Time to be greedy?

Time to be greedy?

“We simply attempt to be fearful when others are greedy and to be
greedy only when others are fearful.” – Warren Buffet.

As an investor you can hardly beat the market if you’re always on the bandwagon of popular thinking. You’ll tend to be greedy when prices are already high – and most investors are greedy, even your hairdresser. But you’ll also tend to be fearful, along with everyone else, now that the JSE All Share Index (JSE ALSI) has declined by 15% since January this year. We’re seeing investors getting restless with the low returns and pulling out of the stock market to invest in fixed deposits.

History shows, however, that it’s dangerous to follow the herd. For example, when the Rand was trading at R13 to the US dollar, some investors converted their foreign shares back to Rands – thereby losing out on the bull market in the US and the weakening rand while investing in a declining JSE, a triple whammy. This is what herd thinking makes you do.

I’m fortunate to be able to work with contrarian thinkers like Alwyn van der Merwe, Director of Investments at Sanlam Private Wealth (SPW). In 2007, when commodity prices and shares had been rallying for years (it’s hard to believe platinum was trading at US$2 200), Alwyn recommended going underweight in commodities and overweight in bank shares, which were relatively cheap at the time. It took only a few months for him to be proven correct. Banking shares fared much better than commodities in the 2008 financial meltdown, and for years thereafter.

The excellent performance of the SPW portfolios, which include the Sanlam iTrade iManaged portfolios, speaks for itself. Our iManaged General Equity portfolio regularly returns double the return of the JSE ALSI. See iManaged at www.sanlamitrade.co.za.

Where do we currently stand? 

After an excellent bull run to 2014/15, the JSE ALSI essentially moved sideways for four years.


Bull markets eventually arrive for patient investors. However, many investors left the market in 2003, just before one of the strongest bull runs in the JSE’s history that lasted.


The JSE ALSI price-earnings (P/E) ratio of 15.5 is not very cheap, but if you strip out Naspers, which has a big weighting in the index, it is quite palatable.


What is the expected return now?

The consensus among analysts of the earnings per share (EPS) of the JSE ALSI in three years’ time is R55.43. The matrix below shows different compound annual growth rates (CAGR), depending on your own analysis of EPS and different exit P/E ratios. If the consensus is correct and we estimate an exit P/E ratio of between 14 and 16 in three years’ time, the JSE ALSI will grow at between 18% and 22% per year over the next three years. This is considerably higher than a few months ago, before the JSE ALSI declined so sharply.



The 15% correction on the JSE provides a cheaper entry point for the long-term investor. In our view, share prices have already discounted all the negative news. Potential returns over the next three years look attractive. A last quote from Warren Buffet: ‘No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.’

Gerhard Lampen
Head: Sanlam iTrade

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