Stock Investing 101: how to get started

NASTASSIA ARENDSE:  We are talking Investing 101. It can be a bit daunting, especially if you are starting out. You hear guys come on the show talking about particular stocks and how a stock is performing and it’s something that you find quite interesting and you want to get involved. Perhaps you’ve been doing it for a while on your own and you want to re-look at strategies or something along those lines.

We are going to be taking your questions with Gary Booysen, who is a senior portfolio manager at Rand Swiss. Gary, thank you so much for your time.

GARY BOOYSEN:  Hello. Thank you for having me here.

NASTASSIA ARENDSE:  You’ve been involved in the game for a fairly long time. For a lot of people investing can seem daunting, especially when we get guys like yourself and Wayne McCurrie coming on the show.

GARY BOOYSEN:  We really can’t be that daunting. Investing is a lot simpler than people think, but it’s always – I suppose – daunting because it’s your money. It’s hard-earned money and you don’t want to invest it in the wrong thing and lose money. There is always that side of the coin.

But the one thing that all South African investors can I suppose take encouragement from is that we have a very, very strong regulatory system in South Africa. So, as long as the institution that you are investing with is registered with the Financial Services Board, or if you are looking at buying shares, a JSE member also helps. And your money is going to be safe.

It comes down more to trying to select the instruments that will work for you. The kind of question that we are faced with for every new client that we have is: what are you looking for? All of them invariably say: “We want to make more money; we want to make our money make more money.”

But unfortunately investment is not quite that simple and, whenever we make money we need to put money at risk to do that. Probably the first question that an investor who has never invested should ask is: how much risk am I willing to put my money at in order to try and generate a return?

Risk is quite an abstract principle. So it’s quite difficult for, say, a novice investor to understand exactly what risk is. How do we quantify risk? As soon as you start looking at unit trust statements and such, and you start trying to work out what the Sharpe ratios are, that’s above most retail investors. But in its simplest form in the investment community, risk is volatility. It’s the fluctuation in the value of your investment.

So if you invest in the lowest-risk instrument, which would essentially be a money-market account or a bank account – our money market accounts, for example,  get 7.34% interest. That doesn’t change. So if you invest R100 000 at the beginning of the year, at the end of the year you will have R107 340 in your account. If you come halfway through the year it’s a very linear relationship.

Whereas, as soon as you move into a risk asset – as soon as you move towards bonds and stocks, which are essentially the big categories that you can invest in – you are going to have some volatility on your return.

If you look at the South African markets, if you go back, I think about 60 years – it was a study done between roughly let’s call it 1960 to 2014 – if you look at the average return on the market, the average return on the market was about 15 to 18%. But, if you keep money in the market for a longer period of time, over a five-year period there is no time that the Top 40 [JSE index] has ever lost money over a five-year period. If you had bought at the peak of 2008 and the market had collapsed, you had gone down just over 40%; and if you had held for five years you would have been back to square.

As you push your time horizon out further and further, so as you go 10, 15, 20 years, that band narrows dramatically. So when you get to 20 years your average return is probably between 14 and 18%. Those are rough numbers – I might be out by 0.5%, but that’s kind of the band that you are looking at. That would be your compound annual return. So that’s how much your money is growing on annual basis.

Of course to do that you are taking risk. Now the volatility on your portfolio is essentially in that first year – how much are you going to be up over the first year? You could be down 40% if you picked the top [of the market] at 2008. You could have picked at the bottom of 2009 as well, and you could already be up 46, 50% in the first year.

With markets and with investment I think the first thing is to understand your risk profile. How much volatility can you handle in your investments? And the second thing that you need to understand is also your time horizon – how long can you invest in the markets for? If it’s less than five years, you shouldn’t be looking at stocks. You should probably be looking at something with fixed income or something a little safer.

NASTASSIA ARENDSE:  We’ve some questions that have come through for you. The first one is from Tudo in Kimberley, asking how exactly one buys stocks?

