This month South Africa woke up to reports of the latest Morningstar awards, a self-congratulatory event in which members of the unit trust industry set out with great fanfare to reward themselves for the work they have done, or not done depending how you view it, on managing the savings of ordinary folk.
The best equity achievement of the industry this past year was a return of 7.98 percent a year over the past five years achieved by the Aylett Prescient Equity Fund while the highest growth overall was 11.56 percent a year over five years achieved by the Melville Douglas SFL Global Equity Fund.
Now if you consider those performances against the figures in my graph below you might consider that the fund managers did really well. After all the JSE All Share Index delivered compound average annual growth over the past five years of just 3.9 percent a year, Wall Street’s S&P500 Index delivered 8.3 percent and the MSCI World Index 4.4 percent.
However, consider, if you will my next graph which is the performance of my own most conservatively-managed pension fund which has grown at compound 17.7 percent a year over the same period. I have disclosed it to emphasise that this was no theoretical investment exercise. It is a real-life portfolio!
There is nothing particularly special about the portfolio. For most of its life it consisted of shares in Sasol, Mr Price, Growthpoint, Clicks and Coronation. In August 2017 I sold Growthpoint and Coronation and in September of that year sold Sasol and in November sold Mr Price while I bought Hyprop in August of that year, more in March 2018 and further quantities in October last year together with Sabvest and Mondi. Today the portfolio consists of 73 percent Hyprop, 16 percent Clicks, 6 percent Mondi and 1 percent Sabvest.
That compound growth rate of 17.7 annually is also not just a flash in the pan. In the next graph I show the performance graph of the portfolio since its inception in April 2002 when I first gained control of the portfolio from the old Argus South African Newspapers company and began managing it myself:
Furthermore, since I bought most of the Hyprop shares at the bottom of their current price cycle, I expect, in addition to enjoying a dividend yield of over 10 percent a year, to receive a considerable up-tick in the capital growth rate of the share as it returns in the medium term to the growth path that it established over the past 20 years. Relative to that trend I calculate that the share is currently over 40 percent cheaper than it should be.
And should you think that I was lucky in my choice of shares for the portfolio, my next graph traces the performance of ALL JSE shares that conform to a basic rule that they have not experienced a dividend reversal in the past decade. There are 38 of them, the best of which, Capitec, grew at 47.42 percent a year over the past five years, the second best, Clicks grew at 26.55 percent, the third best, Sabvest, grew at 22.25 percent, fourth best Naspers grew at 18.29 percent and the fifth best, Discovery, grew at 14.3 percent:
The average of all 38 listed companies on an unweighted basis was 14 percent compound throughout the past five years, nearly twice the growth rate achieved by South Africa’s best performing equity portfolio.
You will note that Hyprop, which now dominates the portfolio, is not one of the top-performers that I have listed. However, the authorities who govern pension fund managers in this country require that one adhere to what are known as prudential principles which broadly require that at least a third of funds be invested in sovereign bonds or property, which is why Hyprop has throughout this period been a major holding. That notwithstanding, it has been quite a good performer. The red trend line in the graph below shows that throughout the time I have held the shares they have delivered annual growth of 16.6 percent compound. However, fears about the impact of declining retail trade and, the high percentage of Hyprop’s exposure to rentals of Edgars Stores has recently dented the share price which is why it has fallen so severely and offered, in my opinion, an excellent buying opportunity.
Whenever I have written about my pension portfolio I receive a whole series of requests for me to take over the management of readers’ pensions which is not a service I perform. However, if you are not satisfied with the performance of your own pension fund, you have a legal right to transfer its management to whomsoever you desire. I manage mine within the ambit of a Johannesburg company named Multilect whose services allow me to manage my own fund. You can learn more about them at https://www.multilect.co.za/.
Choosing which shares to invest in could not be easier if you are a user of the latest ShareFinder 6 package from which I have extracted the following Quality List within which I have listed the top performers in descending order of their five-year compound annual average dividend growth rates; note the column on the extreme right. Those with the highest average dividend growth rates are inevitably over time the shares which also achieve the highest capital growth rates:
The ShareFinder 6 programme produces similar Quality Lists in respect of other leading world markets. In my next table I depict a selection from the ShareFinder 6 Quality List of New York Stock Exchange shares arranged in descending order of their 5-Year compound average dividend growth rate. You can see from the table in the list headed 10-Yr Gro that had you bought a portfolio of ten shares using this selection criterion you would have enjoyed a capital growth rate of 9.11 percent a year.
In the graph below I have also depicted New York Stock Exchange ShareFinder Blue Chip Index performance which, over the past decade grew by 14.6 percent compound, significantly outstripping the 11.56 percent a year achieved by the Melville Douglas SFL Global Equity Fund.
Long out of favour as an investment for the simple reason that it does not deliver either interest or dividends, gold bullion is starting to show up in the charts as analysts ramp up global recession fears.
Sparking fears of a new global recession, analysts have noted that US interest rates have again demonstrated an inverted yield curve; a phenomenon that has in four out of five observed cases led to an economic recession within five years, gold bullion prices have been on the rise again for the past three years as illustrated by the graph composite below.
