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BOOK EXTRACT: Make your money work for you

Jun 24 2019 06:01
Anthea Gardner

Mention the word ‘investments’ and most people’s eyes glaze over. If you advise them to see a financial advisor, you might as well have told them to pay a visit to the finance minister to discuss their household budget. But investing shouldn’t be that intimidating, which is why I wrote this book.

To see that finance, budgeting and investing is well within your grasp, you need to understand that the financial advisor is there to assist you. Many people see finance and banking as one big machine, but just as there are pharmacists, nurses, general practitioners, dentists, physiotherapists, nutritionists and psychologists to take care of your health, so too are there financial advisors, asset managers, traders and banks to support your financial health.

In this extract I’ll outline three of the key role-players using a zoological theme to give you a sense of who’s who in the investment zoo. - Anthea Gardner

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Financial advisors/planners (giraffes)

Giraffes are the ladies and gentlemen you are most likely to encounter on your road to financial freedom. Their job is to assist people like you, to help you make sense of your financial situation and the products on offer, to help you design a plan that best suits your financial goals, to revise that plan as needed, and, finally, to ensure that you get through retirement comfortably.

They should all have done their exams and must be registered with the relevant regulatory institutions. Like giraffes, financial advisors tend to have an air of elegance and eloquence about them; they are usually well-dressed and charming (of course, apart from acting in an advisory role, they are also in sales and need to be presentable to you, the client).

Giraffes sell their time. They spend hours meeting with clients and doing specific client financial analysis, as well as researching available investment products, comparing prices and returns, and assessing their suitability to their clients’ financial goals.

Financial advisors generally do not charge an upfront fee; they get commission based on the products they advise their clients to purchase. They may have to spend the same amount of time with a client who has just started working, has little investment capital, and needs the basic products as with a client who has amassed millions of rands and needs an investment plan.

You can clearly see where most of the giraffes’ commission will come from – they feed from the highest branches. However, if a giraffe is smart, he will build up a decent client base and help his clients grow their capital, leading to higher commission and a good reputation as his clients grow with his career.

Asset managers (pachyderms)

The pachyderms are known mostly by their herd name, such as Coronation, Old Mutual, Melville Douglas, Investec and Allan Gray, or they are often associated with big banks such as Nedbank, Standard Bank, UBS, Pictet, Julius Bäer, Credit Suisse and Morgan Stanley, to name a few. I’ve called them ‘pachyderms’, a category that can be subdivided into elephants, rhinos and hippos.

At the head of the herd is the Oracle of Omaha, Warren Buffett, and his long-time friend and business partner, Charlie Munger, who manage investments in their listed investment company, Berkshire Hathaway, which as of financial year-end 2018 held assets to the value of $707 billion.

I’m not sure if Warren Buffett is revered more for how much money he has made over his years of investing or for the fact that he still lives in the same house and neighbourhood he did in the years before he became one of the world’s most successful investors and a multibillionaire. Or maybe it’s because one of his biggest treats is to buy himself an Egg McMuffin at McDonald’s when he’s feeling ‘rich’.

Buffett’s net worth in 2019 was recorded to be $82,5 billion, which he started accumulating in his teens when he first got interested in investing. Many professionals have tried to emulate Buffett’s style of investing, some successfully and others not so much. Bear in mind that Buffett is known not only for being smart, but also for living a frugal lifestyle, and in 2006 pledged to donate 99% of his wealth to charity.

My triathlon training partner and I share a lot of memes to keep ourselves motivated to spend hours swimming, cycling and running, and Buffett’s story reminds me of one we recently shared: ‘To succeed, make sure you’re not just motivated by the end goal, but you’re so passionate about the process that you’ll love the journey and stay on track.’

In my mind, this completely sums up the phenomenon that is Warren Buffett. No doubt he loves making money, but more importantly, he loves reading his newspaper, analysing companies, and making investment decisions.

Asset managers, such as State Street in the US, have the potential to grow to an astonishing size. State Street manages $2,8 trillion in assets and in 2017 generated revenue in excess of $11 billion. The company offers a range of investment products and work closely with the other animals in the park to deliver their products to the market.

The largest South African asset manager is Coronation, which as at their financial year-end 2018 managed R505 billion. An asset manager can offer you anything from an emerging-market-focused fund to an equity fund, impact investment or (ESG) bond fund.

Each herd is made up of individual asset managers. They are sure-footed, move slowly, assimilate huge amounts of information, and are responsible for making the decisions on which shares, bonds, derivatives, property or unlisted stocks are bought and sold in the markets of their choosing.

A pachyderm is wholly focused on finding assets that meet her investment criteria and will buy or sell these assets based on the projected risk and return expectations. The reputations of pachyderms are based on how well they deliver returns to their clients; hence the fame of one such as Warren Buffett, whose fund has returned close to 750 000% since 1964.

Fund managers are generally specialists in a particular asset class, whether it is shares in a company (equities), debt (bonds), derivatives and developed or emerging markets. Elephants such as Mark Mobius, Bill Gross and Paul Tudor Jones have led their herds for decades with unwavering discipline, but may not necessarily have become household names.

Every day of their lives is spent reading, analysing and investing large amounts of money for their clients. Each of these well-known fund managers has left their mark on the investment world in some way.

Big cats (traders)

I’ve worked with enough traders, or big cats, to know that some of them literally growl, hiss and roar. They very rarely purr. More than once, I have been on the receiving end of a roar when I unwittingly got between the predator and his prey. Big cats come in the form of panthers, tigers, leopards and even lions. They’re born hunters: stealthy, fast and with a laser focus when in search of their prey.

Traders stand in the pit or sit in front of their computers, day in, day out, looking at the numbers on multiple screens, mostly waiting to take advantage of mispricing and turn a quick profit. There is the executing trader, who acts on instruction from his clients – ‘Buy 1 000 Tesla shares at the average price of the day’. In this case, it is the trader’s job to understand how the Tesla shares trade, to watch the newswires for any headlines that may affect the share price and to deliver to his client the best price possible.

The proprietary trader trades for her ‘own book’. She buys and sells shares, holding them for days or weeks in order to maximise profit.

Electronic trading has exponentially increased the pace at which trades are processed. Imagine the pressure on the traders when price discovery happens faster than they can blink because of the combination of the nature of news and the rate of flow of information in the modern age, and the speed at which one can execute large trades.

The world does not stand still, and before we knew it we had electronic trading. Some may say this will eliminate the human trader, but there are benefits and nuances to having a human hand on the enter key. Artificial intelligence and computer programming have come a long way, but it is still very difficult to upload past experience and emotional quotient.

As a medium- or long-term investor, I believe we need to shut out the ‘noise’ of daily or even weekly share movements. Bearing this in mind also helps calm your nerves when you see the value of your portfolio moving down; the movement might be due to structural economic changes that last a couple of years, or it might just be short-term market ‘noise’.

Anthea Gardner is the author of 'Make Your Money Work for You', published in 2019 by Jonathan Ball. She is also founder and managing partner of Cartesian Capital, a South African asset management business. Views expressed are her own.

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