Three investment myths busted

When it comes to investing, a number of myths continue to endure that have the potential to negatively affect the decisions of ordinary South Africans.

Linda Eedes, senior analyst at RE:CM, a value based asset manager, identifies and debunks some of the more common investment myths.

Myth one: Positive economic growth equals positive investment returns

Eedes says that, often, investors link positive economic growth to positive investment returns, which is not always the case.

"Investors should be wary of basing investment decisions too heavily on the plethora of economic data they are exposed to on a daily basis, such as GDP growth rates, inflation data, manufacturing and production numbers, various confidence indexes and rating agency and economist outlooks.

"A recent study, which analyses 83 countries over a period of the 30 years, confirms that areas of highest growth do not necessarily generate the best investment returns. Rather, the report reveals that the best investment returns were generated from the countries that experienced lowest economic growth."

Eedes explains that it is therefore not really about what happens in markets, it is about what happens relative to expectations.

"Stocks are often priced cheaply in regions where low economic growth is expected, and these low prices, however, often lead to good investment outcomes."

She says that investors also tend to think that poor economic returns lead to poor investments, which is certainly not the case.

"An example of this is RE:CM’s investment in Carrefour, the second largest retailer in the world after WalMart. We started investing in the company during 2012, at the heart of the Macro-economic recession in Europe. Carrefour is a high quality business and, when we invested, it was trading at less than its property book alone. Since the initial investment in early 2012, the share price has increased by 35 percent in US dollar terms."

Myth two: Uncertainty should be avoided at all costs

Eedes says investors also often tend to avoid areas of near term uncertainty at all costs, which is not always best when making long-term investment decisions.

“A good example of this is Greece. A year ago, Greece faced a lot of uncertainty and everyone was unsure as to what would happen in the region. This led to investors shying away from the region as they were concerned about the impact of this uncertainty on short-term prices."

She says, because of the uncertainty and negativity surrounding Greece, RE:CM was able to invest in high quality businesses trading at exceptionally undervalued levels.

"RE:CM purchased high quality businesses such as Coca Cola Hellenic and Hellenic Exchanges at exceptionally low prices around the start of 2012. Both have performed exceptionally well and produced returns in excess of 40 percent in US dollars since then.

"This confirms that, sometimes, uncertainty brings about an opportunity to invest in high quality businesses at substantially reduced prices where the proverbial baby has been chucked out with the bath water."

Myth three: A good company is always a good investment

Eedes says that a common myth amongst investors is that a good company is always a good investment.

"There is a mindset amongst most investors that if they purchase a good, solid company’s shares, it will without a doubt be a good investment over time. This is, however, not always the case."

She says that a key example of this is the performance of the Microsoft share price.

"Microsoft has always been a good, high quality business. During the lead up to the technology boom, Microsoft was very popular with investors given the soaring share price.

"However, when the tech bubble burst, the share fell 63 percent from its peak. This is not because it was a bad company — in fact it was still delivering good fundamental results. But, at the top of the market, its popularity translated into impossibly high expectations and a price to earnings ratio that peaked at 84 times. Despite being a good company, it was a poor investment at that point simply because the price was too high."

Eedes says that, today, Microsoft is trading at a normalised price to earnings ratio of around 10, which is below the world average.

"Microsoft remains a good company, but is now also a good investment at these levels."

She says that it is therefore very important to place significance on the price relative to the value of the investment.

"By carefully selecting stocks of high quality at reduced prices, we believe that positive investment returns can be generated over time. Unfortunately, high quality businesses don’t become cheap when everything is going well," concludes Eedes.

Source: Iafrica

Why buy an investment property

Why would you purchase a second home as an investment? 

This is usually asked when discussing different investment options, and property versus stocks and shares as a retirement plan is often the debate, says Lanice Steward, managing director of Knight Frank Anne Porter. 

After five years of negative capital growth in property and all the indicators being that the market is improving, now is the time for property investors to re-examine the market, she says. 

Given the stringent lending criteria of the banks over the last five years, if you were interested in investing in a property now would be a good idea to contact a bond originator first to establish what finance you qualify for, she says. 

Why property?  

Steward says property, over a long period (20 to 25 years) has been proven to keep pace with inflation while giving the investor around a five to six percentage return. The return, however, must be seen as the combined capital appreciation that the property achieves over time.  

Property is an ideal way to build capital. It is a means to put together a retirement nest egg without investing all of one’s money upfront, which would have to be done with stocks or shares, she says. Apart from the deposit put down, the bulk of the finance comes from a mortgage loan in most cases.  

What to buy?

If it is an investment property the return will be better on two or three smaller units than on one larger property.  

“It is always better to spread the risk should you end up with a unit unoccupied for a time. Rather have one unit with a rental of R4 000 empty and one or two others with tenants than have one large house with a rental of R12 000 standing empty.” 

With smaller units, there is also a lower cost to maintaining the exterior or garden than homes with larger gardens. Sectional title units are a good option as investment properties because the common property is managed by the body corporate of the scheme.  

Steward says if you do decide to buy a freestanding property with a garden, be sure to include a garden and pool service in the rental and note these in the lease as necessary because tenants often do not look after the garden and this is a huge value loss to a property if it is left to go to ruin. 

When considering what to buy, look for the worst property in the best area, she says, i.e. smaller houses with lower prices in good areas are better than larger homes or higher prices in areas that are not sought-after or out of town. 

Student accommodation and new developments can be a good investment if the units are bought off-plan.  

In the rental market, bear in mind that a home that is close to trains, buses or the BRT route will be a big attraction for tenants. A tenant might even be willing to pay slightly more for this type of unit and it is also best for the unit to be in close proximity to shops or schools.  

“If investing in a property in a partnership, which is sometimes a solution if you can’t afford the bond on your own, be careful to establish beforehand what would happen if one partner wants to realise their capital before the agreed time.” 

Steward says decide what the ‘rules’ would be and whether it would be a straight buy-out of the share of the property or whether they would find another person to buy their share of the property.  

Property investment is the most stable investment to make, as homes will always be needed and there is less chance of losing value if you stick to the guidelines of when, where and how to buy, she says.  

“After a few years there may be a chance to own a few units and this could be a healthy income later or one or more of the units could be sold to live off the capital. In a case like this always be sure that the interest off the capital amount will be higher than the rental received on the unit before selling it.”

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