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I have always been fascinated by the concept of human perception, especially when it comes to the selective decision-making process of what to remember and what not to.
As a young man, I fell in love with the Alfa Romeo GT Junior sportscar. To me, there was no car more beautiful than that little red monster. It didn’t matter to me that technology, luxury and handling had improved over the years; I believed that if you were lucky enough to find one of these beauties, it would be the last car you own.
About 15 years later, I finally managed to buy a 1976 model and I could hardly contain my excitement as I waited for the arrival of my new toy. Make no mistake, I enjoyed this car immensely, but what I imagined I would be driving and what I actually ended up driving were two very different cars. Compared to modern cars, the 1976 Alfa was a bumpy ride, it was uncomfortable and, in many ways, highly impractical.
If you ask Warren Buffett, one of the most successful investors of our time, what his favourite holding period is for a share that he has bought, his answer will be, “forever”. So, if Buffett follows a buy-and-hold strategy, then surely, much like the Alfa Romeo sportscar in 1976, it should be the best strategy?
Many investors tend to forget that as time goes by and the world out there changes, our investment environment also changes. Just look at Buffett’s own company portfolio (Berkshire Hathaway) of 25 years ago. You will see that all investments above $1bn (out of their total portfolio value of $22bn) comprised of only seven companies. Of these seven companies, they still own four, while the other three have since been sold.
The most famous of those sold has to be their 9% shareholding in Freddie Mac. Although Freddie Mac only started experiencing financial difficulties in 2008, in 1999 Buffett was already concerned about the risks the company was facing in achieving their earnings forecasts, and he sold his entire stake.
Back on local soil, I regularly attend consultations and presentations where investors, and even experts, recommend that investors should simply “buy the10 largest locally-listed shares and keep them”. These 10 shares make up 60% of the total market, and more importantly, there is a reason why they have become the 10 largest shares.
How can you go wrong? I’m not saying at all that the 10 largest shares are in any way poor choices, but you need to keep in mind that just because my Alfa GT Junior was the best car on the market in 1976, definitely does not mean that it still is today.
If you had followed a buy-and-hold strategy at the turn of the century, tech companies Dimension Data or Datatec surely would have been part of your portfolio. Both shares initially provided excellent portfolio growth, only for Didata’s share price to tumble from R75 per share in 2000 to below R2 in 2003, while Datatec saw its price drop from R146 per share in 2000 to below R4 in 2008.
Many investors would be eager to point out that this refers to the bursting of the dotcom bubble, and that it’s unlikely to be repeated, although I think that’s highly debatable.
When we turn back the clock to 15 years ago (May 2005) without considering any significant occurrences, you will see that there was no sign of Naspers* in the top 10 largest shares listed on the FTSE/JSE Top 40 Index, although all 10 of those shares still find themselves in the Top 40 Index today.
It is therefore safe to say that none of those 10 shares were bad shares. Secondly, and more importantly, 45% of the Top 40 Index consisted of resources shares. Today, 15 years down the line, this weighting stands at 30%. The reality is that if you had followed a buy-and-hold strategy in 2005, roughly 50% of your portfolio would have been invested in resources shares.
If you had invested R100 each in the FTSE/JSEAll Share Index and a portfolio consisting of the top 10 largest shares on the local market 15 years ago, your R100 investment in the JSE would have been worthR375 today (4 May 2020), while your buy-and-hold strategy investment would have been worth only R230(see graph).
Don’t just assume that a buy-and-hold strategy is the best strategy to follow under all circumstances. The world is constantly changing, so make sure that your personal investment portfolio keeps up with those changes.
Schalk Louw is a portfolio manager at PSG Wealth.
*finweek is a publication of Media24, a subsidiary of Naspers.