Here, noting my previous story reporting that the best-performing South African unit trust over the past five years was the 7.98 percent a year achieved by the Aylett Prescient Equity Fund, it is interesting that the gold price when expressed in Rands, grew at compound 13.9 percent annually over the past 18 years and 6.8 percent compound over the past five years. Expressed in US Dollar terms over the past 19 years the yellow metal grew at compound 9.6 percent.
Many years ago a contact of mine told me that, having sold his business, he had sunk the entire proceeds into Kruger Rands. Whenever he needed an income top-up he simply sold a few which the Receiver of Revenue knew nothing about. Intrigued, because I thought he had made a huge mistake, I have consequently long kept an eye on the gold price to see if he was proved right…
Well I do not know exactly when he did the transaction, the graph below shows how Kruger Rands have performed over the past 20 years, delivering 13 percent compound (Red line) and 9.1 percent compound over the past ten years. In the graph below I have depicted the JSE Overall Index with the red trend line depicting compound annual average growth of 12.6 percent over the past 20 years and the yellow trend line depicting 12.8 percent compound over the past ten.
So, in the long term gold nearly matched the average JSE share though it achieved only 70 percent of the performance over the past ten years. Furthermore, one needs to recognise that holding gold coin does not offer you any dividends. So you can add at least 2.5 percent to the above share market returns which, to my relief, makes it clear that shares did best by a long haul.
Still, if you are not paying Capital Gains Tax!!
I cannot leave this comparison without looking up the performance of the ShareFinder–selected Blue Chips, that is of shares of JSE companies which, as a minimum criterion, experienced constantly-rising dividends over the past ten years and on average delivered 20.5 percent growth over both the past 20 years and the past decade.
Add in an average dividend of 2.5 percent and this category of shares delivered on average 23 percent. That is 153 percent better than Krugers over the past decade.
As always I rest my case with the Blue Chips.
The most common questions encountered at the many talks and societal engagements I attend are ‘is there hope for the economic future of South Africa?’ and ‘seriously, shouldn’t we just pack up and go now?’ or ‘are we winning the battle against corruption?’
My short answer to those who are anxious about our future is to dwell less on what is wrong and to open your eyes to what is really happening. The more we are able to determine and see the positive signs of sustainable change, the better we will be at generating positive impetus for growth and prosperity by those who choose to #Stay&Fix South Africa.
There is no denying that South Africa is suffering from the corruption upheaval of the Zuma era that pushed us into massive economic hardship and to the brink of collapse. Furthermore, corruption, incompetence and maladministration by many in positions of authority in national and local government still exist and are a significant challenge to our future prosperity. We have our work cut out for us in this department.
Sadly, however, human nature in stressful times tends to allow negativity to take hold. It clouds our ability to see the signs of positive change by new leadership committed to turning things around. We forget that change doesn’t happen overnight and that when turning a massive ship around towards a favourable destination, the extent of the change becomes evident when we look back to see the wake of our revival.
However, the extent of change is not always easy to gauge in the early days as the pace of change is never quick enough to satisfy our natural desire and hungry human nature for a big and fast-paced change, especially after a prolonged period of damaging leadership. And when that doesn’t happen it gives rise to growing frustration.
Throw in a few curve-balls such as Eskom load shedding and you get massive spikes of negativity to catalyse thoughts and group discussions of giving up and emigrating. This is where we are right now.
Consider for a moment where we stand today compared to 15 months ago when Jacob Zuma was still in power. The Zuma cabal was confident of winning at the ANC’s five-year elective conference in December 2017, yet they didn’t.
We need to understand that had Team Zuma won that battle, Tom Moyane would still be in charge at South African Revenue Service (SARS), Shaun Abrahams at the National Prosecuting Authority (NPA), Lynne Brown and the destructive forces would continue to plunder away at Eskom, along with a host of other connected cohorts wreaking havoc in many positions of authority. The last remaining “positive” ratings agency, Moody’s, would most likely have downgraded us to junk status and the international and local investment fallout would have been in full swing.
Well, that didn’t happen and very quickly we became upbeat as Cyril Ramaphosa took the reins of national leadership from Jacob Zuma. Our appetite for change and corrective action ran high and placed us in a state of mind that expected more to have happened by now.
We became blind to the complexity and enormity of the turnaround job that lay ahead and the massive “Zuma-era hangover”, with which CR and his new team have to contend, not to mention the internal ruling party factionalism and external election rallying. Throw into the mix constant rating agencies’ scrutiny and a society baying for more, and it is safe to say that Ramaphosa occupies the toughest job any South African president has faced.
Despite all these pressures, encouraging developments within the vital institutions that ensure national stability (which were systemically destabilised by Zuma and his cronies) are now adding to the momentum of change that we seek. Think about the recent revelations at the various commissions of inquiry, the introduction of new capacity within the NPA, at SARS and the Hawks and of the many (often not published) new proclamations resulting from the good work undertaken by the Special Investigations Unit (SIU).
