Bitcoin: boom, bubble or bust?

“It is time to realize that they (cryptocurrencies) are the real barbarians at the gate.”

Andrew Sheng, chief adviser to the China Banking Regulatory Commission.

The world is changing faster than we can think. Disruption is constantly chipping away at conventional systems and driving change at a dizzy speed. Begun in 2009, Bitcoin was initially taken up by an elite few with the technical skills to dive and dabble in something so fundamentally disruptive, that it has taken several years for the penny to drop on the wider public. After a somewhat bumpy ride, the price of Bitcoin has risen from 0.0001 USD in 2009 to 1 000 USD in 2013, to over 4,000 USD per BTC as of August 2017.

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Interest Rates, News and Fake News

So last week, the Governor of our Reserve Bank, Lesetja Kganyago, surprised the great majority of the countries Economists by decreasing interest rates. While the decrease was nominal at 0.25%, the impact on our country’s battered fortunes was great. The Reserve Bank and the judiciary are the only two remaining strongholds between South Africa and a Banana Republic.

The steadfastness and bravery of our Constitutional Court, our High Courts and their dedicated judges are well documented. Lesetja Kganyago’s steadfastness and bravery is less well-known but equally important. Despite a spirited act from a Public Protector that we can only assume to be captured, Kganyago has stood firm. In other African countries, so called Presidents (more appropriately, dictators) have tended to attack their Reserve Banks first. In our case the predators attacked state owned enterprises because they appeared to be easier targets and because, in other African countries, state-owned enterprises did not have the same quantum of assets or level of revenue.

Traditionally a decrease in interest rates signals a need to give an economy a boost. In South Africa’s case, it will have very little impact because there are so many other major factors negatively affecting our economy: the trust between government and the business sector has broken down completely; the state-owned enterprises are a complete mess and heavily indebted; and foreign direct investment has dried up. There are many other factors but these are the main ones.

Against this background we all have to distinguish between fake news and news. Some of the fake news has been completely exposed by the leaked Gupta emails. Take the White Monopoly Capital as an example. On the other hand, genuine news is the announcement of such things, as an interest rate cut. In between, there will be fake news that is harder to detect than Bell Pottinger’s ill-conceived White Monopoly Capital. So, be on standby for dirt to be dug up on Cyril Ramaphosa and Lindiwe Sisulu. The general rule of thumb would be not to believe any of the so-called dirt, which is dug up on these or other high profile politicians.

What does all this mean for your investments? The road ahead is indeed uncertain. Technically, the decrease in interest rates is usually a boost for shares and since the interest rate cut, this has indeed been the case.

Uncertainty, however, will be the overriding factor and the most important thing in the next six months will be diversification. Diversification counteracts uncertainty and provides something of a moat around your investments.

Peter Foster,

24 July 2017

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The Real Value of Advice

In the investment world, where results are measured in percentage terms, it is very easy to lose track of the real value of advice. Of all the participants in the ‘investment value chain’, historically it has been the financial adviser who has most keenly felt the pressure to reduce their fees. Being people centric at heart, quite often they oblige. As it turns out, quite unfairly, as we will explain below.

Consider the illustration showing investor returns:

ComparisonReturn % per annum
Stock market (eg JSE, S&P, Dow Jones)10.0%
Managed Equity Fund (a fund manager)12.0%
Excess Investor Return (Difference between stock market and the Fund2.0%
     Less: fund manager fees (cost of accessing the fund)1.25%
Net return received10.75%

At a glance this shows the investor receiving a net 10.75% return from the fund manager for a fee of 1.25%. Seemingly a good deal.

Take then a financial advice fee of 0.75% p.a over and above the fund manager’s fee, and we are back to square one: the stock market return of 10.00%. Many investors do this simple comparison and start to question the value of advice, with the fund manager receiving substantially more gratitude for the returns delivered.

The reality could not be more different. This comparison, while simple, illustrates how the value of advice can get lost in the numbers.

Here’s why…
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Small Business: high risk, high reward for the canny investor

The value of small businesses in our economy is often overlooked when planning an investment portfolio. But small businesses equate to a substantial impact in nearly all economies worldwide. There are more than 25 million small businesses in the US alone, accounting for up to 60% of jobs – and in a recent study by Paychex, small businesses have produced 13 times more patents than larger firms.

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