The biggest lesson from 50 years of trading on the JSE

The majority of great minds I have interviewed say that stocks are expensive, if not outright excessive. Equities do not seem like an asset class to go all-in on.

But there is a natural bias toward stocks in the family because we come from a line of stockbrokers – my grandad was well known for wearing a “Buy Gold” pin on the trading floor – and we have followed the whims of markets for 90 years.

But surely other asset classes such as bonds, corporate debt, property and heaven forbid, hedge funds, had a role to play? Not according to David Shapiro. His strategy has been all equities, all the time.

The value destroyer

I am certainly not here to advocate that anyone do the same. But I have finally appreciated why it was that my father arrived at that view, and it’s particularly relevant right now: the scourge of inflation.

He explained how many of the once-wealthy families in South Africa had lost their money not by gambling in the stockmarket, but in fact, by failing to do so.

They’d retired or sold their businesses for small fortunes, but persistent inflation whittled away their purchasing power. My father determined from that experience that preserving nominal capital was not enough – a buffer was required. The only way to build one was to pick winners in the sharemarket.

There were inherent risks and costs to being idle and too conservative. We now know that there’s just as much risk that we will outlive our savings as there is that we will simply run out of money.

However, he knows of one group who did manage to withstand the devastating scourge of inflation particularly well: a small cohort of elderly doctors, teachers and lawyers based in two small towns in the Western Cape.

They had backed a man called Anton Rupert by buying shares in his business, Remgro, and they never sold a single stock. Remgro is an investment company that spun-out luxury goods titan Richemont and British American Tobacco.

That stock too had always been considered “expensive” by analysts, but delivered annual returns of 13 per cent over 20 years making these humble folk incredibly rich by any standard.

My father remains convinced that one of the best defenses against rampant or persistent inflation is investing in high-quality companies that can consistently increase earnings.

If prices rise, so too will earnings, and so long as owners have invested their capital into these businesses, they too will preserve or grow their wealth.

The trick, as many investors in high-growth, tech companies are finding out, is that to increase prices and therefore earnings, you must have actual earnings to start with.

It has always perplexed my father that equities are considered the high-risk asset class when shares, in his opinion, have always been the best defense against inflation.

And that’s why he’s remained remarkably zen through every nasty stockmarket correction. Especially this one.

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