How to not lose money on the JSE
Protecting against the loss of capital.
Please note that the contents of this blog have been inspired by the works of Benjamin Graham and David Dodd.
Rule number 1
Never lose money.
Rule number 2,
Never forget rule number 1.
You don’t need a lot IQ to become a successful investor on the JSE.
“ It’s about having the proper mental attitude, being patient, not being led solely by prices and the actions of others, a focus on the fundamentals, and an understanding of value.”
Value investing is a concept of capital preservation (protection of losing principal).
And can be summarized as follows:
(1) Determining the intrinsic value of a company and
(2) Buying the stock only if it sells for less than their intrinsic value.
Value can exist as Market value, which is the price you pay to acquire an asset and Intrinsic value, which is what an asset can produce over many years.
In investing circles
We want to find the intrinsic value of a business.
The Intrinsic value of an asset is the Holy Grail.
This is how You observe rule number 1:
“By paying 75 cents and getting 1 Rand's value.
A focus on intrinsic Value
Spares the investor the mental anguish from short term fluctuations in the share price.
Because You are getting back so much more than You are paying,
You have to be in constant wish that prices fall so that wonderful companies like Famous brands are available cheap.
In the long run however, the share price should reflect the growth in Intrinsic value.
A dropping share price should not be seen as a deterrent to holding a share.
In fact, they should motivate the investor to potentially buy more at the cheaper price.
Determination of intrinsic value.
Take for example
A business that can produce annual profits of 2 million Rands after tax (in today’s value).
If we expect this to be maintainable for the next 10 years.
Then its intrinsic value should be somewhere around 20 million Rands (in today’s value)
(I.e R2m*10= R20m).
Should the business be selling for 14 million Rands, then the investment is acceptable.
We would have spent 14 million and have received 20 million value in return.
If the same business is available for sale at 19 million Rands,
Seeing how close the intrinsic value and its market value is, the investment can be deemed as not being acceptable.
(This will vary person to person).
Rule number 1 just means that you should buy things when their intrinsic value is greater than their market value.
The difference between intrinsic value and market value is called"Margin of safety".
A Margin of safety acts as a room for error in estimating the intrinsic value.
You typically want as big as possible a margin of safety.
The bigger a Margin of safety You have, the less risky the investment becomes.
Do not buy into the crap that in order to have high returns, You must take on more risk.
You can find wonderful companies with stable returns selling at cheap prices ( which makes them less risky) due to having temporarily falling out of favor with the market.
This is most prevalent around around financial meltdowns and periods of low investor confidence.
Take SAPPI LTD for example:
The company is a world leader in pulp and paper production.
Is well established in Europe and North America.
Yet the company is only trading around 6 times earnings.
One reason for the low valuation is the loss of confidence by foreign investors in South African assets.
While the share price has fallen some 55% in the 12 months ended 8 October 2019.
The company's earnings remain unaffected by this.
**Please note that this is just an example and not a tip to buy SAPPI.
All that is required from now on is the patience to sit on your ass and let your money work for you.
Welcome to the South African investor.