Markets & Equities

Buying on the dips

We often hear people say that “he’s a big fish in a small pond”, or “he’s a small fish in a big pond.” I experienced the literal version of this saying in my own fishpond at home. I bought a few Koi and placed them in my tiny fishpond. Soon, however, they grew quite large (and by large, I mean roughly 4 to 5cm in length) in relation to the size of the pond, but there was one that was slightly larger than the others (about 6cm in length) and he swam around like he owned that pond. After a while, I finally decided to make the pond bigger, and to also buy a few larger Koi while I was at it. The new Koi were, on average, about three times larger than the others.  Suddenly, the 6cm Koi wasn’t Mr Bigshot anymore and he seemed to have a tough time adjusting to the new, larger pond.

Long story short, the 6cm former bigshot eventually got his groove back and quickly caught up to the others in terms of size, strength and self-confidence. My message this week, however, has nothing to do with who wins or loses, but rather to point out the effects of one dimensional thinking. We are quick to view South Africa in isolation and to believe that all the problems and mistakes we are currently facing originated internally. By doing this, you are no different to the 6cm Koi who had no idea that there was a much bigger world out there.

I read a very interesting article by Ben Carlson (Buying Emerging Markets During a Disaster) this week, in which he focused on the MSCI Emerging Market Index, priced in US$. More specifically, he focused on what happened after periods where this index fell from its peaks by 20% and 30% respectively. Very briefly, he discovered the following: each time that the index declined by 20% or more over the last 20 years (since September 1998), the average return in the following year was 25.66% in US$ terms, an average of 59.27% higher after 3 years, and an average of 93.17% higher after 5 years. This index has declined by 20% or more 9 times over the last 20 years.

But what does this data have to do with South Africa? A lot more than you think! Yes, I agree that as at 15 August 2018, we were trading 6.5% lower than the market’s peak at the end of January 2018, and 6.9% lower since November 2017, but to focus only on this, means you are behaving exactly like a big fish in a very small pond.

When we take a look at the FTSE/JSE All Share Index (JSE) in US$ terms, you will note that the JSE has declined by 23.83% between January 2018 and 15 August 2018.  Those who are still anxiously waiting for a correction to occur in our local market have most probably already missed it.

By applying the same principles to the JSE that Carlson did to the MSCI Emerging Market Index, it becomes clear that the JSE only managed to sidestep a 20% or more decline in US$ terms once over the last 20 years, and this trend repeated itself 8 times. The good news for those who currently find themselves in a rut due to the last 4 years’ poor market performance, is that the average return in the year following a 20% decline in the JSE in US$ terms, was 5.53% over the last 20 years, 45.49% in the following 3 years and 121% in the following 5 years.

Table 1: FTSE/JSE All Share Index growth in US$ following various declines (source: PSG Wealth Old Oak & Iress)

I really need to stress at this point that historical figures offer absolutely no guarantees for future performance. To conclude, I would like to quote Mark Housel (Getting rich vs. Staying Rich): “Nothing great or terrible is likely to stay that way for long, because the same forces that cause things to be great or terrible also plant the seeds to push them the other way.” The reality is that South Africa is a small fish in a huge pond, and although we may feel that we alone are to blame for the recent poor market growth, that isn’t entirely true. History has taught us that we just need to be patient.

The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained herein. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.

Schalk Louw
As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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