The Investor Diaries: Week 23

Good morning, all

So it’s Wednesday. And I’ve spent this morning updating spreadsheets of portfolios. For the new readers, you can see the quick guide to this series of posts in The Investor Diaries: Week 22.

Where I’m going with today’s post:

  1. I’m going to start with the Once-Off Investor portfolios. Which, I’m realising, are really just a guide to what you should have done on 19 March 2014 with R3,500, if you had R3,500 – although there is some value in knowing in general which types of options for small investors are out there.
  2. Then I’m going to move on to the Monthly Investor portfolios. Which are much more useful – because they show that the real power of investment is the saving habit, and when compared to that, where you choose to put your money is much of a muchness. That is: you’re unlikely to make it big with a small portfolio of stocks. But you might just make it big if you’re a habitual investor.
  3. Finally, I’ll take a look at the SA economy.

The Once-Off Investors

Twenty three weeks in:

Screen Shot 2014-08-27 at 7.52.25 AM

In pictures:

Screen Shot 2014-08-27 at 7.54.17 AM

The Monthly Investors

It’s the last week of the month, so they would have just added another R1,000:

Screen Shot 2014-08-27 at 7.53.40 AM

In pictures:

Screen Shot 2014-08-27 at 7.58.11 AM

You’ll notice that the Naspers investor is having quite a ride… This is normally the point at which someone talks about the Power of Dollar Cost Averaging. Not quite sure whether it’s that, or “the power of the debit order”?

The Economy

Screen Shot 2014-08-27 at 7.53.59 AMThe good news: we’re “not in a recession”, because the GDP growth rate for the second quarter was positive (and a recession is generally defined as “two consecutive quarters of negative GDP growth”).

The bad news: well, we’re still worse off than we were in January. We lost 0.6%, and then we recovered by 0.6%. But the base changed, so 100*(1-0.6%)*(1+0.6%) < 100.

But obviously, that had a lot to do with the strikes. The stock market seemed entirely bored by the news:

Screen Shot 2014-08-27 at 7.53.17 AM


As was the exchange rate:

Screen Shot 2014-08-27 at 7.52.39 AMThe government bond yield, however, did react a bit positively (I know that the yield looks negative – but it only goes down when the bond price goes up, and people buy bonds when they’re feeling more positive, so it was actually a positive reaction):
Screen Shot 2014-08-27 at 7.52.49 AMOn the international commodity front, the price of crude oil continues to drop:
Screen Shot 2014-08-27 at 7.53.06 AMSo hopefully, a fall in the fuel price at some point. On a less happy note, the gold and platinum prices are also going down – which is a bit of bad news for our mining sector:Screen Shot 2014-08-27 at 7.52.58 AMIf you feel like something a bit more technical, I have recently become a fan of the SAfm Market Update with Moneyweb podcast. It’s on iTunes, but you can also find it here.

Until next week.

South African Art: How it gets its value. And why it’s cheap.

So yesterday, I explained why I think that the art market is an investment powerhouse that is only due to get stronger. Basically, for two reasons:

  1. Increasing Wealth Inequality; and
  2. The power of asymmetric information.

Asymmetric information is my favourite part of the story. I love an informationally inefficient market-space where you can be on both sides of a transaction.

But that aside, I believe that there is something particularly special about South Africa’s contemporary art market. In order to explain why I’ll need to start with a basic outline of the art industry. The Art Industry will have to correct me if I’ve gotten it wrong.

To begin with: Contemporary Art

Before I get going: when I talk about the “Art Industry”, I am not referring to all art produced by South African artists.

This weekend past, I went to the Johannesburg Art Fair. Specifically: I went three times. And from what I saw there, and from the discussions I had, and from the talks I listened to, it appears as though an artist can do one of two things:

  1. Test the boundaries – in terms of subject matter/technique/both/etc; or
  2. Sell out.

Pieces produced by artists in the first category become part of the body of work collectively known as “contemporary art”.

The second category is anyone that is not a contemporary artist, as dictated by people in the know. That is: if your work could be sold in…*shudder*…. a furniture shop, or in a gallery that specialises in wildlife paintings, then you won’t be invited to an Art Fair.

