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A simple strategy to beat fund managers at their own game

by , 22 September 2017
A simple strategy to beat fund managers at their own game
Right now, there are just north of 400 shares on the JSE.

Of these shares, investment funds only invest in the top 40, and perhaps the top 100… Only 161 shares are on the JSE All-Share index…

If you invest in a fund you're most likely investing in the JSE's Top 40 Index. Unit trusts simply don't deviate from the index too far, because that's the only way they can match the index performance for their performance fees.

So, simply put, you need to beat the performance of the Top 40 Index, and then you'll beat the majority of fund managers by far!

But how do you do that?

Well, I've got a simple strategy that can help you do so…

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I managed to outperform the JSE All-Share and every fund manager by more than double over the past six years.
 
And I can proudly say that, without a shadow of a doubt, the Room 305 strategy has been the biggest influence on my career – and still is to this day.
 
 
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How to build an index beating portfolio right now

I call it the Core and Satellite strategy.
 
Basically, it means you build the bulk (or CORE) of your portfolio on a solid, dependable investment that'll give you 'dead average' returns.
 
Then, you use the remainder of your portfolio to invest in high growth, high risk shares to beat the average growth.
 
So how would you go about doing this?
 
Well, in the first place to get the index performance you’ll use an ETF, I’ll explain that in a moment.
 
Secondly, I invest in small cap and penny shares.
 
These shares make out more than 70% of all the shares on the JSE and outperform the rest of the market by far. But fund managers simply can’t invest in them because they are so small.
 
In fact, a R10,000 investment in the Red-Hot Penny Shares portfolio when we started out in 2002 would net you R272,198 today. Now imagine you put in R200,000 back then. You’d be sitting on R5,443,960!
 
So how would you go about doing this?
 
Well, let's say you have a portfolio worth R100,000. Normally you'd have invested in between 5 and 15 penny shares with that money right?
 
Well, now you make one change.
 
You take half of it, R50,000, and invest that in a market tracking exchange traded fund (ETF).
 
There are loads of ETFs you can pick. Just check the ETFSA.co.za website.
 
You can pick ETFs like the Ashburton Top 40 (same as Satrix 40, just lower costs), Satrix Rafi or the Proptrax Ten.
 
The reason you use an ETF is that it then guarantees you average market performance, which has been around 10-17% in the last two decades. It'll give your portfolio a ‘safe' edge, but it will still give you decent returns.
 
After you put half your cash into the ETF you have the other half remaining now. That's what you use to invest in penny shares or high performance stock picks of your own. If that's R50,000 I'd say you should look at investing in 5-8 penny shares with that.
 
This strategy will see your returns smooth out much more, with less volatility from the small caps, and higher performance than an ETF alone would give you.
 
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If you’re not prepared to lose, then sports-betting
isn’t for you
 
One of my subscribers actually sent in an email to me at The Winning Streak saying:
 
“This is not for the faint hearted, but if you want to make fast money, doing very little ‘work’, there simply is no better way than The Winning Streak.”
 
And I couldn’t agree more.
 
 
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Another BIG benefit this investment technique has for you today…

 
As you know, costs make out a big portion of your spend as an investor. Buying and selling 10 shares (with R100,000) would cost you around R2,500 in a year.
 
But using this technique you'll also save some money.
 
Firstly, you'll be buying less shares. Let's say half, meaning your costs on those will only be R1,250 for the year. Then, you'll still pay the brokerage on the ETF portion, but to buy your costs should be around R400, and portion of the portfolio is something you hold on to, you don't buy and sell as you see fit. You buy and hold.
 
So in year one your savings will be around R850 and from year two you'll save about R1,250 a year. That's enough to cover your Red Hot Penny Shares subscription in fact!
 
So, if you want to keep the profit charged potential of penny shares in your portfolio, but the volatility and risk is hard for you to stomach, go implement this strategy today. You'll see your portfolio's value become more stable, your risk will be less and you'll still make good money! 
 
Here’s to unleashing real value
Francois Joubert
 

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