Is it a good time to buy Steinhoff?

“How does this Steinhoff debacle affect me? Should I invest in Steinhoff now?” These are by far the two most common questions financial planners had to deal with the last 2 weeks. Let me say that besides for a couple of well-known individuals, organizations who had a large exposure to Steinhoff and individuals who had relatively large exposure to the share (more than 10% of their share portfolio), the impact was wide but not deep.

What I mean by this is that most people were somehow, either directly or indirectly affected but that to the average bloke (except for those listed above), the effect would not have been detrimental to his financial planning strategy.

Something that became all too obvious once again is how susceptible we are to cognitive biases and fallacies. We saw everything, from hindsight bias to rationalization to cognitive discords and of course, classic fear and greed. It started like a Jason Bourne movie, packed with action but as it goes with spy movies, after 20 minutes of watching (when the dust has settled, and everything has been shot to pieces or blown up) you have to pay close attention to know exactly what is going on.

Most people feel like this with Steinhoff at the moment. The share price at the time of writing this article is down more than 90% from its highest point in April 2016. It is only natural that everyone wants to be part of the action and bet on the chance that a drastic increase is to follow. If you have spare cash after your holiday is already paid for, and you are wondering if it is worth the risk, please see the below decision tree to assist you. I am sure it will help!

From the above the following should be obvious:

• If you were not invested before the debacle or if you are not a regular investor in individual shares, you probably have no business getting involved now.

• Do not anchor on the fact that the price was R90 at some point. The highest price that the share reached previously has become irrelevant. If you are considering owning Steinhoff now it must be because of what remains of the business value after the dust has settled and everyone that needs to be paid has been paid.

• If you already had Steinhoff shares in your portfolio it probably makes up less than 1% at this point. As far as I am concerned you will have to apply the same decision tree above. Thus, if you end up in the green block, I think you can make a strong case for buying some more. If not, I would sell the shares and employ the capital elsewhere.

• Concentration risk (large exposures to single shares in a portfolio) remains a larger risk than people realize. Do not think just because it is a big or well-known company, that it is risk free. There is a saying that goes, “you don’t have to lose your money the same way you made it.”

Important: For people who do have large exposures to Steinhoff but who want to keep their position for whatever reason, there is a way to ease the pain. One of these is to realize your losses and then buy back the shares immediately through an endowment structure with accumulated losses (there are only a few of these available).

If the share does recover, the new capital gain that you would have made from current levels will be tax free (except for dividends tax) but you can still use the capital losses to play off other gains within your portfolio and reduce concentration risk (where some other shares might have gone up by a lot over time). Discuss this with your tax consultant or certified financial planner.

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