Let’s not forget the significant Cabinet changes undertaken soon after Ramaphosa became president. Remember to the amendment he introduced to the terms of the State Capture Commission that allowed for evidence presented therein to be used in future charges.
Then there are the banks announcing the closure of business accounts of African Global Operations (formerly Bosasa), just as they did against the Gupta companies, adding another effective mechanism to tackling money laundering and corruption in South Africa. One cannot emphasise enough how important these decisions and developments have been in our journey of recovery.
While the recent arrest of Bosasa and past Correctional Services bosses and others has been music to our ears, people ask: “But why hasn’t the President had Zuma, Koko, Zwane, Motsoeneng, Seleke, Molefe and others arrested yet?” Well, for starters, the president may not command arrests. That process resides within the NPA and the Police, aided by the Asset Forfeiture Unit, SIU, Hawks and SARS. Encouragingly, these same institutions are currently being restored, fortified and de-Zumafied to enable the rule of law to start working again.
Let us also be mindful that some cases are just more complex than others. Some need more “ducks in a row” before the trigger is pulled, while others have the external pressures of political chess and factionalism that take longer to break down in order to achieve desired outcomes.
Some may believe that any positive view of the present dire situation could be a case of getting high on the mantra of head-in-the-clouds thinking, or being blinded by Ramaphoria or even being a government or political party lackey that seeks to sugar-coat and downplay the enormity of our problems. And society has a lot of them.
While driving a positive narrative does help to increase the energy in any system, effective civil intervention requires that we remain pragmatic and apolitical, giving credence to developments that generate momentum, consistency and sustainable positive change, while constructively criticising, challenging and seeking to amend government’s inefficiencies and ill-doing.
The focus is on Shamila Batohi and her beefed-up team to re-energise the rule of law – and in fact, this is already underway. Just as the water flows in a dry riverbed after good rains, it starts at first as a trickle. The challenge, however, is to ensure it doesn’t turn into a raging torrent that is out of control and doing more damage than good.
What we seek is a longer, controlled flow of energy that is contained, less destructive and more effective, as the authorities round up and charge the culprits that set our nation back by a decade or more.
As civil society, we must not relent in applying pressure for the government to fix our broken state entities and to introduce the competence and visionary leadership that is able to take tough decisions.
Neither must we decelerate civil society’s opposition to irrational and failed policies such as e-tolls, the dubious Xolobeni mining and N2 toll road decisions, or the forthcoming flawed Aarto process and other matters that questions Government’s legitimacy.
These issues, along with gross electricity tariff hikes, questionable taxation policies, bloated and inefficient government departments and failing municipalities, will keep civil activism dynamic and prevalent for years to come.
While I maintain that we should all commit to challenging that which is wrong, or at least support those organisations which do so, let’s also acknowledge significant positive developments when these are evident.
Without being blind to the stormy waters and uncomfortable swells that lie ahead, now is the time to promote a #Stay&Fix attitude that will ensure hands on deck to give us a better chance of survival and greater prosperity.
The cost of State Capture hovers at around R1.5-trillion over the second term of the Jacob Zuma administration. That’s just short of the R1.8-trillion Budget for 2019. Put differently: State Capture has wiped out a third of South Africa’s R4.9-trillion gross domestic product, or effectively annihilated four months of all labour and productivity of all South Africans, from hawkers selling sweets outside schools to boardroom jockeys.
Quantifying the cost of State Capture is a Gordian knot. There are some costs that hit hard and immediately, although their final impact can be mitigated, at least to some extent, over time. Other costs creep on to the balance sheets of, for example, state-owned entities (SOEs) such as Eskom or government departments, where they look as if they belong as “finder’s fees”, “consultancies” and “commissions”, but they don’t, as these are effectively kickbacks.
The price tag of a culture of imperviousness for politically connected players, and a flailing governance system, can be obscured. And the impact of reputational damage, broken trust and loss of opportunities is hard, if not impossible, to fully quantify, regardless of the cleverest modelling system.
But there are some readily available numbers in the public domain. And as US Senator Everett Dirkson, cautioning about out-of-control federal spending in his days, reportedly said: “A billion here, a billion there, pretty soon you’re talking real money.”
South Africa’s Budget lost R252.5-billion between 2007, when official data showed a R9.5-billion surplus in the national coffers (and expectations to have money in the kitty for the next three years), to today, when the 2019 Budget reflected a R246-billion hole that has to be plugged through borrowing and leaving less money for service delivery and governance.
Borrowing requirements shot up by some R67.1-billion in just four years from the R178.9-billion needed in 2015. For this reason, debt service costs are the biggest increasing Budget item: R202.2-billion in debt repayments in 2019, up from R147.7-billion debt service costs in 2016 — and escalating from an initial approximately R15-billion more from 2016 to 2017 to R20-billion more from 2018, according to the various Budget Reviews.
Economic growth plunged from 4.9% in 2006 to 2.3% in 2010, when Budget documents forecast an increase to 3.6% amid upbeat sentiment in the 2010 Budget Review that “the global storm has subsided and the South African economy is well on the path to recover[y]”.
