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Friday, August 1, 2008
Gambling ways

There are various forms of gambling ranging from the low risk, low return to high risk, high return. Millions turn to the lotto or the roulette wheel in search of that fortune, which many others would see as ‘throwing your money away’. But such opinions might be suspect when you consider how many people seem to favour investing in the stock exchange when the market is high, and selling their shares when the market is low. People seem to adopt the same losing strategy in property too: they buy into a rising market, usually from an over-borrowed position; then go for a distressed sell when interest rates are high and values are depressed.
The slot machine player and equity dabbler do have a number of things in common: they try to acquire money without earning it (by hard graft) and they can lose money in the process.
South Africa, and most of the world for that matter, has from the beginning of 2003 until sometime during 2007 experienced a massive boom. Equity markets surged, and many people and institutions took advantage of this rosy period by leveraging up their investments. Not only were the markets surging in general, but most sectors were firing on all cylinders.
As is the case with most things in life, there’s no such thing as a free lunch, notes Seed Investments, and market downturns result in your leveraged assets losing value in double quick time. This has been aggravated by the global ‘subprime crisis’ and ‘credit crunch’ which has caused the financial and property sectors in particular to splutter and spurt. In trying to assist these struggling sectors Ben Bernanke, the US Federal Reserve Chairman, dropped rates which helped crank up commodities prices.
While there isn’t much subprime in local banks, the global sell off has hit our banking shares hard. Sure, defaults on loans will be up as a result of rising inflation and interest rates, but the local industry doesn’t securitise its assets to the extent of its US counterparts. It has also been more conservative in its lending standards, although clearly not conservative enough.
The party ended well past midnight, and while some investors might still have some legs, most of them are beginning to nurse a hangover, and these are generally directly related to how excessive they partied the previous night.
It is precisely those who overindulged who end up missing out at the start of the next party, warns Mike Browne of Seed Investments, and sometimes miss out completely.
So, what is your state of mind? For those investors who stayed level headed there are some clear opportunities arising. Hopefully you exercised some restraint when the market ran.
In our cover feature, at the risk of being repetitive we provide advice for following the ‘middle road’ and also talk about things like preference shares, absolute return funds, the cost of guarantees, and offshore exposure. Should you prefer a single or multiple LISP? The ACI inflows rebounded for the latest quarter, and also in the news Dow Jones has launched an Africa Index. We also mention a couple of products, one from Marriott and an updated one from Momentum.
If we’ve got space we’ll finish with a talk on ‘Goal-based investing’ from Advantage Asset Management. But whatever your point of view at the end of all this, Cannon Asset Managers probably summarises the real message: a wise investor is a patient one.
First up, is Mark Seymour of Alphen Asset Management, telling us that it is the time in the market not the timing itself that counts. By Nigel Benetton

Copyright © Insurance Times and Investments® Vol:21.7 1st August, 2008
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