Personally, I think that’s a bit snooty – I quite love wildlife art. But if I can offer an analogy, it may be a lot like the foodie world:

  • Talented contemporary artists: are the molecular gastronomists, the high-end chefs, the secret bistros and all things fine-dining and deliciously extraordinary. The food is not necessarily to everyone’s taste – but it’s not meant to please every palette.
  • Bad contemporary artists: are the establishments that generally get shut down owing to lack of patronage. Of course, you do get those that are supported by rich parents and friends in the hopes that they will one day produce good food – and there’s lots of fanfare and branding in the interim – but the food critics are rarely deceived after a visit. Ahem. Conor Mccreedy, ahem.
  • Wildlife artists (and the like): are the large chain restaurants. The food is reasonably priced and pleasantly seasoned. It’s generally quite profitable because of its mass market appeal – but it’s not the stuff that legends are made of.
  • Furniture store artists: are fast food outlets. The work is produced en masse. It’s cheap. Although a real foodie would rather starve.

And in case it’s not clear, because my art friends are all of the food critic varietal, I’m going to talk quite specifically about the Contemporary Art scene.

An Introduction to the Art Industry

The key players:

  • Artists (obviously)
  • The Galleries (the primary market)
  • The Auction Houses (the secondary market)
  • The Big Collections (museums, large corporates, highly-esteemed private collectors)
  • The Bigger Money (the large art funds, the billionaires)
  • The Smaller Collectors (the private individuals)

Within that, you also have “The Experts”, being those people that have studied art for years (its history, its techniques, its movements, etc), and have assiduously developed a refined eye.

Again with the analogies: I think of this “refined eye” as similar to the refined palette of a sommelier: they’re able to taste a vintage, and tell you where the grape was grown, and in what year, as well as the components of the blend, and what flavours you should be picking up. I, of course, won’t get all of that – but if an expert starts to point a few things out, I might develop a deeper appreciation for the wine I’m drinking.

I’ve not separately identified the “Experts” – because you’ll find them sitting in all those categories. Many of the art academics in universities are also prominent artists. The experts curate the art galleries and the collections. Experts also run the auction houses, and form part of the body of collectors. They’re the bones of the art world: providing structure for movement. The rest of us are the muscle (that’d be the collectors) and the fat (the collectors that are more interested in the investment than the art – too much of it and you start to get coronaries).

How I see those key players interplaying


  1. Artists produce new work and sell it to galleries (and/or galleries sell the works on behalf of artists);
  2. The galleries then hold exhibitions to on-sell the art to collectors. They also try to place the art in prominent collections.
  3. Once the galleries have sold the art – trade in those pieces then has to take place on the secondary market. So the collectors also buy and sell art through the auction houses (there are other players in the secondary market – but auction houses are the important component here).
  4. When the artists produce more work, there is an informational feedback loop that takes place: prices for their new work will depend on what happened with their work in the primary market (how quickly did it sell and at what price and to whom), and what is happening with their work in the secondary market (how are their works faring at auction, who is selling them, who is buying them, and why are the works being sold in the first place, etc).

Whence cometh the value?

Firstly an observation – given the way that the market operates, I think that you’ll find the expert opinion is pretty pervasive:

  1. Experts run the galleries – so they’ll price the works they prefer higher than the works they dislike.
  2. Experts run the large important collections – so they’ll buy the works that they believe are “important” and “strong” from the artists that they believe are “going somewhere”.
  3. Experts run the auction houses – so they’ll make estimates based on their expert opinions, providing price-anchors for everyone that’s not an expert (and I do love some behavioural economics in the mix).
  4. And while we’re at it – most of the large art investors are hardly about to spend millions of dollars/pounds/rands without consulting an “expert” (although, I’ll admit, arrogance could probably supersede that for some).

So when we talk about price-setting in the art world, it isn’t that subjective. At every point, you have these “refined eyes” playing the pivotal role in both the selection and the pricing of a piece of art. And what is amazing is how consistent that “eye” can be. It’s trained to look at technique and subject matter and originality and so on.

Again, just like food critics have general consensus on the quality of food prepared by a particular chef (based on his/her use of ingredient, combination of ingredient, originality, presentation, etc), there is general consensus on works of art. Even if a critic doesn’t necessarily like the piece, that doesn’t change his opinion on the strength of the work, or its importance, or what it should be priced at given the stage of the artist’s career and the artist’s prominence in a particular movement and/or cultural period.

