Research has demonstrated that innovation occurs on average 22 years after the birth of an innovation (allowing time for a generation to grow up familiar with it) and that during that innovation period small entrepreneurial companies typically outperform large companies. It is about 22 years since the launch of cellular phones.
US research also shows that small caps have outperformed large caps during such periods, by factors of four and even six to one.
A local study by Dr Adrian Saville at Cannon Asset Managers, suggests that here too, small cap value-oriented investments can sustainably outperform the market. “The primary explanation is that investors push the prices of poorly rated investments down too far, and expect fancied stocks to shoot the moon. This creates a situation in which depressed value stocks rebound to outperform the market while overrated growth stocks are knocked off their pedestals at the first sign of weakness.”
Dogs and diamonds
To test the hypothesis, Cannon Asset Managers has run dog and diamond portfolios since 1996 as a ‘live simulation’. Allowing for a set of investment rules, the dog portfolio is a diversified set of shunned financial and industrial shares, made up of small to mid-sized caps, and some deeply undervalued large caps. The diamond portfolio is made up of a diversified set of popular stocks trading on the highest multiples.
The results of the study are compelling. Over the period 1996 to end-2010 a passive investor would have earned an annualised return of 13,7%. On the same basis the diamond portfolio delivered an average return of 12,3%, and the dog portfolio delivered 24,6% per year — almost double the market’s return.
Saville believes the sustainability of small cap value investing lies in the fact that investors are driven by psychological biases such as herd mentalities that prevent them from outperforming the overall market.
Does this mean we should all be exiting large cap stocks in favour of small caps? Only if you have the discipline to ride out the entire investment cycle.
“Three years ago we started the SuperDogs portfolio to take advantage of small cap opportunities. SuperDogs has doubled the initial capital and its return is 10% ahead of the market,” says Saville.
Don’t rush in where angels fear to tread
Warren Jervis, fund manager of the Old Mutual Small Cap Fund, says that even seasoned professionals struggle to identify small cap targets for investment, so the amateur has almost no chance. He recommends private investors be in the small cap sector for the out performance it delivers, but through a unit trust, leaving investment decisions to the fund manager.
“The biggest mistake one can make in this sector is to accept golf locker-room investment tips,” he says, listing two reasons for investors to be investing in small caps: alpha generation and diversification. Small caps are an excellent means of alpha generation. Over a long period of time they have delivered alpha of 1,8% to 2% a year (that ’s over and above what the market or benchmark achieves). The risk in small cap investing is that you can lose capital — it is more volatile and carries the risk of a particular stock imploding. However, the upside is that it is a misunderstood sector often ignored by general equity fund managers who largely stay within the confines of the top-70 stocks on the JSE.
“For reasons of poor liquidity, lack of information or general neglect some fascinating mispricings occur. The major liability is liquidity and it is the starting point of my investment process. Companies such as Consolidated Infrastructure Ltd in the power sector are typical of the type of good value available. Companies typically have strong management and balance sheets, are on a growth path and delivering good earnings — if you can get them,” says Jervis.
He warns that small cap does not automatically mean AltX. There are many small and medium-sized companies on the JSE main board, and he would not specifically look at the AltX companies. “Small cap investing is a different discipline to traditional investing. It is all about stock picking in a pool of companies for which there is not a great deal of information flow.”
As to where to look to invest, apart from his own fund, Jervis would be comfortable with the RMB Small Cap Fund and the Nedbank Entrepreneurial Fund. Saville is tipping Conduit Capital Ltd as a small cap stock with legs. Currently trading at around 85 cents, the company is on a trailing dividend yield of a mouth-watering 12%. With a sound balance sheet and good growth prospects, the share is highly attractive.
Finally, some common sense
Of course, others argue one should not rate size as a factor in stock picking, but fundamentals of the company, such as:
- Positive earnings. Look at free cash flow as earnings can be manipulated.
- Accelerating sales and improved operating margins.
- Minor blemishes for fixable problems can make bargains out of well-run companies.
- High insider ownership.
- High rates of return on assets, equity, and capital: then catch them on the upswing.
- A great product.
4 Strategies For Impact Investing
Impact investing isn’t for everyone, to be sure, but with a few investing strategies to assist you and a bit of patience, you should be able to accomplish your goals.
Harnessing the positive effects of enterprise is easier than you think. Investors can have beneficial effects on a number of social, environmental and entrepreneurial issues with sound impact investing strategies. “Around the world, inspiring pioneers are demonstrating that business and investment can be a morally legitimate and economically effective way to tackle social challenges,” writes Anthony Bugg-Levine for The Huffington Post.
Investing in clean, renewable energy or purchasing private stock in nonprofits aimed at providing education to lower income areas are just a few examples of socially responsible investments.
By approaching impact investing intelligently without pursuing returns ravenously, investors can find considerable profitability while contributing to a greater good. In fact, a 2013 study conducted by GIIN and JP Morgan found that 90% of impact investors reported that they were meeting or exceeding their financial projections.
Here are 4 powerful strategies for effective impact investing:
1. Develop a clear plan
Developing a successful approach to impact investing means taking the time to develop a clear plan. Exploring your options, researching the opportunities available to you, and weighing those options carefully will help you remain realistic about the risks and the rewards, both financial and social, of your investments.
