Understanding Long Term Performance

Understanding Long Term Performance


Since November last year the All Share Index, which represents every share on the market and has an enormous weighting to the top 40, has traded sideways between 31 000 and 33 000, desperately trying to break through its previous high on 14 May 2008 which was 33 232. Some shares hit new highs daily but others still remain way below what they achieved at the peak of the market.

The market is dictated by fundamentals and sentiment, and when both are in positive sync, markets will rise. On the contrary, when negativity prevails, markets will fall. At the moment, fundamentals and sentiment seem to be out of sync and this adds to the volatility. There are many different measures which govern market performance but often a little bit of ‘gut feel’ can help an investor pick a stock which will perform well over the long term.

Real-life examples

About six years ago we employed a lady who asked us to pay her salary into Capitec Bank. I asked her who they are and she explained to me it was a bank which was opening up in all rural areas, and was very popular amongst the lower income earners. The price of Capitec was then R10 — it’s now R185!

There’s a relevant expression here — if you sell to kings you live like a pauper, but if you sell to paupers, you live like a king.

At the same time, a friend of mine returned from the US with new Apple technology. He told me that they were years ahead of everyone else and he wanted to buy their shares, which were then in the doldrums. He bought the shares and these have climbed to four times the price he paid, illustrating what I mean by ‘gut feel’.

Guided by experience

Speak to your friends, colleagues and partner about what they are spending their money on. For example, male investors
could ask their wives where they shop, what their experience is like and thus get a feel for who is giving good service, who is competitive and who is likely to attract the customer into their store.

A few months ago, following a world trip, a client of mine called me and asked me to organise the purchase of Louis Vuitton shares in her international portfolio. She told me that she loved the brand and had visited their stores in Sydney, Paris, London and New York. Not only were they busy, but what attracted her was all the people leaving the stores with bags. They weren’t simply browsing.

The stock was purchased on her behalf and time will tell…

Most investors want to buy when markets are low and sell when they are high, but this rarely happens. In my experience, many investors do the exact opposite. They buy when markets are high, following the herd mentality, and continue to follow the herd by selling when markets are low.

In hindsight

It’s a salutary lesson to look back at what happened during 2008 — the shares which were bought during the first half of the year were sold in 2009 when the market had dropped 40%. Now, two years later, the market has nearly recovered and investors are sitting in money market funds.

We would all like to buy today and see the price rise higher tomorrow but it rarely happens. For if we bought today, only to see that the price had come down the following day, we would then spend precious time regretting our decision. Thus, it is important to be a little bit of an ostrich when you buy shares, keeping your head down, so you don’t feel drained a few days after your purchase if the market is down.

I question investors’ original intention of moving into stock markets if they are hoping for instant gratification. Shrewd investors buy when their shell-shocked counterparts are selling.

My advice is that you have to be in the market to beat inflation — but don’t try to time it — you will be disappointed.

Bryan Hirsch
BRYAN HIRSCH has been in the financial services industry for 47 years and is a director of Bryan Hirsch Colley & Associates. He has written two books, the first Bryan Hirsch’s Guide to Personal Finance and more recently, Steps to Financial Freedom. Bryan has written for many of South Africa’s top financial and business publications, has been a weekly guest on Radio SAFM for 18 years, and has his own weekly TV show You & Your Money on Summit TV.