But by 2014, economic growth had plunged to 1.5%, down from 2.2% just a year earlier, and fell further to 1.3% in 2015 on a consistent downward slide — ending at 0.7% in 2018. If the current modest 1.9% growth for 2019 does not materialise, serious questions must be asked as to whether the state of South Africa’s economy, and government’s ability to deliver on a better life, are just the delusions of a political elite in search for votes.
R506-billion was wiped off the value of South African bonds and listed companies, where pension funds are heavily invested, after the midnight end-of-March 2017 Cabinet reshuffle that saw Pravin Gordhan and Mcebisi Jonas booted from the finance ministry.
That Cabinet reshuffle was widely seen as a firm attempt by Zuma to secure ministers favourably disposed to the Guptas and their businesses. Then Finance Minister Malusi Gigaba never really shook off that Gupta tag, and two of the three international ratings agencies reacted bluntly: South Africa was downgraded to junk status by Fitch and Standard & Poor’s in April 2017, both citing institutional and political uncertainty in the wake of the Cabinet reshuffle, policy uncertainty, and possible changes of direction with regard to nuclear power and SOEs.
Gordhan, now Public Enterprises Minister, in November 2018 testified before the Zondo State Capture Commission about the cost of this reshuffle: “The devastating impact of this unexpected announcement on the South African economy is estimated to be approximately R500-billion… Over two days the market value of the country’s 17 biggest financial and property shares fell by R290-billion. The figure excludes the remainder of the equities market that also was hit by the decision. South African bonds lost 12% of their capital value (R216-billion).”
R378-billion had been wiped out on the Johannesburg Stock Exchange (JSE) and some 148,000 jobs — in what is known as South Africa’s 9/12, the evening Nhlanhla Nene was dismissed as Finance Minister in December 2015, in particular over his opposition to the R1-trillion nuclear deal that the Zuma administration was pushing.
Finance Director-General Dondo Mogajane, in a note to his testimony before the Zondo commission, clearly states debt service costs in the 2016 Budget were R5-billion higher than initially planned because of the impact of Nenegate, that pushed up South Africa’s borrowing costs by one percentage point.
The costs of State Capture also arise in the drop of foreign direct investment (FDI). In 2017 FDI stood at $1.3-billion (about R18-billion), down from $4.5-billion (about R63-billion) in 2012, according to the United Nations Conference on Trade and Development (Unctad) 2018 World Investment Report. And the report directly links politics and economics: “FDI to South Africa declined by 41% to $1.3-billion, as the country was beset by an underperforming commodity sector and political uncertainty.”
Add into the mix R200-billion overspent on Medupi and Kusile, according to a Public Enterprises briefing to MPs in February. Shoddy workmanship first discovered there in March 2013 — 9,000 welding faults in boilers, according to Business Day at the time — continues to this day in the deal forged in political connectivity that profited the ANC investment company Chancellor House to the tune of at least R50-million.
It recently emerged that the Special Investigating Unit (SIU) is investigating theft and corruption of R139-billion at those two power stations, as Fin24 reports, part of its probe into misappropriations at Eskom amounting to R170-billion.
And then there is the R419-billion Eskom debt that makes the power utility the most significant risk to the South African economy. The debt has been incurred against government guarantees of R350-billion, and if Eskom defaults it sets in motion a complex cross-default call-in of debt that would cut across SOEs and also affect SAA, which has government guarantees of R19.1-billion.
Eskom’s debt ballooned from R40.5-billion in 2007 to R254.8-billion in 2014, and R419-billion today amid consistently above-inflation tariff hikes, effectively 170% over the past decade, in events that the 2018 parliamentary Eskom State Capture inquiry linked to various procurement deals and appointments of executives and board members.
State Capture costs must include the roughly R90-billion drop in collected tax revenue between 2015 and 2018 — a R48.2-billion shortfall in 2018, R30.4-billion in 2017 and R11.6-billion in Budget 2016. It’s directly linked to the South African Revenue Service (SARS) unravelling in politically motivated State Capture machinations under ex-head Tom Moyane, a close Zuma ally from exile days in Mozambique. Officials do not deny taxpayer morality declined and more sought (legal) ways not to pay their dues, as is borne out in tax collection rates.
In May 2018 MPs in Parliament’s finance committee were bluntly told by the Tobacco Institute of South Africa (Tisa) that due to State Capture at SARS, South Africa lost R5-billion in custom and excise taxes during 2017 alone, or R27-billion since 2014.
Like the capture of SARS has had a direct impact on monies, but also institutional capacity, State Capture through the appointment of politically pliant officials has affected the prosecution service, the SAPS and the Hawks. Aside from internecine internal battles, the costs of State Capture mean actions that should have happened, didn’t. Or as South African Reserve Bank (SARB) Deputy Governor Kuben Pillay told MPs on the parliamentary finance committee as far back as August 2017, it was unclear what had happened to the 41 suspicious cases the SARB had referred for criminal investigation by the law enforcement agencies in the previous five years.
This is part of what could be called soft State Capture, where the impact is not so much measurable in Rands and cents, but rather the impunity put on a show by politicians and the politically connected.
