoop het vir R35 000 wat vandag oor die R3 000 000 sou kos.

Toegegee, ons kyk na ‘n tydperk van meer as 30 jaar, maar dis die soort termyn waarvoor diegene wat tussen 60 en 65 aftree, moet beplan. ‘n Angswekkende gedagte?

Daar is waarskynlik niks wat soveel welvaart vernietig soos die eroderende effek van inflasie nie. Welvaart word weliswaar ook vernietig deur opspraakwekkende kulskemas, soos dié van wyle Herman Pretorius, en ander swak beleggingsbesluite. Maar inflasie vernietig welvaart so skelm ….…

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Avoid risky investments

30 Oct

Author: Unknown

Publications: PSG Konsult

Date Published: 30 October 2012

During the last two months, I have had many emotional visits by investors, some of them hoping for some relief in the difficult situations they find themselves in, others looking for a shoulder to cry on.

Most of them lost money in Herman Pretorius’s Relative Value Arbitrage Fund (RVAF).  It was in fact never a fund, but only a private trust.

Some of my friends, who knew that I had investigated the scheme two years ago and recommended that investors should withdraw their money as soon as possible, sheepishly admitted they had not believed me and had invested more money in it.

Some investors had not yet made up the losses they had suffered in other property syndications and had now lost money in the RVAF as well.

After 21 years in the industry, I have seen the same story over and over again.  The same factors were present in every one of the investment schemes where .…

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Beleggings – verstaan voor jy belê

19 Oct

Author: Marius Kruger

Publications: PSG Konsult

Date Published: 19 October 2012

Verskeie emosionele beleggers het my die afgelope twee maande kom sien. Sommige het hoop gesoek vir hul benarde situasie terwyl ander ‘n skouer gesoek het om op te huil. Die meeste beleggers het geld verloor in Herman Pretorius se beleggingstrust, Relative Value Arbitrage Fund (RVAF)

Die RVAF was toe nooit ‘n fonds nie, maar ‘n private trust.

Van my vriende wat geweet het dat ek Pretorius se skema twee jaar gelede ondersoek het en aanbeveel het dat beleggers so gou moontlik hul geld onttrek, het verleë kom erken dat hulle my nie geglo het nie en nóg geld daarin belê het.

Die slagoffers was nie net bejaardes wat desperaat .…

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Wees bedag op kulskemas

16 Oct

Author: Hannes Smuts

Publications: PSG Konsult

Date Published: 16 October 2012

Nog ‘n kulskemabom het onlangs gebars. Die RVAF (“Relative Value Arbitrage Fund”) van wyle Herman Pretorius en sy trawante het in duie gestort. Nog goedgelowige beleggers lek hul wonde; Baie steier onder die terugslag . Uiteindelik het hulle hulleself te blameer. As die koeël reeds deur die kerk is, is dit die moeite werd om weer hierdie holruggeryde onderwerp te takel? Beslis JA en  vir , ten minste , die volgende redes: Alle beleggingsadviseurs, ons inkluis, het ‘n plig teenoor ons professie en, meer belangrik, teenoor ons kliënte en ander beleggers om tot vervelens toe die gevare van dié tipe …

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