In some ways, it’s a bit like pricing a share. Any trained financial analyst will look at a company and be able to tell you whether a share in that company is over-priced, fairly-priced or cheap. How do they come to that opinion? Well they certainly look at the financials and past performance. But they also consider the growth trajectory of the company, the industry and the economy; they look at the quality of management and margins and capital investment. Those are all fairly subjective things to look at – and yet somehow, you usually get general consensus, with a few outliers that the market ignores.

So to summarise, when talking about the “value” of a work of art, that value is driven by a number of factors:

  1. The artist – or, rather, how the artist is regarded by art experts (usually indicated by how often the artist is reviewed in professional art publications).
  2. The presence of the artist in significant collections (of the famous art museums, in particular) - because that is a clear indicator of just how widespread the expert regard for an individual artist actually is.
  3. The strength of the work – because all the way along, experts in the primary and secondary markets will be judging and evaluating that work based on how representative that particular piece is of the artist’s work and/or the artist’s work during a particular phase of their career.
  4. The demand for the artist – although, again, I would think that this is a bit of double-counting – because high expert regard and having the art in significant collections tends to generate the demand for the artist.

Of course, you get exceptions. But generally speaking (and to be clear, “generally speaking” is sufficient when you’re talking about diversified investments), a good work from an artist that is well-regarded and featured in prominent collections is going to be a fairly valuable item to own.

At that point, it’s really a question of deciding whether that value is fairly represented by the price that’s presented to you. And for that, there are two options:

  1. Ask an art critic (because they’re in touch with the art world, so they’ll have a fairly good idea of what is, and what is not, a good price); or
  2. Try and see what that artist is doing at auction for yourself.

Probably better to do both.

Coming Back To The South African Art Industry

The South African Art Industry, in many ways, is still rapidly growing. But in particular, there is not an especially developed market demand for the art. That is: investors continue to treat art investment as more risky and more subjective than it actually is.

That perception = depressed prices for art sold locally

Meanwhile, the international market has a growing interest in South African art.

Take the US as an example. In the late 1980s, you had all this university endowment boycotting against apartheid. Boycotting that was driven by student action. That is the kind of cause that creates deep vested interest in South Africa and what it produces.

The students of the late 1980s are now in their mid-40s and early 50s. Just about old enough to be real investors in the art game. Wealthy investors that were once deeply involved in the anti-apartheid cause…

So it should come as no surprise that anti-apartheid artists like William Kentridge do so well in New York. And yet you find his work still going relatively cheaply here Johannesburg.

You know what else isn’t surprising? It isn’t surprising that you get articles in the Business Day saying that there is increasing international interest in South African art, and that South African auction results are starting to cruise high above estimates.

It makes me want to say “Come on, South Africans. You are missing out!

Get out there and make friends with the art world. Because they can tell you what to buy and when to buy it. They can also tell you what not to buy, and that’s important too.

Also, it’s a far more satisfying spend than a new Audi.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at


South African Art: The Economic Reason To Buy It. Immediately.

If you had asked me a few months ago about my opinions on buying art as an investment strategy, I would have made the following observations:

  1. Hmmm.
  2. I see.
  3. So what you’re saying is, you’d like to veer clear of productive assets in favour of the persnickety tastes of the art world?
  4. Sounds risky to me.
  5. More risky, in fact, than the return would substantiate.
  6. And what exactly do you know about art?
  7. Art seems an awfully subjective thing.
  8. And where do you start?
  9. Also, here’s an art index from Citadel:

    Thanks, Citadel. You're awesome. I love me a graph.

    Thanks, Citadel. You’re awesome. I love me a graph.

  10. Buying art looks to have the same return as home-owning.
  11. And you know how I feel about home-owning.
  12. So just buy equities. They’re productive assets. Come now.

But then I decided to buy some art.

