Running hard just to stand still

By Steven Crouse

On a recent trip to the UK to attend a most insightful conference hosted by Investec Asset Management, we spent our time walking the streets of central London between the head offices of the global financial powerhouses. And while listening to the conversations dominating the queues at Starbucks or on the Tube platforms waiting to catch a train, what caught my attention and surprised me most was the general tone and sentiment of Londoners. In one, short sentence: we are not alone! 

When Statistics South Africa released data showing the South African economy in recession after two consecutive quarters of negative GDP growth, fingers were pointed at the demise of ‘Ramaphoria’,  and policy uncertainty around land redistribution or expropriation without compensation . Yet the challenges and headwinds in the global arena were largely ignored. 

I have long subscribed to the notion that only 30% of how we feel as South Africans has to do with the goings-on within our own borders. The vast majority,   the other 70%,  has nothing to do with ourselves and is driven by worldwide factors.  For instance, consider the adage , ’When the USA sneezes, the world catches a cold’. The USA and the rest of the world are seemingly doing well at the moment, so why aren’t we feeling the positive effects of this? The answer is somewhat complicated, and searching for the clues to navigate this  period is what keeps many of us awake at night. Although, this is also what makes our roles as your advisors so intriguing! Successful investing is not buying into the next neck-breaking fad or ‘get rich quick’ scheme. Successful investing remains the goal of identifying those assets that are more likely to deliver sustainable upside over a very long period of time. Countless studies have shown that the thrill and excitement of buying an asset whose value goes up quickly is often offset by a correction at some time thereafter, and the ensuing disappointment and disillusionment will forever be associated with that loss. Whereas the compounding effect of earnings growth and dividends (for a share) or interest (for a fixed interest or credit asset) are what create the sustainable returns to investors over time. 

As can be seen in the chart below, titled Source of returns over time, it is the change in price (or valuation) of an asset that is the greatest contributor to returns over a short period of time (like over a year). But when considered over a longer period, the change in price or valuation occupies a far smaller a share of total returns relative to the earnings growth and dividends that are returned to investors! Currently, we seem to be expending a lot of proverbial energy without making much progress – we’re running hard, but only standing still, and experiencing an untold amount of frustration in doing so! At the time of writing this, both the local JSE and Global stock markets are negative for the year to date, with some indicators are negative well into double digits.

So, as prices fluctuate on market volatility – up today but down tomorrow – it seems like we’re getting nowhere fast. However, this year is just one small piece of the compounding machine that is the long-term investment. While the change in prices is holding us back on negative performance, it is the earnings growth and dividends that are doing their small bit for us now. And every basis point of this adds up to what will eventually make the pie grow bigger further down the line. 

All we can do is just keep running hard!