Price and value: Why successful investing starts with understanding their differences. (October 2010)

1. Price and Value
Why successful investing starts with understanding their differences
Alec Hogg

2. Investment stool’s legs
“Life is difficult”
• Opening sentence of Scott Peck’s bestseller The Road Less Travelled
“Life is random”
• Theme of Nassim Taleb’s masterpiece Fooled by Randomness
“Life is complex”
• Opening sentence of Scott Peck’s Further Along The Road Less Travelled

3. Which means……
Nobody knows the future
Plan for the unexpected
Build in redundancy
Successful investing begins once you accept the reality that
life is complex, difficult and random

4. Ok, so now what?
Option 1 Option 2
Delegate responsibility Invest like you mean it
“For the know-nothing investor, “Nobody cares as much about
nothing beats ETFs…..” your money as you do….”
WE Buffett Anon

5. But either way, realise
you’re in for the long
haul – investment
success is usually a
function of time

6. Where you start makes all the
difference
Two key variables
PRICE
is what you pay…
VALUE
…is what you get

7. Price v Value (1)
RETAILERS Share price © HEPS © Profit/R100 invested
Foschini 7555 521 R6.90
Woolworths 2641 164 R6.21
Truworths 6800 378 R5.56
Pick n Pay 4365 236 R5.41
Shoprite 9750 455 R4.67
Massmart 14795 567 R3.83

8. Price v Value (2)
BANKS Share price © HEPS © Profit/R100 invested
Mercantile 21 4.1 R19.52
Sasfin 3650 355 R9.73
Investec Ltd 5810 496 R8.54
Firstrand 2118 180 R8.50
Absa 13400 1099 R8.20
Standard Bank 10889 771 R7.08
Nedbank 14605 1010 R6.92
Abil 3560 225 R6.32
Capitec 14700 527 R3.59

9. Price v Value (3)
CONSTRUCTION Share price © HEPS © Profit/R100 invested
Basil Read 1190 333 R27.98
Group 5 3600 614 R17.06
WBHO 12225 1747 R14.29
Aveng 4300 483 R11.23
M&R 4351 341 R7.84

10. Entry price is critical
Assuming a stock bought today trades at R100 per share in
five years’ time:
Buy it now at R50: compound return 15%pa
Buy it now at R40: compound return 20%pa
Buy it now at R33: compound return 25%pa

11. The eighth wonder of the world –
Compound interest!
How R10 000 grows over 25 years
at 5% pa R33 863.55
at 7.5% pa R60 983.40
at 10% pa R108 347.06
at 12% pa R170 000.64
at 15% pa R329 189.53

12. Fractions matter
How time makes us look smart
How R10 000 grows At 10% At 15%
5 years R16 105.10 R20 113.57
10 years R25 937.42 R40 455.58
15 years R41 772.48 R81 370.62
20 years R67 275.00 R163 665.37
25 years R108 347.06 R329 189.53
30 years R174 494.02 R662 117.72
35 years R281 024.37 R1 331 775.20

13. As a rule of thumb…
Over 15 years,
each five percentage points annual extra return
doubles the value of your investment
And trebles it over 25 years!

14. Myth busting
Charting:
Imagine buying a company this week because its value
randomly increased last week – but that’s what chartists
suggest you do with shares that have risen on volume!

15. Myth busting
Diversification:
“Put all your eggs into one basket, and then watch the
basket carefully. Do not scatter your shot. The great
successes of life are made by concentration.”
Andrew Carnegie,
The bobbin boy who became the world’s greatest industrialist

16. Myth busting
Outsource:
“The really big fortunes from common stocks have
been made by people who packed all their money into
one investment they know supremely well.”
Benjamin Graham,
author of The Intelligent Investor; mentor of Warren E Buffett

17. Thank you
Alec Hogg