And if I’m entirely honest, I must confess that I didn’t view it as an investment decision – or, rather, I didn’t see it as an investment decision purely for the sake of the art. My thought process:

  • I work in the professional services industry.
  • Which means that I need to connect with potential clients (although, the need for connection is pretty much consistent across the board).
  • Connection doesn’t take place in a boardroom – in there, we’re all business.
  • Connection has to take place in the five minutes before we step into the boardroom, while the cappuccinos are being prepared, and the pleasantries are being exchanged.
  • Five minutes is not a huge amount of time.
  • And so often you can end up with awkward silences and the standard “So how was your weekend?” question. Which, when you think about it, is a really weird question to answer – do you talk about the personal issues you had with your spouse? The slightly too many draughts on Friday evening? The haphazard Sunday night of scrambling for leftovers and watching the 8 o’clock movie?
  • That’s not really the stuff that good conversations/connections are made of.
  • What you really need is a conversation kickstarter.
  • Which is why I went out to try and buy a Diane Victor smoke portrait – painted with a candle. Here’s an image of her at work:

  • Because that is a conversation starter.
  • And there are few things to beat a shared moment of admiration for ingenuity.

Sadly, I didn’t manage to get a smoke portrait. The bidding war bested me, and I left my first art auction with nothing.

But I did go back to subsequent auctions. And I started visiting galleries.

Not because I was suddenly taken by the art – but because of all the money in the room. And I was beginning to ask the question: “Why is all this wealth gathered here on a Saturday afternoon?”

Here is what I’ve realised:

  1. The value of art is not that subjective. Incredibly.
  2. Artworks are actually not all that hit-and-miss. Some are hits. Some are misses. And there are people out there that can tell the difference. As in: real experts that would share the same opinion independently.
  3. There are solid economic reasons why art investment should be high on your list of “places to put your money”.

So I’m going to start with the last.

The Economic Case for Investing in Art

How the wealthy spend their money

We live in a world of increasing wealth inequality. So if you’re going to follow the money, the question to ask is: what do the really wealthy do with their money?

I mean: there are only so many homes one can own; there is only so much vacationing that one can do; there are only so many cars that one can buy; there are only so many cool gadgets that one can use.

And, of course, there is the market for shares and bonds and commodities. But that can get tedious after a while – and every new company acquired becomes yet another headache to deal with. And besides, where is the status in that?

So while the wealthy might put much of their wealth into the traditional things - there will always be some allocated for the higher things of culture and scarcity.

And art – art is almost the ultimate positional good.

By that, I mean a good whose value is derived from the fact that other people don’t own it but would like to. There are others (rare books, coins, stamps) – but few that can be so gloriously hung from a wall for others to covet.

The further implications of wealth inequality

At the same time, looking forward, I think we can agree that the growing proportion of the wealth in the hands of the wealthy means two things:

  1. The wealthy will have more money to spend on stuff like art; and
  2. The lower classes will have less money to spend on consumption.

So if you’re going to invest for the long-term: should you invest in art, where there is growing demand? Or would you rather invest in companies that are going to squabble over the remnants of lower class consumption?

I also wonder whether art won’t become one of the last few private sector transfer mechanisms for wealth – where the wealthy spend money on new art being produced by up and coming artists, and these artists are always up and coming from the lower classes (it’s a statistical thing – if the 99% are the lower classes, and the production of art is classless, then they should produce 99% of the raw artistic talent).

Personally, I’m also a fan of art investment because it has that “Indian Cow Effect” (ie. Why do poor Indians invest so much money in cows when they demonstrate a -64% annual return after you take into account man hours? Answer: because the saving process feels like you’re spending money – and everyone likes to spend money).

A world of asymmetric information

My final observation about the art industry/world – there is not a lot of transparency. So to backtrack, the art world is split into two markets:

  1. The primary market – where artworks are sold for the first time. This is the province of art galleries and the artists themselves.
  2. The secondary market – where artworks are sold between investors. This is the auction space. But the art galleries and art dealers and so on are also often involved as well.

The crux is:

  1. You can’t easily see listed prices of works for sale in the galleries (you have to request prices).
  2. And you can only see listed prices of what an artist achieved at auction if you pay to subscribe to online databases.

One final component before I get to my point: from what I’ve seen, galleries hold old stock of an artist’s unsold work in their storerooms – and they’re not all that fastidious about keeping their price lists up to date. Although they do try – which is probably why prices are so rarely publicly quoted.

