By Daryl Ducasse**
WE ALL know that investing comes with risks. However, some risks are more unpalatable than others – for example, the mismanagement of your funds, or worse still, the dipping of fingers into the till by directors and promoters of investments.
Risk comes in the form of reasonable risk to plain stupidity. For example, reasonable risk could be defined as an investor having considered all the risk elements, and arriving at the conclusion that the benefits of upside in the opportunity outweigh the downside risk of loss.
Stupidity on the other hand is not doing the research or considering any of the risk elements at all – even gamblers consider the risk of absolute loss.
In between these extremes comes the fact that the market is imperfect – although an investor can consider the risk elements known to him or her, anomalies will always exist.
These come in many forms, and are unforeseen – for example, the wildcat mining strikes of 2012 were largely unforeseen, as was Marikana.
All investors in resources have learnt to price in the effects of strikes in the mining industry as an annual occurrence – it is a fact of life that there will be labour / management wage disputes.
However, few priced in the devastating effect that 2012’s strikes would have had on the mining sector, gold, platinum, the All-Share Index, South Africa’s credit rating and our exchange rate.
An investor may have invested funds in a scheme where the promoters have taken out funds without the knowledge or permission of the investors – people are inherently trusting, and this type of behaviour is neither expected nor acceptable standard practice. It is an anomaly.
There are pricing and information inefficiencies, where a delay in information mismatches buyer and seller objectives, mainly to do with pricing. This requires a perfect system and flow of information – something which is unreliable.
So, how does all of this affect an investor and the decision-making process? Simply:
* Delayed information may cause (irrational) exuberance or despondence in the mind of an investor, triggering an untimely or incorrect ‘buy’ or ‘sell’ decision;
* Lack of knowledge and information leads to the same effect;
* A lack of research sums it up – research means obtaining current information in order to make an informed decision;
* All of the above enable an investor to make a decision free of post-investment regret. Don’t put yourself in a position where you live in a state of regret;
* Pricing moves in accordance with current information – some are more informed than others – this is a reality, and partly why markets have leaders and followers. Those early to buy or sell are likely armed with better and more current information than others. An investor’s decision could be price-influenced – the reason for this could be affordability, or knowledge. The former is an excuse for failure; the latter a reason for success – i.e. don’t ‘buy’ or ‘sell’ just based on affordability (if this is your main decision trigger, the likelihood is that you should not be attempting to invest yet anyway). Buy or sell based on knowledge and information;
* Timing – perhaps the most critical of all decisions, investors try to time the market to perfection – face the fact that it will likely not happen unless you are a seasoned fund manager, and even they make mistakes. Perhaps the expression “…catching falling knives…” will explain it better – don’t try to time the market, or a particular share that is falling, but recognise that timing plays an important role in your buying or selling of an investment. Timing is linked to pricing;
* Accept the fact that no matter how much research and information you have, or how much knowledge and experience you have, there will always be an anomaly that influences your investment – sometimes for the better, but often for the worse. This acceptance will give an investor peace of mind – a calm mind makes better and more rational decisions, where a panicked reaction very often worsens a situation;
* Affordability – this does not mean how much an investor can afford to invest; rather, it should refer to how much an investor can afford to lose because the reality is that investors can and have lost all their capital in investments. Don’t make your investment decision on how much you think you can make – rather make the decision on whether you can afford to lose all the capital you are considering investing – it will be a much more sombre process, but closer to the truth than any investment salesman will reveal;
* Seek professional advice or opinion – not that this makes your opportunity absolutely risk-free, but it will reduce the risk and help you see things from a different angle. Don’t fall into the trap of thinking you know it all;
* Don’t go on hearsay – I know of many people who make decisions based on what their friends, family or neighbours have to say. No matter how tempting, do not go down that road without doing the research and getting professional opinion. If in doubt, bring in all of the elements above to assure you of this truth (information, pricing, timing, affordability) – you don’t know what that persons level of affordability is, or perhaps the influencing anomalies at the time – all you hear is how much profit the person has made – don’t invest on this alone, because profit is only taken when a third party is willing to pay you that profit;
So, no matter whether the investment you are considering is the purchase of a new home, JSE shares, a commercial property investment, a share in an unlisted entity, currency, gold, timeshare or property syndication, we encourage you to:
* Do the research;
* Seek professional opinion;
* Disregard hearsay;
* Measure your affordability;
* Price your entry correctly;
* Time your investment as best as possible;
* Be patient when it comes to returns and growth;
** Daryl Ducasse is an investment risk specialist, investor activist and member of Merkurius Capital Solutions.