GARY BOOYSEN:  If you look at a stock, you basically have to buy stocks through stockbroker. The way that the South African market is structured – and most markets in the world – is that you have to essentially buy stocks on an exchange. In our case we are going to talk about the Johannesburg Stock Exchange, the JSE, but you can buy stocks in New York, you can buy stocks in London, and you can buy stocks all over the place. Generally you’d buy exchange-traded stocks. A stock is a share, it’s share in ownership of a company. As soon as a company becomes a public [publicly traded] company, it generally lists on the exchange. You can get OTC companies, but we will limit that for this discussion, for 101.

But essentially what you do is you open an account with a stockbroker or a financial services provider, and once you have an account they will assist in buying and selling shares. In the old days you would literally phone up your broker and you would open an account with them and you would say “Please can you buy me 500 MTN shares?” and he would do a trade for you.

These days we get what’s called DMA, which is direct market access. It will feel exactly like you are dealing directly with an exchange but you never are. You will always have to deal through an intermediary. You open an account. In our case you would come to us, we would open your account and you would do a mandate. We would obviously take the terms and conditions on your account. As I said, the financial regulation in South Africa is very strict, and you are going to have to do the same things you would do when opening a bank account. So you are going to have to do the general Fica checks; your brokers will have them. Once you’ve sent through a certified copy of your ID and/or the various documents, the account will be opened. These days, again, the market is still split. There are those that do the old-school telephone broking, but most guys will give you an online platform.

It really comes down to selecting a stockbroker that suits the type of investing that you want to do. Do you want to have a very online-geared platform, where you are doing everything yourself? Do you want to have live pricing. Do you want be able to pull a large amount of research out of the platform? If that’s what you need, you need to find a broker that services that area.

As I said, the market is split into two. In the old days it was spilt into discount brokers versus full-service brokers, and you would select which one you wanted, discount brokers being cheaper but not with all the bells and whistles.

These days the market has changed dramatically. Technology has come in and really helped us to deliver full-service broking almost at discount prices. These days price is not perhaps as much of a concern as it used to be because most of the brokers are pretty much priced at around the same level. So it really comes down to the support that you are going to get around it.

But speak to a broker, open an account, put down your money, and then you can buy either over the phone or via your online platform.

NASTASSIA ARENDSE:  A lot of the time when we have guests and we are talking markets we do tend you use words that people may not understand. Brandon from Johannesburg asks “What are dividends?” I suppose when people talk about P/E ratios and dividend yields when it come to a particular stock, that might throw somebody off. So [give us] the basics of understanding dividends and dividend yields as well.

GARY BOOYSEN:  It’s a challenge that all brokers face. If you look at it, we have our own jargon and we have to almost educate you first. A lot of brokers do do a lot of free education because they want their clients to understand.

Looking at a dividend, essentially when you are investing in a company it’s the same as I suppose in anything – you try to get a return. So how is that return delivered to you? Companies essentially can return capital to shareholders in two ways. Either they are going to do a share buy-back, where they’ll take cash that the company has earned and they will go and buy their shares, which will increase their share price. Obviously you as investor in the share will appreciate that because your shares will be higher ; and when you eventually sell your shares you’ll realise a larger capital gain.

Now another way of a company returning cash to a shareholder is to pay a dividend. In this case a lot of companies – and I’m not going to get too technical – have a very specific dividend policy, and there are a lot of different instruments on the exchange that are more suited to investors looking for high dividends. So if you look at a lot of property reits [real-estate investment trusts], for example, theirs are not called dividends; they are called distributions, and they distribute more regularly. There are very strict rules around what they can give to shareholders.

Generally the more mature companies that are not really in their growth phase don’t have the same capital requirements. They have established almost utility-type businesses that pay very regular dividends that people use to get an income and live off.

NASTASSIA ARENDSE:  Gary, you often hear the do’s and don’ts of investing, and one thing that people talk about in my circle is doing momentum investing – where you are doing what everybody else is doing. If the stock goes down, then you either sell or you hold on to it. And then there are those who do their homework and research and ask questions. I suppose momentum investing is all about knowing when to sell at the right moment. Let’s talk about the do’s and don’t of things you need to avoid when you are coming into this market.