What that means: if you see an artist do surprisingly well at auction on a Saturday, then in all likelihood, the galleries that act as agents for the artist won’t have updated their price lists by the Monday morning. So if you’re a bit liquid, and you’re prepared to put the research time in, there is opportunity to score bargains by taking advantage of the short-term discrepancies between pricing in the primary and secondary markets.

It doesn’t happen all the time. But when it does…

So the economic summary:

  • There is increasing wealth inequality
  • Meaning that the wealthy will have more money
  • Which makes for a promising future for art
  • Because art is a positional good
  • And art is also traded in an informationally-inefficient market

For some circumstantial evidence, I give you this article: “Billionaires scramble for world’s finance art pieces“.

The Case for South African Art

So putting the big picture to the side, and assuming that you agree with me so far, there are good reasons why the South African market, in particular, is an area of growth.

As a teaser, I’m going to refer you to last week’s article in the Business Day: Art takes off in SA as a diversification strategy for investors.


Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at

Office Politics: Getting Somewhat Existential About Value

If you’ve been following my blog for some time, you might be familiar with my intrinsic/extrinsic value argument for human beings. The general summary:

  • Extrinsic value is relative – in that you, as a question of self-interest, may be of no value to me at all. Which is the way that we sometimes relate (usually more than sometimes, if we’re honest).
  • Intrinsic value is absolute – in that you, as a human being, are a mathematical impossibility. The combinations upon combinations upon infinite combinations of chance encounters that had to take place in order for each person to be here, as they are, make the likelihood of them non-existent. And yet, here they all are. Occasionally causing frustration in the workplace.

I bring this up because I found a magnificent infographic to illustrate that last point. And I went looking for that infographic because today is turning into a hectic one - and much as I wanted to write about:

  1. Shoprite, and their crazy expansion plans; and/or
  2. The Johannesburg Art Fair, and why we should all be buying South African Art;

…it’s just all turning out to be a bit impossible.


So instead, I give you the miraculousness of being:

What Are The Odds?

by sofyay.

My favourite line:

“That number is not just larger than all of the particles in the universe – it is larger than all the particles in the Universe if each particle were itself a universe”

And that wasn’t even the largest number on the page. It was just a component.

Happy weekend.

The Trials of Tax Season. And The Benefits of Sunk Costs.

So this morning, I went off to a SARS appointment for a client. And honestly, thank God I had an appointment - because the queues at this time of the year are amazing. Also, the SARS officers are well-tired of telling people that their proof of residence is no good, and that the certification dates on that certified copy are outside the 3 month window, and no sir, he really does have to come here himself and no, that’s not the right power of attorney form.

Naturally, the appointment concluded with:

  1. The proof of residence was no good (no lease agreements, no telephone accounts, no bank statements – it’s either municipal bills or form CRA01).
  2. Not enough certified IDs.
  3. And I’d gone to the consultants on the wrong side of the building (it doesn’t seem to matter where I go – I’m always on the wrong side).

Anyway, the reason I bring this up: I’ve been asked to write something about preparing your tax return. Which makes me want to say: this is something that you should learn how to do. Especially if you’re living and working in South Africa.

The Ease of E-filing, and what your accountant does

I understand that people are afraid of tax. And of SARS. You shouldn’t be.

If you are employed, and you have no real other sources of income, then here is what your tax-practitioning accountant does:

  1. Logs onto your e-filing account.
  2. Clicks “update IRP5 forms”.
  3. Scans through to see the IRP5 forms have automatically filled in stuff.
  4. Types in some personal details.
  5. If you’ve given him a medical aid certificate, he copies those into the form.
  6. Clicks “file return”.
  7. Forwards you an invoice.

Do you know what that is?

A cheek, is what it is.

And people will pay good money for it.

This is madness. If you’re employed, and your job is your only source of income, then for goodness sake – try it. It really is that simple. Not even an hour of your time. And if you’re stressed about it, I recommend a good merlot cab sav blend. Because this is the type of stress that can be alleviated FOR ALL TIME simply by taking a single hour of your Sunday afternoon to give it a go and realise that it’s really just forms and personal details.

Also, you’re allowed to make mistakes. SARS understands. It’ll let you fix them.

That Said

If your job is not your only source of income, then find an accountant.

Because here, it can get a bit complicated. But it’s probably worth it. Because…

Here is why you should try to have alternative sources of income

As an employee, you’re not allowed to claim very much in the way of expenses. Your PAYE gets deducted each month – and maybe at the end, you’ll get a small refund because of medical expenses.

