Autopilot not working

It appears that to a large extent the productive sector in South Africa has been left on autopilot by policymakers and government. The idea behind it being that the private sector is sufficiently capable to navigate the route to growth without assistance and even with headwinds. With this background, government has sought to implement policies that it believes will improve equality and address the social difficulties faced by so many South Africans. Without judging the effectiveness of these actions, it appears a noble purpose.

Unfortunately, autopilot is not really working. I think we need to change focus, if only temporarily, in order to ensure that there is an economy in place to support the social ambitions of our government and needs of our people.

The key to this is competitiveness. Too often, I read in these pages that a sector is in crisis and that confidence is down. We need to turn a corner and sharply. We need to take a harsh look at the sectors in which we are on the cusp of competitiveness and do what is necessary to get there. The Department of Public Enterprises' CSDP initiative from a few years back had some good ideas but was not enough. We need a focussed set of projects to go grab these sectors and pull them up by the bootstraps.

I understand there are untouchable barriers to competitiveness such as labour and BEE. These are not disastrous and can be compensated for by sufficient determination. By determination I mean targeted capital contributions, skills and technology transfers, medium sized business support and so on.

In doing so, we must be realistic about which industries we target. While I would love it if we were able to be a financial powerhouse and leader in technological development, we simply lack the short term skills. The finance sector can take care of itself and frankly, we are behind on most technologies we are trying to introduce (notably in the hydrogen economy).

This will cost money but it will be a debit in the asset column and not on the income statement.

Technically Correct

Cough cough...the dust on this blog is pretty thick but I thought it was about time I brushed it off and said something not particularly meaningful.

Just short of six months ago I launched myself into a TV show by posting a video of myself without my pants on. This is noteworthy as the show was on a finance-centric channel and is designed to pick Africa's best amateur trader. Nevertheless armed with some experience in finance and plenty of ego I dove in ready to win.

The way I see it is I am pretty good at evaluating a company. I can probably get a good idea of what a business is worth quite easily and I should be able to exploit any miscalcuations. Little did I know at the time that this is pretty much irrelevant. My long-held views of the stock market were shattered. The opportunities for making a profit out of under-valued companies are all over the place but they are overwhelmed by the power of the ordinary Joes poking around with shooting stars and tea cups.

The market is not inefficient as the finance theory leads you to believe it may be, it is just down-right wrong.

As wrong as it may be, anyone with the right software can make a lot more money doing this than using sound business analyses. The fourth episode has just aired and some of my more talented friends seem to have more than doubled their money already. The consistency of their performance also seems to indicate that, if disciplined, one can limit the risk exposure relatively easily.

If this is such an easy way to make a buck why am I so opposed to it?

I guess this is the kind of pig-headedness that has plagued many people, businesses and even regimes. Am I pulling a Kodak? When i think of technical analysis as a tool for making investment decisions my top lip curls the way it does when I think of tattooed youths in hoodies smoking and joking at a music festival. The herd mentality of it all is so.....common. This is in stark conflict with my ambitions of rapid wealth creation and leaves me in uncomfortable internal turmoil.

I think i will likely act like a pompous artist and remain poor but pure.

Who's being held accountable?

So it seems I am not great at regularly updating this blog but I am on holiday so I have no excuse now. I was hoping to venture away from hardcore theory that is only digestible for Commerce graduates but this topic has been grating at me for some time. What it comes down to is the dishonesty of IFRS accounting.

Any student of accounting will have been told about the various users of accounts but I think this is where the deception begins. If we take a second to think we see that management use management accounts because it's important that they know what's going on in their business and the tax-man has his own rules because he wants to get the right money out of it. So creditors and investors are left to use the things as per IFRS and invariably have to spend a lot of effort (not to mention the tertiary education required) interpreting them, fiddling with them and then some guesswork to get anything valuable out.

Lets focus on investors.

All these guys want is information that represents the economic substance of the business in question. Instead the IASB (and FASB) have decided it's more fun to torment people by leaving the economic substance at the end of an unpleasant maze. I am not even talking about the controversial issue of fair value of financial instruments (don't get me started on this) but I will list some other heinous examples of "The Board's" tomfoolery.

Share Based Payments (IFRS 2 I think) : Put simply I can issue shares to the value of $1billion to buy a single can of Coke and it'll show up on my balance sheet as an asset worth whatever Cokes normally sell for. The Board will say "ah but it will show up in the notes and there'll be hints in the Statement of Changes in Equity" but I don't want to have to read a book to find every answer. This approach is much like a newspaper publishing a defamatory article boldly on the front page and then printing the retraction somewhere amongst the adverts for adult entertainment that no-one wants to be seen lingering on. Leases are now getting the same treatment as the Board attempts to plug the holes in the accounting system using an axe.

Even consolidation is flawed in the way it ignores separate legal personality (especially obvious with liabilities). I won't go on because most readers haven't made it to this point without getting bored.

My solution is toss the lot out and start from scratch. that's not really possible but the IASB have decided that a good step is to change the framework (the principles upon which the standards are built). This was the good bit and now that the cockamamie system is falling apart they seem to want to make the whole thing cockamamie.

Anyway if you're reading this and want to develop a new set of standards just comment and we can get in touch. I hope your holiday season is treating you well! I may elaborate on this with a discussion on the role of auditors but probably not.

Cheers

Edna

My First Blog and First Disagreement with Buffett

I am finally writing something for this damn blog of mine. The reason I have started this is because I frequently have opinions (mostly around business and politics) that I feel are wasted in my head or restricted to my housemates. Is that arrogant? If you think so just give me a piece of your mind in the comments section below.

Now I have been a student of finance and have paid careful attention to Warren Buffett (as anyone who wants their money to work for them should) but I found myself disagreeing with him for the first time recently. Much like many of my other thoughts, this isn't thoroughly thought out but again that's what the comments section is for. I hope to encourage conversation over things on my mind more than impose my views on the world, I'll leave that to the print media.

In short I challenge the effectiveness of value investing. It is clear to anyone looking that Buffett has outperformed the world when it comes to investing. But this is not based on personal success but just on what makes sense. Buffett firmly believes that one should focus entirely on the fundamental business case for each investment irrespective of whether you are buying the entire firm or a single share (an amusing concept given Berkshire's $120 000/share price tag). Furthermore, one should ignore "Mr Market" as if he is some eccentric informal trader. To my mind this works well where you are buying a significant share in the firm and where you are trading in a relatively "private" market. But for the rest of us that struggle to scrape together the $500 needed to own a share in Google, we would be exposing ourselves to significant risk if we were to disregard Mr Market's eccentricities. The variations as a result of speculation and market interpretations of value are far more severe than most changes in cash flows, especially when discounted from way into the future.

This is then exaccerbated by the fact that these investments may be part of our resources that we may need to utilise to live. Not by necessity but when your investment is worth the same as a plasma-screen-TV then it is automatically more liquid than a multi-billion dollar stake in Coca-Cola.

Now i don't want this to get too long and any more boring but my main concern comes with market pre-conceptions about industries or other permanent determining factors. For example one company in an industry trading at 6x earnings will be cheaper than another at 20x the same earnings without fundamental differences merely because of the industry. These things don't change and although eccentric are going to affect the future value of your investment.

So Buffett is just about always right and following his methodology should save us from getting things too wrong but sometimes I think we need to remember that he is a billionaire in any currency and most of us aren't. I hope you read again, I am sure my grammar and humour should improve and if hits are low I will stoop to trashy reporting on celebrities and my own sex life.

I am not qualified or authorised to give financial advice so what I write here is merely commentary for your and my amusement.