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Defining risk: counter-intuitive thinking

Blame it on a mid-life crisis, but I recently acquired a motorcycle, much to my mother’s dismay.

I vividly recall the same response from her around 32 years ago when my dad agreed to me getting a 2nd hand 50cc Honda motorcycle, which I nicknamed “interceptor”, not that you could intercept much at a top speed of 90 km/h.

While riding with my brother-in-law, who is a seasoned superbike racer, he suggested I try counter steering, which is pushing the handlebar in the opposite direction to the turn. If you think that sounds crazy try doing it at 120 km/h. Intuitively you want to turn the handlebar in the direction of corner.

When it comes to investing you also should “counter steer”, which is very difficult to do because you are “steering” against your emotions which is known as counter-intuitive investing.

Investing is simple, right? Buy low and sell high. How difficult is that? Well it is just as difficult and scary as counter steering at 120 km/h around a hairpin bend, but it is also just as rewarding.

With that as backdrop I would like to discuss a counter-intuitive view of investing today. So, everyone knows the world is in a mess, but forget the world, lets focus locally and we need look no further than the current political risk facing SA Inc.

We have the premier league or traditionalists, which is Zuma and his cronies facing off against the reformers. The outcome is binary, premier league win – SA down the tubes, reformers win – SA flies. Fifty-fifty odds winner takes all!

With this sovereign risk and 50/50 odds binary outcome it’s quite normal and intuitive for investors to want to avoid risk by running off to the bank with their investments.

After all the JSE has provided dismal returns for three years now with cash producing a better return before tax.

Surely it makes sense to simply stick with cash for now, at least until the dust settles.

That’s where the counter steering or rather counter-intuitive thinking comes in.

Let’s assume the premier league take it and with that the treasury. We immediately get downgraded, the rand collapses, inflation shoots through the ceiling and the economy goes into recession. The Reserve Bank changes its inflation targeting policy and lowers interest rates in a final attempt to stimulate the economy. Your cash investment is now generating a negative real return eaten up overnight by inflation, in a Zim scenario, becoming worthless. Counter-intuitively your JSE investment shoots the lights out as the weaker rand feeds through into higher rand profits for the ±60% of the JSE companies doing business offshore, protecting you against the collapse of the rand and resulting inflation.

In this scenario, and let me be clear, this is not my prediction but only to illustrate counter-intuitive thinking, in this case, you want to have no money in cash and/or bonds, but everything in quality rand hedge shares or offshore investments. – www.markwilliams.co.za

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