And so, former SAA board chairperson and executive director of the JG Zuma Foundation, Dudu Myeni, went head-to-head with at least two finance ministers in late 2015 over SAA aircraft deals that would have seen the cost of new aircraft balloon due to R603-million pre-payments to a middleman.
Earlier in 2015 Myeni had called then Eskom board chairperson Zola Tsotsi to a meeting at then president Jacob Zuma’s official Durban residence to discuss the power utility. Or, as Tsotsi told MPs in the parliamentary State Capture inquiry: “Ms Myeni then proceeded to outline the purpose of the meeting, namely, that the situation of Eskom’s financial stress and poor technical performance warrants that an inquiry into the company be instituted. She further elaborated that, in the course of the said inquiry, three executives, namely acting chief executive Tshediso Matona, group executive for group capital Dan Marokane and group executive for commercial Matshela Koko, are to be suspended…”
Although MPs wanted to hear from Myeni, she claimed illness when invited in February 2018, and subsequently flouted a subpoena from Parliament to appear before the Eskom State Capture inquiry. The final report was adopted by the National Assembly in early December 2018, and is now, with supporting documents, witness statements and other documentation, with the Zondo Commission.
But a culture of untouchability runs through government. In the reports Auditor-General Kimi Makwetu released in 2018, only 33 of South Africa’s 257 councils had a clean bill of health, while at the national and provincial level, only 28% of departments had “no findings on compliance with legislation”. For many consecutive years, Makwetu and his predecessor Terence Nombembe had the same refrain: Lack of compliance with prescripts and the law, lack of political will and lack of consequences for wrongdoing.
And so 14 councils invested R1.5-billion of monies they received for service delivery and other projects in VBS Mutual Bank in contravention of the law, the Municipal Finance Management Act (MFMA), and against a caution by National Treasury not to invest. And while, for example, Vhembe district ANC mayor Florence Radzilani resigned, insisting she had done nothing wrong, earlier news reports said she had complained about getting only R300,000 for Christmas from VBS. All these 14 councils are on the list of 87 dysfunctional councils identified in May 2018 by Co-operative Governance Minister Zweli Mkhize.
Water and Sanitation, which received a qualified audit in 2017 and clocked up R6-billion in irregular expenditure, paid invoices for engineering and project management hours that would have meant the consultant was working 24:7 at a rate well above what is stipulated by Public Services and Administration, Parliament’s watchdog on public spending.
That emerged in a series of meetings in 2018 by the Standing Committee on Public Accounts (Scopa), which also heard there is still no access to safe drinking water for all villagers under the Giyani water project, despite costs ballooning to R2.2-billion in 2017, from R1.3-billion just a year earlier.
On Wednesday Parliament’s environmental affairs committee in a statement welcomed that the project’s trenches had now finally been closed — after the death of six-year-old Nsuku Baloyi, who fell into one such uncovered trench of this Giyani water project in January 2019.
Meanwhile, in the Eastern Cape, investigations are underway into why a contractor was paid R4.8-million to replace nine pit toilets, when that was meant for 12 toilets and the renovation of several classrooms, according to City Press.
There are straightforward State Capture costs that have been in the public domain for at least three years, confirmed in the #GuptaLeaks. This includes the R1-billion Eskom paid to international consultants McKinsey, the R659-million coal prepayment for Gupta-owned Tegeta in April 2016 that effectively facilitated its acquisition of the Optimum coal mine, and the R5.3-billion finder’s fee to a Gupta-linked company as part of the 1,064 new locomotive deal by Transnet.
McKinsey repaid the R1-billion some eight months after London-based McKinsey senior partner David Fine told the parliamentary Eskom State Capture inquiry in mid-November 2017 that the consultancy “did not want any tainted money. Our understanding is we went into a relationship with Eskom in good faith… They gave us verbal commitment they had National Treasury approval”.
Civil proceedings have been underway since January 2019 to recover at least R1.3-billion from former executives, according to Transnet board chairperson Popo Molefe, as Fin24 quotes him saying: “One would not be exaggerating to say what we found there (at Transnet) was a horror show.”
Molefe is part of the crop of new board members and executives appointed to troubled SOEs since early 2018. At Eskom, this meant that scrutiny of the books uncovered further irregular spending; it rose to R19.6-billion in 2018 from R3-billion just a year earlier. And while irregular expenditure does not necessarily mean corruption, or losses, it does mean procurement and other processes were not properly followed and requires each instance be investigated, according to the Public Finance Management Act.
To date, it’s unclear whether, or what, steps are being taken to recoup the R659-million spent on the Tegeta deal that was described in the parliamentary Eskom State Capture inquiry report as part of a series of “questionable” decisions taken by a new board appointed under then public enterprises minister Lynne Browne.
“The Board oversaw some questionable procurement decisions, including the resolution taken on 9 December 2015 regarding an unprecedented prepayment to Tegeta ahead of its acquisition of (Optimum)…”
The Stellenbosch-based Bureau of Economic Research (BER) in October 2018 calculated that South Africa’s GDP could have been anything between 10% and 30% higher, and between 500,000 to 2.5-million more jobs could have been created by 2017, according to the Financial Mail. And between R500-billion to R1-trillion more tax revenue could have been collected over 2010 to 2017. Or as BER economist Harri Kemp is quoted: “If domestic post-crisis growth had matched that of SA’s peers, citizens and the government would have been in a much better position than is now the case.”