But let’s say that you’ve also done some work on the side. For example, if you’ve done some freelance web designing from your home, you’ll be able to deduct some of the expenses that you’ve incurred on:

  1. Internet Provider Fees and Telkom bills
  2. Computer expenses (including depreciation on your software and hardware)
  3. Cellphone bills (for the calls made to clients)
  4. Possibly some office expenses

Of course, all the above are going to be split in the ratio of business use to private use – but still, there’s a deduction. And it could earn you a larger refund.

Why is this important?

It’s important because there is a difference (to you) between economic (sunk) cost and tax costThat is:

  1. All of these expenses, you would have incurred anyway. In all likelihood, you were always going to pay for internet and own a lap top. Therefore, there is no economic cost to you when you taking up freelance web design. The costs are already sunk.
  2. Instead, what you’re doing is recovering some of those costs by using them to generate income.
  3. On the tax side of things, SARS doesn’t care whether you would or would not have otherwise incurred the expense – what’s important is that the expense actually incurred was used in the production of income.
  4. So if you take some of your internet cost, and use it to design websites for money, then that’s an expense actually incurred in the production of that income – therefore you can deduct it from your gross income.
  5. These deductions are effectively the incentive that SARS offers you to be entrepreneurial.

Just to be clear, a diagram:



PS: that cellphone bill is about the only item on that list which would have cost you a bit more. Unless you’re on a contract with a set number of minutes, and you used minutes that would otherwise have gone unused…

The net result is that your tax losses from your ‘secondary trade’ would go against your employment income and get you a larger refund. That is, until such time as your secondary trade becomes profitable. But if you hit that point, who cares about the tax -you’d have a profitable side-trade.

A Caveat

Now obviously, SARS doesn’t intend for you to be indefinitely loss-making – that’s not the point. If you’re going to be entrepreneurial, then it needs to pay off eventually. So there’s a section in the Income Tax Act (section 20A, for anyone that’s interested) that says if you’re loss-making from a particular “secondary trade” for longer than 3 years, then you can’t deduct the loss from your full gross income anymore.

However, that ring-fencing only applies to people that would otherwise be in the top income bracket – so if you’re in a lower income bracket (ie. you basically earn less than R673,100 each year), then the ring-fencing should not apply (as it stands – the regulations could always change).

The Sum Conclusion

If your finances are relatively simple, and you earn only your income, then the money that you spend on an accountant is a bit wasted.

But if you’ve decided to expand your budget by doing stuff on the side and such, then it’ll probably pay you to pay someone to help.

And in those moments, it’s always best to find someone that’s a bit reputable. Because if you go for cheap, then you’ll get an accountant that wants to do it quickly and with the least amount of hassle.

Question: do you know what happens when your tax return is done quickly and in a way that minimises the likelihood of hassle?

Answer: you pay in.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at

The Investor Diaries: Week 22

For any readers that are joining me for the first time, this series of posts sets out to track some investment options for people whose lives don’t revolve around finance. And, basically, to show that the Warren Buffett strategy of investing in the passively-traded equity ETFs is a pretty solid bet.

Here is a list of the more important posts:

  1. Week 0: The Investor Diaries: Naspers and Tencent – where I explain what investment options are available to someone with R3,500 (or thereabouts).
  2. The Investor Diaries: Week 3, and Investor Profiles - involving an allocation of personality to each investment-type. Which was my way of trying to make it interesting (it lasted about 3 weeks).
  3. In The Investor Diaries: Week 7, I decided to start breaking down the economic data for laypeople. And I started by picking some indicators.
  4. In Week 9, I talked about the “political narrative” of the indicators (which was basically an explanation of how certain economic indicators are there to allow comparison of SA with other countries).
  5. In Week 10, I talked about the “historical narrative” of the some of the other economic indicators – because they tell you how SA is improving or not over time.
  6. Then I realised that doing a once-off investment of R3,500 is actually pretty inaccurate – as most people save monthly. So in Week 12, I started tracking a new set of portfolios – as though the investors had a once-off investment of R3,500, with regular monthly investments after that of R1,000.
  7. Then, in week 20, I had a fun moment when Bloomberg had a data glitch with the db x-tracker MSCI World ETF.

