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3 Checks to Protect Your Portfolio as Airlines Crash and Burn…

by , 07 May 2020
3 Checks to Protect Your Portfolio as Airlines Crash and Burn…
It was quite a week for airline stocks.

It started with the announcement from Warren Buffett that Berkshire Hathaway had sold stakes in four major US airlines: United, Delta, Southwest and American Airlines.

This is an exceptionally uncharacteristic move from the legendary value investor.

Firstly, Buffett is all about “buy and hold”. He rarely sells investments unless, the prospect of holding the assets has become so bleak, they need to be dumped.

Secondly, Warren Buffett very seldom sells assets at a loss. Berkshire lost around $2 billion on the sales after buying roughly 10% of each airline in 2016.

The rationale for the sale: Airlines are all grounded, fixed costs remain high. The swift economic recovery the market seems to be pricing in will not arrive for the airline industry.

South African airlines didn’t fare any better
I’m not even going to touch on the unadulterated mess called SAA. 
This thing should have been shut down years ago. And the fact, the government is planning SAA 2.0 at a time when many South Africans are falling below the breadline should be deemed a crime against humanity. 
Instead, let’s focus on companies South African investors, can actually access. 
Oh wait. That list just became shorter. 
Comair, a stalwart of the JSE and operator of Kulula and British Airways in South Africa, filed for business rescue on Tuesday. 
Again, you might think:
“What is so surprising about that? Just another JSE company hitting the wall. We always knew the economic fallout from Coronavirus was going to be bad. We are expecting a couple of businesses to go belly up. And the airline industry is not exactly stable…”
Yes, that’s true. 
But Comair was stable. 
The company began flying on the 15th of June 1946 using a Fairchild F-24 Argus. It then proceeded to deliver 74 years of uninterrupted profits. 
74 profitable years!
That’s one of the key characteristic’s shareholders should be looking for when ferreting out “good” companies. And yet, that sort of track record would not have saved you had you bought Comair shares. 
Instead, you would have seen your investment value collapse as the share price tanked all the way to R1, where it was this week, finally suspended by the exchange. 
So much for the old’ buy-and-hold philosophy.
Three simple checks to avoid getting carried out by crappy investment picks
The two examples above, one local and one international, highlight just how difficult a bear market can be for investors. Top quality companies are going bang, while even expert investors, including hall-of-famers like Warren Buffett, are making serious miscalculations. 
So how do you protect yourself?
Check #1: Are you diversified enough?
There is an entrepreneurial mantra that says: Concentrate to create; Diversify to protect.
Of course, the level of diversification you require depends very much on what you’re trying to achieve. There are also many ways of diversifying your investments. Some are good some are bad. 
For example, 98% of our clients have some form of offshore exposure. As the rand collapsed to R19/$, our clients breathed easy knowing that no matter what happens in SA they have a nest egg outside the net. 
If inflation goes hyper, and your new 82-inch TV costs one million rand, well you’ll have your funds securely diversified across multiple territories. So, you’ll likely be thinking about your TV in USD, GBP or AUD and will be happy to shell out the million ZAR required because your investment balance has exploded in rand terms. 
Check #2: Do you understand which underlying assets are creating value in your portfolio?
This check leads on from the last one.
One of the big rookie mistakes which often crops up in consultations, is when a client has attempted to decrease risk by diversifying across mutual funds or unit trusts.
Once we drill into the underlying holdings, there is significant duplication in the underlying assets. 
This is specifically true of the South Africa unit trust industry. Each fund manager usually has their own special mix of large companies in their basket. 
One might prefer slightly more Naspers than the other, and one might include Standard Bank while another includes FirstRand, but there is often significant duplication. 
The marketing and product branding makes these investment options look very unique, but maths and correlation show us that you’re actually buying the same thing. All you’re doing is hiking up your investment costs by paying high active management fees while essentially creating yourself a local market tracker. 
It’s likely this problem will become even more pronounced as more and more companies either go bust or are delisted by private equity firms. As listed investment options on the local market become slimmer, the value proposition by local asset managers becomes poorer.
Check #3: Are you buying quality assets?
Finally, let’s look at the concept of “concentrate to create”. Buffett once said: Diversification is protection against ignorance.
Now, it’s easy to argue, especially in the face of Buffett’s recent airline investment faux pas, that there will always be an element of ignorance in any investment process which relies on future performance. 
But there can be no question some companies are just all round better positioned, better capitalised and have better products and prospects than competitors. They will make for better bets on riding out the turmoil.
Since the coronavirus outbreak these gains from global financial markets have been pouring in...51.57%... 323.00%... 15.80%... 44.10%...114.29% most in a matter of days!
The question is how to identify them?
For us, we follow a tried and tested investment process.
For example, in our managed portfolios we currently hold (and have held for many years) a single “airline” counter. Its name is Lockheed Martin. It’s listed in New York. The ticker is LMT. Instead of flying passenger aircraft it creates products like F-16 Fighter Falcon jets, Apache helicopters and high-tech satellites. The share price has doubled over the last five years. Year-to-date performance positive. This following the worst financial crash since the great depression.
How did we know to add this share to our portfolio?
I could try and take you through 20 years of investment experience, but that would be missing the point.
The lesson here, is use a professional investment advisor. If they’re good, a 1% annual fee is an absolute bargain. It’s probably the smartest money you’ll ever spend.
These days everyone seems to think cheaper is better when it comes to investment. Every mainstream media channel pumps out adverts about how saving 1% compounding over time amounts to a fortune.
My view: Take that rubbish with a pinch of salt.
Who do you think is funding that advertising?
It’s the low-cost platform highlighting their Unique Selling Proposition (USP). And, let me tell you, from the perspective of the person required to pick up the broken pieces of too many self-directed DIY client investment portfolios, after they’re 60% down, following poor decision after poor decision on these low-cost platforms. It’s heart-breaking.
It should be obvious, a 60% collapse in your capital is a lot harder to come back from than a 1% annual management fee on a profitable portfolio.
If you’re getting serious about investment, either offshore or local, you should consider chatting to one of our wealth managers. And, if you’re looking to invest with me directly, you can send an email to support@randswiss.com. I run direct offshore managed share portfolios for clients. And I’ll be happy to send you my full and transparent performance track-record.
Gary Booysen,
Rand Swiss, Wealth Manager

3 Checks to Protect Your Portfolio as Airlines Crash and Burn…
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