State Capture has extracted an enormous price directly and indirectly on South Africans, most harshly on the poorest and most vulnerable, who cannot opt for private housing, private health insurance, private education and private security.
Here’s how the cost of State Capture adds up to R1,5-trillion over the past four years or so:
There are other costs arising from a plummeting economic growth rate, down to 0,7% in 2018 from 2,3% in 2010 and 2,2% in 2013 negatively impacting job creation and tax collection. And costs arise also from a culture of impunity within the government that allows service delivery project costs to balloon without completion while 4 councils invest R1,5-billion against the law in VBS Mutual Bank, instead of service delivery projects.
These calculations on the State Capture price tag don’t even touch on the untold costs of loss of trust, reputation and opportunity
You have some money. Do you pay down the mortgage, or do you invest in the stock market?
You can use math to make this decision, but math is not much help, because there is uncertainty.
There is a third consideration. How much do you keep in cash? How much liquidity do you need? Most personal finance people like to say this is an easy decision. But it’s not an easy decision. There is a lot of nuance.
The answer is likely to be a balance of the three possibilities, based on qualitative factors such as your opinion on the direction of stocks, interest rates, and real estate. And if your opinion is right, you will probably be right by accident.
There are no easy answers. There is no silver bullet. The point is to avoid getting too wound up about it. There are consequences to being really wrong, but there are no consequences to being a little bit wrong.
We are faced with hundreds of economic decisions like these throughout our lifetime. Some people are pretty good at making them. Some people are pretty bad at making them.
This is where education comes in. If you’ve been taught a little bit of personal finance, at least you can make these decisions from the right framework. Of course, some people will still make bad decisions, and we are powerless to stop them.
My point here—don’t spend too much time thinking about optimization. Spend any time on the personal finance blogs and this is where people get bogged down.
Stick to principles.
Debt is dangerous, and debt retards growth. Debt can also take you to zero, and make you bankrupt. It can screw up your life. Sometimes it is necessary, but you must have a healthy respect for it.
We talk about debt all the time.
You really shouldn’t go into debt unless you have a plan on how to pay it off—a good plan. Still paying off your student loans in your late 40s is not a good plan.
If you are going to borrow a substantial amount of money, you should have a plan on how to pay it off in 3-5 years. Maybe 10 years in the case of a mortgage.
You should also recognize that the more free cash flow is going to debt, the less free cash flow is going to equity. Most people never experience what it is like when the debt is gone and all the free cash flow is going to equity, and your net worth goes up fast.
There are a lot of people out there with a negative net worth. Including people who have a pretty good standard of living.
By the way, the median net worth in the US for people under 35 is around $11,000. The mean net worth for that age group is around $76,000.
One of the funnier things about the Google monster is when you type someone’s name into the search box and it suggests “net worth” underneath. We like to find out how rich people are.
Interestingly, people don’t spend a lot of effort trying to make their own net worth go up. An easy way is to pay down debt.
I get sick of these personal finance jerks telling people to stop drinking Starbucks all the time. I get it—if you spend 5 bucks a day on Starbucks, it’s over $1,000 a year, and $1,000 a year compounded at 8 percent adds up to something.
Starbucks is still in business, so clearly not that many people pay attention to this. FWIW, I stop at Dunkin’ Donuts every morning and get an iced coffee. Even in the dead of winter. It costs me $2.86.
I have a different philosophy on this stuff. All the other personal finance people will tell you to stop drinking Starbucks coffee, because they believe it is the accumulation of small decisions that gets you to save.
I disagree. I think it is one or two big decisions that make a difference. Skipping the coffee doesn’t do any good if you then buy a Lexus SUV.
“Penny wise and pound foolish” is a really old and corny saying, but I see a lot of people get stuck on this.
If you get a $400,000 house instead of a $300,000 house, quitting Starbucks for a lifetime wouldn’t make up the difference.
You have to get the big decisions right: going to college, buying a car, buying a house. If you get those wrong, it’s going to be difficult to recover.
I spend pretty much all of my waking hours thinking about risk. My entire life has been a study in risk: as a deck watch officer, a law enforcement officer, a trader, and then a guy who thinks about risk all the time, whatever you call that. I know how much risk I can handle. I probably know how much risk you can handle better than you do.
I also understand that different people have different risk tolerances. Some poker players are weak-tight (they play fewer hands, cautiously). Some will go all-in on every hand. Is there a one-size-fits-all solution for risk? Actually, for the most part, there is.
We can measure this empirically. We spend an inordinate amount of time thinking about returns and not a lot of brainpower thinking about what those returns cost in terms of volatility. Another thing to teach in the personal finance classes.
TLDR: People have too many stocks and not enough bonds.
And people are looking in the wrong places for the right balance. There aren’t many things I’m bullish on right now, but what I am bullish on is not being talked about all that much.
