By Cassie Carstens

29/6/2024

Those who follow Formula One will know that there are only 20 seats available for the world’s best drivers The annual race in Monaco is spectacular, yet very predictable since there is little room to overtake on the narrow streets. When it rains, the road conditions become a nightmare, and even the 20 best racers in the world make amateur mistakes.

2024 is the year of elections and extremely noisy news flows will dominate sentiment. Like the 20 F1 racers, millions of professional and everyday investors are currently trying to navigate these narrow investment paths in the rain – and are finding it very difficult. After months of election manifesto propaganda, it is a good idea to now review your investment manifesto, especially for someone at the southern tip of Africa. Accept that brilliant investment ideas often start with a large dose of discomfort.

If you want to read one of the most meaningful and appropriate memos, make time for Howard Marks’ “I beg to differ”. In it, he writes that the average investor wants to invest in stocks or areas where they feel comfortable, where short-term returns are good, and the prospects are rosy.

Unfortunately, the typical manifesto of a South African investor is rewritten every time something prominent happens. Was it right to throw out all South African assets along with the bathwater amid the Eskom crisis, the Zondo Commission’s investigation into state capture, political policy uncertainty, or billions of rand outflow from our stock market? How does your manifesto change based on the government of national unity, the significantly stronger rand, and the nearly 3.5% rise in the JSE’s all-share index on June 19th?

The successful long-term investor will pay almost no attention to any of this and rather sniff out market extremes for ideas with discomfort, weak short-term returns, and pessimistic prospects. This is something South African investors know very well, but the discipline to stick to it has been thoroughly tested over the past four years with the COVID-19 crisis, the Russian invasion of Ukraine in 2022, and this year’s elections.

I remain amazed at how, lately, 10-year figures are used in all conclusions about the performance of local versus foreign stocks. It shows that South African stocks underperform by nearly 7% to more than 9%, depending on the benchmark used.

The surprise is that there were indeed a few local equity fund managers who could deliver returns that nearly matched the average return of 100% foreign active equity funds (even considering rand depreciation). South African stocks have indeed underperformed US stocks since 2010, but this applies to the rest of the world as well. See the graph below.

It can become a huge problem if you overpay for a stock (US technology stocks for example) and an unforeseen negative event occurs. Investment “safety and convenience” disappeared in an instant in 1929 (Great Depression), 1973 (the Oil Crisis), 1987 (Black Monday), and 2000 (dotcom bubble burst).

The advantage for South Africans is that our stock exchange still trades at historical lows. An unforeseen negative event (like a new finance minister) will have a much smaller impact than an unforeseen positive event (like a recovery in the Chinese construction sector boosting demand for our resources). The narrative is that South African stocks constitute only 0.5% of the world index and therefore you should invest everything overseas. Bigger isn’t always better. Finding better opportunities is better. South Africans should have a significant amount of foreign exposure in a typical long-term portfolio, but not at any cost.

When looking at the American stock market, the magnificent seven stocks have been the biggest contributor to returns since 2010. The next 42 stocks combined are just as large but generate nearly 2.5 times more sales and double the profits.

Yet, their stock prices certainly haven’t risen as dramatically compared to the top seven. Your manifesto will yield better results over a longer period if you invest in what sometimes makes you uncomfortable, rather than assets that seem obvious due to general perception. Spend your time on what you can control. You can’t control politics and its impact. You can control your investment structure.

To achieve above-average investment outcomes, you must diverge from consensus opinion. Fasten your seatbelts, the 2024 election rain has barely begun, but a manifesto grounded in second-level thinking will indeed reduce amateur mistakes.

Cassie Carstens is a certified financial planner at Woodland Wealth. Contact him at info@woodlandwealth.co.za.

Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.