There was a memorable scene in the movie American Sniper where an extract from a book written by Lieutenant Colonel David Grossman called On Combat which was published in 2004 was quoted by the main character Chris Kyle. The extract went as follows:
“If you have no capacity for violence then you are a healthy productive citizen: a sheep. If you have a capacity for violence and no empathy for your fellow citizens, then you have defined an aggressive sociopath—a wolf. But what if you have a capacity for violence, and a deep love for your fellow citizens? Then you are a sheepdog, a warrior, someone who is walking the hero’s path.”
Whilst this quote is specifically aimed at the military and the use of the word violence is extreme I think the gist is that there are those that will do no harm, those that will do harm with no conscience and those that have the courage to do what is necessary to protect their fellow citizens.
In this context, South Africa can do with a lot more sheep, a few more sheepdogs and a lot less wolves.
What do sheep, wolves and sheepdogs have to do with investment and the markets? If we look at the year that has been they have helped make sense of what has been one of the most difficult years of my brief 17 years of managing money. It has been the unpredictability that has made it so challenging. It is easier to make good calls in declining markets as there is a more predictable direction. We might be scared of snakes but while they slither forward we at least know which is the poison end that helps us avoid being bitten.
As we know share prices are driven by the collective wisdom of the market or if you’re a cynic the collective stupidity. Either way it is the collective action of the participants that drives markets. So let’s think of the collective participants as the sheep where there is safety in numbers. As they come through the gate at the one side of a large paddock and head for the other end they are accompanied by the sheep dog. What we know is that in time the sheep will all go through the other gate followed by the sheep dog. They do not move in straight line and this causes the sheep dog to run from side to side trying to keep them on course.
These investment markets have been a little more random than many care to admit so trying to make money by betting on which way the sheep dog moves next is not so easy and you wonder if it’s worth the risk considering that ultimately both the sheep and sheepdog will all exit the other gate together. With wolves in the paddock and unanticipated surprises like Trump and Brexit betting on the dog can be a risky game. This is why over the course of this year we have chosen not to make extreme calls. We have stayed well diversified across asset classes and geographies and this has resulted in us delivering on our promise to Protect and Grow our client’s wealth.
Whilst the returns have been modest relative to 2015 our Growth and Conservative clients’ portfolios have achieved at return after costs that has beaten 85% of Unit Trust Fund Managers in the relevant sectors and both outperformed inflation. In addition, our commitment to reduce costs for clients has resulted in us saving clients on average just over R15 000 per million in fees this year. Considering that the average return for the multi asset growth sector was 4.28% then that saving is like an extra 30% return for investors.
May we see more sheepdogs and fewer wolves!