In it for the long haul

Published Feb 11, 2014

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This article was first published in the fourth-quarter 2013 edition of Personal Finance magazine.

All my adult life I have been an ardent supporter of a culture of saving. I think this was ingrained in me by the actions of my grandmother, who was the product of the pre-World War I British work ethic and the painful experience of the Great Depression, when there was no welfare state.

As a bookkeeper, my grandmother did not earn much, but she always saved and bought shares when she could. She was lucky to work in a stockbroking partnership and retired very comfortably compared with many of her friends, who did not have the same culture of saving through the stock market. This was when pension funds were uncommon outside of large companies and female membership of pension funds was fairly limited.

With our markets rattling along at all-time highs at the time of writing, in August, I continue to be a firm believer in the stock market. Yet I sometimes stop to reflect on the advice I give people and I am shocked to realise that it seems to betray signs of doubt and contradiction.

I am inclined to tell elderly, long-term clients who have been invested in the stock market for decades that there is no bad time to buy shares. I point out that there has been no five-year period in the past 50 years when you would have made a loss on the JSE. This is probably not a particularly helpful statistic, but it is a fact. I say: “You should really re-invest the dividends that have piled up in the past few months. Why pay all that tax on interest, when you could add to your holdings of great blue-chip shares, such as SAB Miller, Tiger Brands, Anglo American and BHP Billiton?” Those shares would have been acquired at relatively low cost, but they now represent an enormous capital gains tax liability.

This is the philosophy I bring to my own portfolio in this buoyant market: when I have the cash, I add to the holdings I like – mainly large multinational companies that produce goods and services that are in demand, have a good track record, pay dividends and have proven management. I keep an eye on the dividend yield, because I confess I like to see the easy return, but I seldom pay any attention to the price-to-earnings ratio (which tells you whether a share is cheap or expensive at the current price, taking into account the earnings per share). If this makes me a rather cavalier investor, I would argue that (i) I am a very long-term investor and (ii) there is a good chance that, being ill-disciplined, I will spend the money on something else. I like to put the money to work as soon as it is to hand.

This strategy is a little like comfort eat-ing. Because the cost of my long-standing holdings is so low relative to current values, a fresh purchase of shares at today’s higher prices raises the average only slightly, leaving lots of wriggle room if the purchase was not “perfectly timed”. In other words, even in a massive market correction, the price is unlikely to fall below the average cost per share in my portfolio.

Comforting indeed. But then I hear myself speaking to a younger, newer investor with a smaller portfolio, acquired at higher cost, and I am astounded to hear myself saying: “Well, you know the market is at all-time highs, and I wonder if we should not wait for the inevitable correction before investing?” Why do I do it? It really is silly, for a variety of reasons.

First, the young investor would normally have a relatively high risk profile and a long future in the market. Second, it flies directly in the face of what I actually do for myself. Third, it is arrogant, because it presupposes that I have some divine knowledge of investment cycles and when markets will “correct”. It is very nice to get in at the lower prices available in corrections, but this seldom happens, because most people are unable to time these purchases to perfection and investable income does not always present itself at just the right time.

In the final analysis, it is silly, because investing in the stock markets has produced good returns for at least 100 years, despite a number of corrections.

Having “absorbed” the progress of the stock market since childhood, I know that the 1969 JSE crash saw many good companies taking 10 years to get back to their pre-crash prices. Yet the 1970s created many wealthy people, who built up investments in blue-chip shares that produced a higher dividend yield than the prevailing interest rate.

The market fell again in 1987 but recovered completely within a year. The fall of 2008 was predicted for at least two years before it happened (and I was one of the bears who got the timing wrong by 17 months, during which time the market rose substantially), but I am not sure anybody predicted the collapse of Lehman Brothers.

Financial markets are influenced by passing fads that come into vogue until they are proved to be unjustified and we move on to the next one. In the mid-1980s, there was a belief that unlimited risk was OK, because derivatives could be used to hedge positions. This myth exploded in the 1987 crash.

Then there were the “Asian tigers” in the mid- 1990s, which would grow forever. This came to grief with the “Asian contagion”. The “small-cap euphoria” in South Africa ended in tears in 1998, and the international “dot.com boom” exploded as the dot.com bomb. The South African pessimism of the past two decades was proved wrong as our market raced to new highs, and the commodity super cycle recently came unstuck.

Markets will rise and fall, but unless you get involved, you will never reap the enriching rewards. It is all about time in the market.

In South Africa, where there is a safety net for only the poorest members of society, the importance of saving cannot be stressed enough. Those who work in the formal sector should be saving at least 15 percent of their income. Some of this can go into the mortgage bond, but most should be going into retirement annuities and share portfolios – over and above pension fund contributions.

Certainly, it is my inclination to be bearish right now, with all the problems in the world, yet my practical experience of markets over 30 years tells me to take a long-term view and keep investing.

And “long term” means using money you can afford to invest. Once the investment has been made, you have to accept that the money has been spent. You must not be tempted to withdraw it because of buyer’s remorse, price volatility, or the desire to have new curtains or cars. Remember that you are in this for the long haul and focus on that “time in the market” principle.

I have a vivid memory of my grandmother in the kitchen telling me that she could cheerfully strangle her stockbroker (also her boss), because one of the shares she had bought on his advice had just fallen heavily. She didn’t believe in buying more of them to drive down the average cost price, but it was not all that long before she was singing her boss’s praises because the share price had risen and she had just received a fantastic dividend cheque in the post.

* David Sylvester is a stockbroker with Investec Wealth and Investment.

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