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Having worked in stock broking, I have mixed views on individuals trading on the JSE.
On one hand, there were individuals who built up quality share portfolios over time and made a significant amount of money, and there were traders who made money more often than they lost it. On the other hand, there were many, many individuals who lost money – the number one culprit was emotions.
Private client investors get caught up in the emotions of the market. When they see headlines that the JSE is breaking new highs or that the market is up 30% in just six months; that is when they want to invest. Invariably that is exactly when you do not want to invest – when the market is getting expensive.
Then, when the share market crashes, they forget that this is a long-term investment and tend to sell at the bottom. They have bought the shares at the peak of the market and sold at the lowest price, which loses them money.
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People also see the stock market as a get-rich-quick scheme. They bet on tips they hear at dinner parties without thoroughly researching the company they are investing in.
People who trade on the JSE usually talk about the shares they have made money on, not the shares that have cost them. This creates the perception that there is easy money to be made. It isn’t easy: it takes steady emotions, research and a plan.
The best way to invest or trade is to have a strategy and stick to it. Building up a long-term share portfolio is one way to do this. You can open an account with a registered JSE securities firm and decide what service you require .
DIVERSIFICATION
PSG Wealth head of securities Wendy Myers explains that diversification is one of the most important investment strategies, and for good reason.
“As a risk mitigation strategy, diversification is one of the most effective ways to bolster a portfolio against factors such as market volatility, concentration risk and inflation.” Myers says:
When it comes to building up your portfolio, make sure you are diversifying across various industry sectors and geographically.
EXCHANGE-TRADED FUNDS
An exchange-traded fund (ETF) is a low cost, well-diversified starting point. You can purchase an ETF through the various platforms available or a stockbroker.
If you are planning on building up your own share portfolio over time, this is the starting point and you can use the time to learn about individual shares.
When purchasing an ETF, you are effectively buying one share but having exposure to many different companies or assets.
For example, you could purchase a Top40 ETF and you would have exposure to the 40 largest companies in South Africa.
You could buy a property ETF and have exposure to 20 listed property companies. You could invest in an MSCI ETF and have exposure to the 1 300 largest companies in the world.
BUYING INDIVIDUAL COMPANY SHARES
Myers recommends starting with R50 000 which you can use to buy shares in five different companies. Many of the larger companies have share prices of over R1 000 per share, so you need to have at least R10 000 to gain a reasonable exposure to the company.
She says:
Many stockbrokers offer training and educational material to help you get started.
Myers recommends that you diversify across sectors and market capitalisation which means having some large cap shares and smaller companies in your portfolio.
THE STALWARTS
A good starting point is to invest in one of South Africa’s top 40 companies. These are successful companies that have a good track record, and you will be familiar with most of them as they are household names.
There is also a lot of research on these companies available, so you can read up on them and see which you believe is offering the best value now.
As you are starting off, it is best to buy shares in different sectors (industries) so that you have a diversified portfolio.
Some of the large companies include the banks (FirstRand, Standard Bank, Capitec), mining houses (Anglo American, BHP), retailers (Shoprite, Clicks, Woolworths, Mr Price) and telecoms (MTN, Vodacom).
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There are other large companies in various sectors, such as Richemont, Anheuser-Busch Inbev, Naspers and Bidvest.
Do your homework and even use your own gut feel. My mother bought shares in Shoprite because she found that the one closest to her was busy all the time.
The shares have done well, but now they are considered expensive – so you need to do your research to find out if the good news is already priced into the share.
INTERNATIONAL
Any portfolio should have offshore exposure. It can be daunting to decide what companies to purchase globally as there is such a wide range of options.
An ETF such as the S&P 500 or MSCI World Index can be a good way to obtain offshore exposure. These can be bought locally, which means that it is rand denominated but exposed to the hard currency. Alternatively, you can use your foreign exchange allowance to purchase an ETF offshore.
Most stockbrokers have relationships with offshore providers, or their own platforms allow investors to purchase offshore.
“In principle, offshore diversification is important to local investors, but how investors go about achieving this will depend on each client’s individual needs.” Myers warns:
THE LOTTO TICKET
As you become more familiar with the stock market, you will want to include one or two smaller companies in your portfolio. Smaller companies tend to be more risky because they can still suffer growing pains, however, this is where the real money can also be made.
In 2002, if you had invested R5 000 in Capitec on the day it listed at R1.80 a share, that investment would be worth over R5 million today with a share price of more than R2 000.
It is these kinds of success stories that attract people to the stock market.
But you would have gone through a bumpy ride which would have seen your investment halve a month after you had bought it.
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Only investors who had bought the company because they understood it and believed in management would have held on to those shares.
By the same token, there were many small companies that listed on the JSE in the late 1990s, which no longer exist and lost investors a lot of money.
Again, you have to make sure you understand the business and that you are not just buying it because of a hot tip.
There is always room for a small company in your portfolio, but the rule of thumb is that it should not make up more than 10% to 15% of your total investment.