I am doing my best at being a personal finance guru, but the collar is a little tight. I am allergic to spreadsheets—I suspect most people are. If you are working on some personal finance problem, and you can’t do the math in your head, then it probably isn’t worth doing.
You have to get three big things right. If you don’t succeed at this, it won’t be because you didn’t carry the 1.
These principles I laid out: avoiding debt, saving, and managing risk, are all character issues—who you are as a person.
That’s why personal finance is a mission of mine.
Yes, some people get themselves in financial trouble because they are unsophisticated and uninformed. So the goal here is to make people sophisticated and informed. But that’s just part of the solution.
It’s not simply about tips and tricks. It’s about being a better person—the best version of ourselves.
How much money will you need to retire, and how much will you have? Answering those questions is one reason a good financial advisor is worth every penny you pay them. But let’s talk about some generalities.
Say you want to stop working at 65. You’re in good health and your family tends toward long lives. You expect to reach 90, having been retired for 25 years. Will Social Security alone be enough?
If you spent most of your life paying as much as legally possible into the system, and you retire in 2019 at age 65, your monthly benefit will be $2,757, which is then indexed for inflation (at least under current law). It jumps to $3,770 if you delay retirement until age 70.
Since I am not yet 70 for another eight months, I really haven’t paid much attention to what I will get when I start my Social Security. I assumed like the charts that I’ve seen below that it would be a couple of thousand a month. I was surprised to learn I may get significantly more. Considering how much I’ve contributed over 50+ working years, it’s probably not that great a return. Yet most people get less. Here’s the distribution.
A solid majority of Social Security recipients receive $2,000 a month or less, and many less than $1,000. The average benefit is $1,413, according to Social Security’s latest fact sheet. If that’s all you have, your retirement lifestyle is not going to include many cruises and golf tournaments.
Of course, it shouldn’t be all you have. Social Security was never supposed to be a complete multi-decade retirement plan. It was designed to keep retired workers out of poverty at a time when lower life expectancies kept retirement much shorter for most—if they lived to 65 at all. Now we live longer, and we have higher expectations, which political leaders have done little to dampen. Often they’ve done the opposite.
Bottom line: Social Security probably won’t give you much security. You need more.
Ideally, people should avoid relying on Social Security and accumulate other savings as well. Many, perhaps most, do not. The reasons vary. I suppose some just spend their money unwisely and neglect to save anything. But income data says many Americans can’t afford to both live a typical middle-class lifestyle and save enough to finance a 20+ year retirement. Here’s a Doug Short chart to illustrate.
Source: Advisor Perspectives
In constant dollars and adjusting for hours worked, average weekly earnings for non-managers are now $779, and that’s an almost 40-year high. Millions of those now approaching retirement age spent their entire lives earning the equivalent of $40,000 a year, at most. Little surprise they don’t have six-figure retirement savings. The simple fact of the matter is, it takes enormous discipline to save even 6% for your 401(k) at that income level.
In a country of 330+ million people, shockingly few have enough retirement savings to support the stereotypical leisurely golden years. Dennis Gartman shared some disturbing numbers last week.
Firstly, we note that there were 133,800 “millionaires” late last year with sums of more than $1 million in their retirement accounts, which on its face, sounds like a large number. But that is down from 187,400 at the end of third quarter of last year, according to Fidelity Investments. According to the Federal Retirement Thrift Investment Board, which oversees TSPs, as of the end of last year, there were 21,432 “millionaires” compared to 34,128 at the end of September in those TSP accounts. The 4th quarter of last year was a disaster to those solely involved with equity investments; it was merely “horrible” for those with a more balanced investment portfolio.
But these are not really our focus this morning; our focus is that the average balance in 401(k)s, 403(b)s, or IRAs fell to $95,600 at the end of last year from $104,300 at the end of the 3rd quarter for 401(k)s, to $78,700 from $85,100 for 403(b)s and to $98,400 from $106,300 for IRA balances. It was not the drops in value that caught our attention; it is the fact that the averages are only at or near $100,000, forcing us to wonder what sort of retirement can the average retiree look forward to with this minimal sum of money set aside? Is that all there is? Really? Is that really all there is? If so, we are in very real trouble.
The average IRA balance is not necessarily indicative of retirement savings generally, as many other vehicles exist, but it’s probably a good proxy. And an average of around $100,000 won’t yield much of a supplement to the monthly Social Security benefits described above.
I found this chart on CNBC, which also refers to the study Dennis quoted:
Many of our parents and grandparents had defined benefit plans and other guaranteed retirement benefits from the corporations they worked for. Those are increasingly an endangered species in the private sector while 401(k)s, IRAs, and Social Security aren’t giving the average person enough to retire on anything close to a comfortable lifestyle.
Average household savings for the bottom 40% are under $30,000. Median household savings for the bottom 40% are zero dollars. Clearly the top percentiles and especially the top 1%, skew the average. Note the bottom lines in the chart below is not the top 20%, but the top 1%. And the top 1/10 of 1%? Don’t make me giggle.