GARY BOOYSEN:  It’s interesting. Now you are talking strategy. The old-value strategies are kind of the Warren Buffet philosophies. You’ve got the growth investors as well. And of course there is momentum investing, which is almost quasi-trading – you see something that’s moving up, so you think because it’s moving up I’m going to buy it because if it’s moving up now it’s probably going to keep moving up. The more people that think like that, the more the stock goes up. But inevitably it moves back. A value investor would say that the stock has an intrinsic value – there is real underlying value that the market isn’t pricing in.Remember, all financial markets are just people, buyers and sellers. A market consists of people all trying to value the underlying assets. Now, you can create a book value – but how much it’s worth is what someone is prepared to pay for it. And if everyone suddenly is willing to pay a lot more for it, the stock is going to go up. But which is right, which is wrong? It’s always a very difficult question because different strategies work in different environments and there is no one strategy that works across everything. Even Warren Buffet, who is very much a value investor, talks a lot about the intrinsic value in a company, he will go and buy growth stocks, which are typically stocks on very high P/Es, which are price/earning ratios. You can pay a lot for the share compared to how much the share actually makes. You’ll still buy it and you’ll say: “But I believe that the intrinsic value of the share is low.” Buffet will still buy growth stocks. So it is a very murky area and often new investors get caught in should I be in value, should I be in growth, should I be in momentum, and when should I sell.

Again, if you are in the markets, the time is what matters. And that’s why, if are a novice investor, I would tend to go more with a kind of Buffet-style investment philosophy because you are not going to get hurt. I’m all for buying high p/e stocks if there is great growth potential in them, absolutely. But the problem is, like you say, you need to know when to exit. And the way that you can damage just a normal equity portfolio – we were actually discussing it the office today – is when you really go in and you buy those hyped stocks, the market darlings that everyone is excited about. They normally are great companies but, as soon as you start buying things on 30, 35 P/Es, you are looking for trouble because when that unwinds nothing has to change in the company.

The company’s earnings can continue to grow but, if they don’t quite grow as much as the market is expecting and you get what’s called a P/E unwind, you suddenly see that these prices can drop 50%. The company is not going to go out of business; the company is still managing to make a profit but you as investor are left holding the short straw.

NASTASSIA ARENDSE:  A question that’s come in now is about loyalty. Is there such a thing as having too much loyalty to one particular stock? I know somebody who has quite a lot of loyalty to Anglo American and he’s taking a lot of punches right now. So do you hold on for dear life no matter what happens?

GARY BOOYSEN:  Again, it comes down to your time horizon on your particular investment. I’ve always liked my profession. Before being a portfolio manager I was a derivative trader. Yes, absolutely, you never get married to a position or a stock because when things fundamentally change on a stock the trader with a momentum kind of philosophy needs to change his opinion as well.

That said, if you are buying good-quality companies and you are not speculating on the market, you are looking for a longer-term investment. If you are buying things like British American Tobacco, AB InBev, like these multinational companies, you can buy them at reasonable prices in the offshore market. We do a lot of business with our clients offshore at the moment . One of the stocks we absolutely love at the moment is IBM. It is a low, low P/E stock. There is not a lot of growth in IBM at the moment, but it is absolutely monumentally large. They’ve got artificial intelligence coming via Watson. It’s a very exciting company, a company that’s changing. But you are not paying too much for it.

So if you buy a company and haven’t paid too much for it in terms of its earnings, you have this huge margin of safety. Then – do you need to jump out? Do you need to not get married to it? No, in that case get married to your stock. You should follow the Buffet philosophy; your holding period should be indefinite. As long as the stock is paying dividends, as long as there’s a fundamental argument to be made to continue to hold the stock, don’t get too caught up in the day-to-day price moves. The day-to-day price moves, don’t get me wrong, are a lot of fun to watch and they are a lot of fun to trade. But if you are novice investor that is coming into the market to try and build up a solid portfolio that is going to beat inflation, I wouldn’t worry too much. Get married to the stock.

NASTASSIA ARENDSE:  That said, we’ve come to the end of the show. You can tweet @moneywebradio if you have any more questions that you’d like us to answer for you. Gary Booysen is also on Twitter. Gary, what’s your Twitter handle?

GARY BOOYSEN:  Just @garybooysen.

NASTASSIA ARENDSE:  We’ll leave it there.
Gary, thanks so much for your time. Gary Booysen is a senior portfolio manager at Rand Swiss.

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