ALBERT BOTHA: How to protect your money during wild times
If there was ever a time for investors to reflect on how they should protect their capital, the past two years have been it
Global pandemics, local riots and now the unfolding war in Ukraine are just some of the events that have rattled portfolios. Policies around the movement of people and their participation in the economy, the unprecedented application of monetary policy and the rising affect of inflation, have also muddied the waters. These events have resulted in various sell-offs and price spikes in almost all major markets, dragging down investor sentiment and portfolio performance.
In China, a combination of the historic oversupply of property alongside some changes in local policies led to a drop of almost 15% in the country’s stock market between the highs of February 2021 to the rude awakening of December 2021. China has recently shifted to a common prosperity policy, which aims to reduce inequality in its society after the declaration that poverty has been eradicated. Over that same period, the US stock market rallied 21.9%. Yet before you shift all your assets to the US, it’s worth noting that over the six months to the end of February, the SA market outperformed the US market by more than 10% in rand terms.
Even before the war in Ukraine, there was already a significant degree of uncertainty regarding rates, inflation and global GDP growth over the next 12 to 24 months. Inflation was high and drifting higher along with some truly staggering numbers coming out of Europe for its Producer Price Index (PPI). The year-on-year change in German PPI rose to 25% in January, the highest number since 1977. The previous high came in at 9.2% back in 1981. It is worth noting that this record PPI change in Germany was recorded before the huge increase in energy costs hit in March.
Impact of the Ukraine-Russia crisis
Oil has spiked to levels not seen in multiple years, breaching $125 a barrel in the first weeks of March. Yet while this is very high in a more recent context, the average oil price from 2011 to 2014, adjusted for the US Consumer Price Index (CPI), would imply an equivalent level of about $165 a barrel today. The 2008 high equivalent would mean oil at just above $250 a barrel.
Nickel is probably the commodity that had the most severe reaction amid the Ukraine-Russia crisis, spiking more than 250% from March 1 to 8 on a short squeeze. This forced the London Metals Exchange to close and even take the unprecedented step of reversing some already executed trades.
There are dozens of examples one can point to over the last two years that demonstrate the increase in uncertainty and related volatility. Bitcoin, ethereum, non-fungible tokens (NFTs) and GameStop are among the most well-known, but not the most extreme.
Protecting your capital
So, what can be done to safeguard your capital? The root of most of the mistakes people make during uncertain and volatile times lies in greed and fear. “Everyone has made money from crypto,” rings out, so you pile in at the top. “The market is down 30%,” is the cry, so you sell at the bottom. To help temper these voices, there are three things every investor needs to remember to help reduce these and other risks:
The root of most of the mistakes people make during uncertain and volatile times lies in greed and fear
Eighty years of investing and the last five have given Buffett more than the first 75 years combined. So if you really want to learn from the “Sage of Omaha”, save early and save often. Time is your ally in investments, but only if you also follow steps one and two.
• Botha is portfolio manager at Ashburton Investments.