Farming should be seen as any other career, says of AngloRand Securities. “You won’t get rich by working as a teacher, farmer or brain surgeon,” he explains. “Doing a nine-to-five job will simply help to cover your daily living expenses. But if you want to generate wealth, you need to invest in something that generates compound interest.
“SA’s financial and political environment forces farmers to diversify risks. You have to invest some of your profit outside agriculture in a form that generates compound growth. If the worst should happen and you lose your land, you’ll still have something left.” He adds that many farmers have been able to save their land because of this type of investment. Money doesn’t grow on trees B ut makes it clear that investing in shares is not a get-rich-quick scheme.
“The only way you can make money on the stock exchange is if the company in which you bought shares is making money,” he explains. “There’s no hocus-pocus, you simply get a share of that company’s profit.” H e stresses that while all investments carry some degree of risk, the reward should justify it. Last week, we quoted the advice of stock market expert Warren Buffet – it’s better to invest in a company that has a good chance of yielding a high profit every year and a low risk of making a loss once every 10 years, than to invest in a company that generates small profits with a high risk of making a loss once every 10 years.
By considering the risks and advantages, farmers can make an informed decision about whether to diversify their financial portfolios by starting their own dairy, or by investing in shares in a listed company on the Johannesburg Stock Exchange (JSE). Y et there are many stories of people who lost vast amounts of money through irresponsible investments. If it sounds to good to be true, it probably is – when the yield promised is double the inflation rate, alarm bells should ring.
Nicolaas warns that investors need to investigate thoroughly to ensure their investments are worthwhile if they buy into unlisted stock or investment opportunities. “Most unlisted opportunities are smoke and mirrors and the unregulated broker aims to capitalise on the ignorance and greed of the would-be investor,” he says. “There might be no transparency in the calculation of an unlisted company’s financial performance, and no guarantee you’ll see your money again.” Advantages of the JSE Nicolaas advises prospective investors to only invest in listed stock.
“To protect investors, the JSE has strict regulations concerning the listing of stocks,” he says. “As a result, cash invested in the JSE is as good as money in the bank.” When buying stock in unlisted companies, there is no protection against irresponsible behaviour by non-regulated brokers, but the JSE has a fund to protect clients from traders’ illegal behaviour.
However, clients are not protected against the impact of market fluctuations on their shares, as that is what investing is all about. The JSE is also protected from political interference. While such interference can affect individual listed companies, it’s possible to switch investments easily and at relatively low cost. Nicolaas points out our largest companies are also listed overseas, which means that investors don’t have to invest abroad if they want to buy stock in overseas listed companies. Because the JSE is also transparent, you can access your fund at any time and review its growth, the value of your stocks, and the associated costs.
Another huge advantage is the liquidity of the stock exchange: it’s possible to value the investment and liquidate it within a day if necessary. “The benefit is obvious when compared to property or another business, as it takes time to sell a business and property – hence you’re not constantly aware of the value of the investment,” Nicolaas says. “Even so, investors should preferably hang onto stocks for at least five years and preferably 30 years to reap the benefit of compound growth.”
Investors buying listed stock also only pay around 1% commission when they buy and sell it. When buying property, not only do buyers have to pay around 8% commission to the sales agent, they also have to pay transfer and bond registration costs. The opportunity to profit on the stock exchange compares well with any other form of investment but the risks are much lower, as listed companies must have a good track-record and are run by experienced businesspeople.
If you bought your own franchise or started your own dairy, you’d have to hire skilled people to manage them if you wanted to remain a full-time farmer. Not only would this add to costs, but inept workers would increase the risk of failure. How to get into the game To invest in listed companies, farmers can either buy the shares themselves or use a regulated broker who is a member of the JSE.
“If you are interested in the stock exchange market, you have the background and you have enough time to monitor market movements, then it would be okay to manage your own shares,” says Nicolaas. “Remember, however, that trading, like farming, requires skill. It’s better to leave your shares in the hands of an expert than to manage them yourself.” There is software that supposedly makes it easier for people to trade shares, but Nicolaas warns it’s like any farm implement, “You might have a state-of-the-art planter with the most advanced potential, but in the wrong hands, it can create more havoc than good.
Software can’t replace sound judgement and human skill.” Investors can gain exposure to the stock market through a portfolio manager, or through unit trusts or retirement annuities. Nicolaas advises that with a portfolio manager, it’s better to negotiate payment through profit-sharing than a fixed management fee, as your manager will be directly involved in your success. Buying unit trusts can be expensive, as the overheads of these companies are greater than for smaller companies and costs can include the fund’s management and profit-sharing. When choosing a portfolio manager, it’s always important to check their credibility.
“Ask around whether the person has a good reputation, ask them how they decide which stock to buy and when to buy and sell, and about their track-record,” Nicolaas advises. To trade on the stock exchange, the person must also be accredited by the JSE. Where you invest your money will depend on how much you have to invest. “Most of the large portfolio managers require a minimum investment of R15 million,” says Nicolaas. Smaller companies can take anything from around R250 000.” People without this much money to invest can buy unit trusts, and move on to making larger investments as the unit trusts grow.
Nicolaas advises against incurring debt to buy shares. “Most people borrow money to start a new venture or buy property, but the risk is too high for the average investor. It isn’t worth the risk to invest for a probable 18% yield if you pay 15% on borrowed capital. The cost of borrowing capital is certain, while the yield on the investment is uncertain, just like farming.” Contact Nicolaas Hanekom on (021) 975 4790 or e-mail [email protected].
Disclaimer: Any returns generated in the past on the Stock Exchange Market might not necessarily yield the same returns in the future. There are financial risks involved in trading in the stock market. Aspiring investors should therefore first speak to their consultants before investing in a specific division. |fw