The point is that the 80% of households have less than $100,000 in savings. That is not enough for even a minimal retirement. Let’s make the very aggressive assumption that you can take 5% a year from your savings plan. If you have $100,000, that’s $5,000 yearly or about $417 a month—on top of your Social Security. And if you don’t have your house paid off? Or car?
Nearly every article I read on this topic talks about the fourth quarter’s losses, but something else leapt out at me.
Back-of-the-napkin math (and a rough napkin at that) says these retirement accounts are at least 50% invested in equity index funds. Some of you are now asking, “What’s the problem? All those index funds have come back. Everybody is back to where they started.”
Not so fast, Jack. As I have said until readers are probably tired of it, bear markets (which the last little bump in December barely qualifies for) that are not accompanied by a recession have V shaped recoveries. Which is exactly what we got.
Bear markets that are accompanied by recession take a very long time to recover and will likely be in the 40 to 50% loss range. A 50% loss requires a 100% gain to breakeven. That took about five years from the bottom of the last bear market.
Now, let’s look at the chart from the S&P 500 for the last 10 years courtesy of Macrotrends. Note that the S&P is up well over 3.5x (give or take) in the last 10 years. But the 401(k)s and IRAs did not even double. Some of that is due to investors getting out at the bottom and back in later. Some is maybe due to high bond allocations in 2009 (bond funds had done very well, and we know people chase returns). But nonetheless, retirement funds have not performed as well as you might expect.
Further, when that next recession and bear market hit, it will take even longer to bounce back. The recovery will be even slower than this last one. As the research I’ve
Millions don’t, which means they have an even harder challenge.shared in previous letters shows, large amounts of debt slows recoveries. Very large amounts create flat economies. We are approaching large amounts in the US.
(Think what that large debt and recession did to Japan. In any event, the next recession will shortly cause a $30 trillion debt for the US government, soon to be followed by $40 trillion. Will that much debt turn us Japanese? That’s not entirely clear, since we have the world’s reserve currency and a unique role in global commerce and finance, but I think the recovery will be much slower, at a minimum. A double dip recession is clearly possible, making those stock market index fund losses even worse.
You must have some kind of strategy for dealing with market volatility. I don’t know how many times I can say that. But that’s the case only if you have savings to lose.
I speak at a variety of investment events every year. Some are for high net worth investors, but others draw a broader crowd. Lack of retirement savings, both their own accounts and those of their neighbours and the rest of the country, is by far the most common worry I hear at those events. Sometimes it verges on panic, even among people who spent decades earning good incomes and saving all they could.
The Baby Boom generation that is now reaching retirement age has a double problem. First, many of its members didn’t save enough cash to support a comfortable retirement. Second, those many who did save enough could see it evaporate when we get into another bear market, which we certainly will at some point.
What can you do? Some suggestions.
First, whatever your age, save as much as you can. Stash it in your IRA, 401k, defined benefit plan, or whatever other tax-advantaged vehicles are available to you. Then save more outside them. If you look at your income and expenses and think “I just can’t do this,” think again. Start saving something, even if it’s $20 or $50 a month. Get in the habit and it will become easier.
(A personal note: If you have a small business, you should at a minimum have 401(k)s and business employment retirement plans. If you’re making a relatively good income, you should think about getting your own defined benefit plan. DB plans are not just for monster corporations. They can work extremely well for small, very closely held businesses. You can put away over $2 million of total contribution over your lifetime. If you start your plan and your age is 60, those can be some hefty annual contributions. Just another reason a good financial advisor can be useful.)
Second, invest in programs that give you at least a chance to dodge bear markets. Buy and hold works in theory, but not for most people because we are humans with emotions. We should recognize that and take steps to control it. As I continually say, we should invest in trading strategies and not buy-and-hold index funds in this environment. And of course, fixed income strategies like actual bonds, real estate, private credit, and so on.
Third, forget about retiring at 65 unless you are in truly dismal health (in which case, financing a long retirement is probably not your top worry). Keep working a few more years, even if you have to find a new career that better fits your circumstances. This will let your capital accumulate longer and you’ll get a higher Social Security benefit by waiting until 70 to start collecting.
Fourth, take care of your health. It will both reduce your medical expenses and keep you in shape so you can work and produce income longer. Further, staying physically active will keep you healthier. If that physical activity is involved in a job, that counts. There are studies that actually associate retirement with lower life and health spans. But gym time and a healthy diet are still important.
I’m personally doing all of the above, and I’m still concerned it won’t be enough. Laugh if you want to, but that concern for me is real. Relaxing is not in my personal makeup. I know a lot of people like me. I can only imagine the panic of those less fortunate and prepared. Their problems are yours and mine, too, because an economy with so many low-income elderly people has less opportunity for everyone.
While I think socialist and progressive policies are terrifying, they are spot-on when talking about wage and income disparity. Corporate profits are at their highest level ever percentage wise, yet labour is back to Great Depression levels. That is not healthy for our society. I am not going to start singing 1930s union songs, but this is a problem we must address. It is only going to get worse and the longer we wait, the more expensive the solution is going to be. Those of us with a libertarian bent may just have to suck it up and become part of the solution.