It’s important to answer questions like the ones below before making any impact investing decision:
- What kind of impact do you wish to make?
- Which is more important to you: your finance goals or your impact goals?
- What do you want your risk tolerance to be?
- What vehicles will you use to achieve your goals?
- Do you want to directly invest or invest indirectly?
Questions like these will help guide you and root you to a slow and steady plan of action.
2. Thoroughly investigate tradeoffs
Impact investing can be a mixed bag. Impact investing funds have grown in number, but it is uncertain if their profitability has risen with it. “In the last 10 to 15 years, the number of social impact funds has grown from a handful to several hundred,” explains a Wharton article examining impact investing.
“This growth has occurred despite the widespread assumption that in making investments intended to achieve social objectives, investors are accepting more modest financial returns than they would if they were to choose investments solely on the basis of their return potential.”
The vast majority of impact investment funds are private equity funds. These funds don’t make their returns public, so you may hesitate to place your trust in them without some evidence of profitability. Additionally, you’ll need to understand the tradeoffs concomitant with impact investing, such a loss of liquidity and the possibility of diminishing returns.
3. Concentrate on fixed-income investments to lower risk
If investing in private equity funds proves too risky for you, then you may want to consider pouring some of your resources into fixed income instruments, such as municipal bonds. These bonds finance important and impactful projects, like building hospitals and affordable housing, while providing you with steady interest payments. “Municipal issuers are typically mission-driven; that is, their projects tend to address environmental, social and community development concerns,” says Goldman Sachs research analyst Michael Kashani.
4. Stay realistic
It can hard to juggle both a mission to have a positive impact and a desire to make beneficial social changes. Trying to accomplish both goals requires a metered approach, one with sustained patience and dedication to staying rooted in realistic expectations. You may feel tempted to invest in an array of pressing issues and to make immediate positive change. Overextending yourself can frustrate the process and, in the worst case, preclude you from continuing to invest in important, socially conscious projects and companies.
Managing Director of Integrated Performance at Uhuru Capital Management, Jed Emerson, explained impact investing’s two-fold mission to contribute to social good and to create wealth as a cohesive – rather than dichotomous – endeavour, saying, “There is an idea that values are divided between the financial and the societal, but this is a fundamentally wrong way to view how we create value. Value is whole. The world is not divided into corporate bad guys and social heroes.”
Indeed, impact investing, while certainly challenging, can be a source of both fulfillment and wealth. Developing a clear plan and staying realistic will help guide you through the process. You’ll need to understand tradeoffs to ensure you’re two goals don’t end up competing against each other. It’s even possible to lower risk by investing in fixed-income options, like municipal bonds.
Ultimately, impact invest is a personal affair. Your goals will be tailored to what you deem important to you. Research your options, consult financial experts before embarking on your next investing journey, and remember to keep in mind the impact you wish to have so you won’t get discouraged when you encounter obstacles. Impact investing isn’t for everyone, to be sure, but with a few investing strategies to assist you and a bit of patience, you should be able to accomplish your goals.
11 Things You Need To Know About Bitcoin
The cryptocurrency has had a tumultuous existence so far.
11 Bits about Bitcoin
Even the most tech savvy among us have a hard time wrapping their heads around Bitcoin. It’s a hot topic and a frequent point of discussion among investors, entrepreneurs and stock traders, so you should want to know all about it.
For starters, here’s an overly simplified explanation of Bitcoin: It’s a digital currency (there are more than 800 now) that isn’t controlled by a central authority such as a government or bank. It’s created by “miners,” who use computers and specialised hardware to process transactions, secure the currency’s network and collect bitcoins in exchange. Supporters say it allows for more secure transactions over the internet. That’s in part due to blockchain, a technology that records cryptocurrency transactions chronologically in a public digital ledger.
Bitcoin is only eight and a half years old, but it’s the oldest and most highly valued cryptocurrency out there. In such a short time, it’s had a rocky and controversial history, but it’s also attracted a fair share of high-profile supporters.
Click through to read 11 bits about Bitcoin that will make you at least sound like you know what you’re talking about next time it inevitably comes up.
The birth of Bitcoin
The origins of bitcoin trace back to 2008, when its creator, who went by the pseudonym Satoshi Nakamoto, published a proof of concept for Bitcoin. The proof was then published to a cryptocurrency mailing list in 2009. Nakamoto left the project in 2010 and disappeared, but other developers picked up the work. Bitcoin’s birthday is Jan. 3, when Nakamoto mined the first 50 units of the currency.
An elusive creator
The true identity of Bitcoin’s creator has never been confirmed. Newsweek claimed to have found Bitcoin’s creator in 2014, identifying Temple City, Calif, resident Dorian Satoshi Nakamoto. He has vigorously denied it. In 2015, an Australian entrepreneur named Craig Wright said he was Bitcoin’s creator, but he couldn’t produce the evidence to support his claim. Whoever Nakamoto is, that person is very rich, as the creator is estimated to have mined a million bitcoins in the currency’s early days.
