If one were to buy a share for R100 and sell it six months later for R150, you made a 50% return on your capital over a short period. This is known as a capital gain.
You would be naïve to believe that SARS doesn’t want its piece of the action, but tax is an area that I don’t want to delve into in this article.
The point however, is that if you think this is the only way to make money from investing, you have essentially limited your investment universe to a handful of assets that are 100% capital in nature.
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Over time people have become more aware of the concept of total return. It is an important concept to get your head around. Total return in essence is the theory that it does not matter what form the return comes in, as long as the end investor has achieved the necessary return on investment.
This may seem a little confusing, but let’s consider some other forms of return. First, let us go back to the example of owning a share. This is a small piece of a company.
You imagine your return coming from the value of that company increasing and therefore the share that you own increasing in value as well. This is all well and good, but what about a large company like SABMiller.
It is a huge multi-national brewing operation that does not grow its business at the double digit rates it used to when it was growing into the business it is today. It does however, pay a large annual dividend to shareholders, which is essentially a distribution of the profits to the owners of the business.
Dividend investing has become a fairly popular strategy. The reason for this is that dividends are generally fairly stable over time because a company is loath to cut its dividend due to the negative impression this would give of its future earnings prospects.
Back to the concept of total return. In this case you have two sources of return on a dividend paying stock. The prominent one is the dividend that you should receive from the company which in South Africa is generally between 3% to 5% per annum.
On top of that you still own the share in the company which can appreciate or depreciate in value over time. This means your total return for a given year will be the sum of the dividend yield and the capital gain on the stock.
Sources of Return
The same concept applies to property, although let us think of this slightly differently. Again most people think of return on property as the capital gain from owning it, while it appreciates over time. Forget about the home you own and think about the office block down the road. That office is filled with a tenant who pays a monthly rental.
That rental contract includes an annual increase which is normally slightly above inflation. As the property owner you get a yield on your investment. In South Africa that is around 6% to 9% per annum, depending on the type of property and the quality of the property and tenant.
Now of course the property has a capital value as well, which may be realised if you were to sell the property. However, your return comes in the form of income received from tenants of the property.
Property funds are portfolios of properties valued on the overall value of the properties they own and the estimated future cash flows the properties will generate, so by owning a share of such a fund you essentially would realise both capital gains and distributions of earnings which would make up your return over time.
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There are also bonds to consider as an investment class, where you lend money to a company in return for a predetermined repayment of your capital over time. The amount of return you receive depends on the risk factors related to the entity/government you are lending the money to and also the interest rate environment.
There is more to it than this but at a basic level you may, for example, buy a retail savings bond from the government which should give you 8% per annum over five years. This is an income return and you are taxed on it accordingly.
There are multiple forms of return. They are of equal importance because tax aside, they are as valuable to the end investor. If your investment goal is 10% per annum, it should not matter if it comes as 5% capital gain + 3% dividend income + 2% interest income.
The end goal was achieved and having more than one source of return is probably advisable, as it reduces the risk that a bad year means a negative return.
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.
5 Worthwhile Investment Lessons I Learned From Warren Buffett
Patience in long-term investing is one lesson. Investing in what you understand is another – the reason Buffett steers clear of tech.
It’s one thing to be a good investor; it is quite another to know how to teach investing. Warren Buffett is spectacular at both and has over 50 years worth of financial and investment success to prove it. Nicknamed the Oracle of Omaha, Buffett may not be the richest man in the world, but he is, by a great margin, the planet’s wealthiest investor.
He also dishes out free and priceless investment advice whenever he can, mostly through his annual letter to shareholders. His sage words of advice can benefit everyone across the investment spectrum, from the Class A shareholders of Berkshire Hathaway to the average investor involved in low-key passive income investing.
Here are a few of these lessons Buffett has offered throughout the years that may help you, too, become a better investor.
1Develop an investment mindset
It’s true that any of us can become investors, but not all of us can own and manage our investments ourselves. For that, we’d need a fully equipped investor’s mindset. And that means putting in thousands of hours of intentional study to build your investment-skill level and mental aptitude.
Related: Why Warren Buffett Doesn’t Worry
2There’s a power to practicing patience in long-term investing
Whenever Buffett uses the word “investment,” he specifically excludes speculators who are in the habit of hit-and-run investment (meaning purchasing, then selling off investments at the slightest northward tick in value).
This is why the Buffett-led Berkshire Hathaway has never split its Class A shares (which as of March were worth $258,000 per share) and only created Class B shares to discourage the creation of unit trusts. One of Buffett’s famous statements, which alludes to his preference for long-term investments, is:
“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.”
A real investor, in short, does not merely speculate; he or she makes informed and intelligent investment decisions and rides it for the long haul. That kind of investor eventually ends up with more success than the short-term kind. Case in point: Berkshire Hathaway’s 2014 letter to shareholders disclosed that in the period extending from 1964 to that year, 2014, the company claimed an overall 751,113 percent gain.
3Prioritise value over money
Sometimes, the amount of money we spend on something and the value we get back from our purchased item do not correlate. Just because you purchased a Ferrari for $400,000 doesn’t mean that your overall quality of life will improve because of the car you drive.
Many people make the mistake of ascribing ultimate value to money. Buffett disagrees. An investor understands that the market prices of commodities and stocks are driven by demand, supply and general market sentiment about the company or commodity in question.
Buffett has a general formula for investing, especially in stocks. He suggests that the best time to invest in any business is when the price of its stock is lower than its intrinsic value. In simple terms, you should invest in companies when they are undervalued.
4The human factor plays a big role in investing
Buffett’s decades of consistent success are further proof that the now largely discredited efficient market theory is flawed. Investing is both a science and an art, and Buffett believes that modern financial theory does not adequately take into consideration the artistic side of it – the human factor.
Human emotions and sentiment and intelligence affect the market much more than modern financial model is willing to admit. The latter makes things look too easy and straightforward, assuming that something that has never happened can happen.
The modern financial model leans more on past and present market data (physical science) than the human factor (behavioral science) when the reverse should be the case. Buffett has suggested that controlling the emotions is much more important. According to him, “Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble in investing.”
5Invest in what you understand
Drawing on his “circle of competence” belief, Buffett advises that you “never invest in a business you cannot understand.” In other words, don’t choose businesses requiring knowledge outside your circle of competence, at least not until you have acquired sufficient knowledge to do so. Buffett lumps factors affecting a business into categories: The knowable, the unknowable, the important and the unimportant.
So, what he’s saying is that businesses are a good bet for investing only if their important factors are knowable – and known.
If you don’t have sufficient knowledge about a company, it becomes harder to hold long-term investments and predict what the company (and its industry) will look like a few years down the line.
Buffett, for instance, usually stays away from tech industry businesses; he puts most of these businesses in the “too hard” pile on his desk. He refers to investing in businesses you do not understand as trying to jump over seven bars when you should be looking for a one-foot bar (a business you understand) that you can step over.
Clearly, the Oracle of Omaha, over the years, has found and profited from plenty of those one-bar businesses.
This article was originally posted here on Entrepreneur.com.
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