Very expensive pizza
The first transaction involving bitcoin was reported on May 22, 2010, when a programmer identified as Laszlo Hanyecz said he “successfully traded 10,000 bitcoins for pizza.” As of Aug. 28, 2017, 10,000 bitcoins are worth about $43 million.
You can spend bitcoins
Federal Bureau of Bitcoin
At one point, the U.S. government was one of the largest holders of bitcoin. In 2013, after the FBI shut down Silk Road, a darknet site where people could buy drugs and other illicit goods and services, it took over bitcoin wallets controlled by the site, one of which held 144,000 bitcoins. Investors have been making a killing by bidding on government-seized bitcoins.
A mountain-sized setback
In early 2014, Bitcoin suffered a devastating loss after the alleged hacking of Mt. Gox, a Japanese exchange. About $460 million of the currency (in 2014 value) was stolen. It was the largest loss of bitcoins ever and raised concerns about how secure the currency was.
The billionaires’ takes
Warren Buffett, perhaps the most famous investor in the world, was not so keen on Bitcoin one of the only times he addressed the currency. “Stay away from it. It’s a mirage, basically,” he told CNBC. “The idea that it has some huge intrinsic value is a joke in my view.”
Fellow billionaire investor Jamie Dimon, chief executive of JPMorgan Chase, had even stronger words about Bitcoin: “You can’t have a business where people are going to invent a currency out of thin air. It won’t end well … someone is going to get killed and then the government is going to come down on it.”
But not all billionaires are against Bitcoin. Mark Cuban has said its value is inflated, but he recently invested in a venture capital fund that backs cryptocurrency. Richard Branson, however, has spoken more optimistically about it.
Related: The Currency Revolution
Wealthy twins and a smart teen
Other notable investors in Bitcoin include Cameron and Tyler Winklevoss (the Harvard-educated twins who sued Mark Zuckerberg claiming that Facebook was based on an idea they’d had). They invested $11 million into Bitcoin in 2013, an amount said to be about 1 percent of all bitcoins in circulation at that time. The Winklevoss twins have been petitioning the SEC to create a bitcoin exchange traded fund. The agency rejected the idea earlier this year.
Another is investor and entrepreneur Erik Finman, who invested $1,000 into Bitcoin when he was 14 years old and is now a millionaire.
Celebrities want in
Celebrities have also expressed enthusiasm for the cryptocurrency. Actor and Goop founder Gwyneth Paltrow advises Abra, a Bitcoin wallet, and Ashton Kutcher, Nas and Floyd Mayweather have all invested in Bitcoin start-ups.
Support from a big financial institution
In August 2017, Fidelity Investments became a rare standout among financial institutions in embracing Bitcoin and other cryptocurrencies. The company allows its clients to use the Fidelity website to view their bitcoin holdings held through digital wallet provider Coinbase.
“This is an experiment in the spirit of learning what these crypto assets are like and how our customers may want to interact with them,” Hadley Stern, senior vice president and managing director at Fidelity Labs, told Reuters.
A hard fork
On Aug. 1 2017, Bitcoin experienced what’s being called a “hard fork” as a result of a few issues, including the limited number of transactions that can be processed per second. Essentially, the cryptocurrency split into two, with Bitcoin Cash debuting.
Here’s how Rob Marvin of PCMag explains the situation:
“The Bitcoin fork speaks to a fundamental ideological rift over what’s more important: Preserving the decentralised nature and independent control of the Bitcoin network, or accelerating transaction speeds to make the cryptocurrency more viable for mainstream ecommerce and payments.” Bitcoin Cash allows larger blocks of currency and more transactions per second.
This article was originally posted here on Entrepreneur.com.
9 Warren Buffett Quotes That Will Teach You More Than Just Investing
While he is one of the most famous investors in the world, his expertise goes beyond money.
Check out these nine quotes on time, success, mindset and more
There’s more to learn than finance from one of today’s most famous investors, Warren Buffett. In fact, the businessman, financial guru and philanthropist can teach you a thing or two about life. From taking risks to coping with change, Buffett’s expertise that expands far beyond stocks and dollar signs.
From a young age, the billionaire investor was destined for success – selling garbage bags to neighbors and delivering newspapers. By age 15, Buffett was already worth thousands of dollars and investing in real estate.
However, fast forward nearly 70 years and the “Oracle of Omaha” is now worth a whopping $77 billion, according to Forbes, making him currently the second richest person in the world (behind only Bill Gates). There’s much to learn from Buffett too.
“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.” – Warren Buffett
“I don’t look to jump over seven-foot bars: I look around for one-foot bars that I can step over.” – Warren Buffett
“The most important thing to do if you find yourself in a hole is to stop digging.” – Warren Buffett
“You only have to do a very few things right in your life so long as you don’t do too many things wrong.” – Warren Buffett
“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” – Warren Buffett
“You do things when the opportunities come along.” – Warren Buffett
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” – Warren Buffett
“Someone is sitting in the shade today because someone planted a tree a long time ago.” – Warren Buffett
“Predicting rain doesn’t count. Building arks does.” – Warren Buffett
This article was originally posted here on Entrepreneur.com.
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