Which brings me to today.

The Individual Once-Off Investors

22 weeks in:

Screen Shot 2014-08-20 at 6.50.33 AMAnd because graphs are prettier than tables:

Screen Shot 2014-08-20 at 6.51.00 AM

Now obviously, the Contented Pragmatist AKA Satrix SWIX ETF guy is pretty much the core of my more risk-averse self – so I’m a bit delighted by how he’s bearing up (first).

Although before anyone asks – this question does have a lot to do with fees. For smaller investors attempting to invest through their online banking facilities, those transactions costs and monthly fees just eat away at returns. For example, on a R3,500 investment, monthly fees of R19 mean that you’ll need to return more than 6.5% per year just to break even. That’s quite a burden.

But it does get alleviated if you’re constantly increasing your investment…

The Regularly-Saving Monthly Investors

Screen Shot 2014-08-20 at 8.21.06 AMAnd because graphs are still prettier, even if you invest monthly:

Screen Shot 2014-08-20 at 8.22.08 AM

The fun thing about this graph is that you can pretty much see, from the outset, that by far your greatest return comes from the habit of saving each month.

At this point, many people might start to say “Well, I see that actually, the FNB Share Builder isn’t doing so badly, eh?”

Here’s why:

  1. The larger your investment, the less onerous the fee component becomes (because paying R19 per month to manage R8,500 is a better deal than paying the same to manage R3,500 #math).
  2. But also, because I chose at the outset to invest in Naspers (because I’m a contrarian sort of soul).
  3. Being contrarian basically means that you buy against the market.
  4. So I was regularly buying while the market was low (have a look at the Naspers line in the Individual Once-Off Investor graph).
  5. And I was therefore well placed to benefit from the Naspers recovery.
  6. Going forward, that might change. Because if Naspers is peaking, and I’m regularly investing at the peak, then obviously, I’m going to be well placed to lose on the drop-off.
  7. I’m just throwing the caution out there. Because at this point, if I were holding Naspers shares, I might be considering a sell-off, and then investing into something else that the market currently dislikes.

The Indicators

Here’s what Week 22 looks like:

Screen Shot 2014-08-20 at 6.50.21 AM

Much has remained the same. As it does. But here are some graphs anyway:

Screen Shot 2014-08-20 at 6.49.14 AM

Bond yields are going down – so the bond market is improving. Presumably, now that the market has calmed down after last week’s African Bank panic.

Screen Shot 2014-08-20 at 6.49.25 AM

The exchange rate is weakening. Because it is. I’m just not convinced that anyone can really explain the short-term trend of exchange rates.

Screen Shot 2014-08-20 at 6.49.36 AM

Anyone feel like investing in gold? You could earn a return of general flatness.

Screen Shot 2014-08-20 at 6.49.46 AM

Crude oil continues to go down, thanks to a supply glut from the US and Saudi. Also, world fuel consumption has come down slightly. Or so I’ve read.

Screen Shot 2014-08-20 at 6.49.56 AM

Equities – still on the up.


Until next week!

The Economics of Spite, and Nose-Cutting

sphinx nose

Thanks I didn’t get this image from you (I found it on Google) – but you seem to be the right people to credit.

The origin of the phrase “cutting off your nose to spite your face” is (ironically) found in the lives of the saints. Specifically: ancient Christian nuns. And in particular: St Ebba the Younger of Coldingham.

St Ebba was the abbess of a convent during the 9th Century, when England was frequently attacked by barbarians (Danish pirates AKA the Vikings). Barbarians, as it turns out, felt especial entitlement to the ravaging of monasteries and the ravishing of virgins. This heady combination left holy sisters in a highly vulnerable space – especially as the belief at the time was that a violation of one’s chastity vow, voluntary or otherwise, was an automatic exclusion from the Kingdom of Heaven. St Ebba and her spiritual daughters achieved sainthood when they gathered together in advance of an attack, and used razors to slice off their noses and upper lips. The Vikings were so aghast at the spectacle that they ran away. Then in rage, they returned and torched the convent and its inhabitants, crowning St Ebba and the sisters with the crown of holy martyrdom.

Strangely, the “spite” in this story is applied to the nuns for their self-mutiliation and not to the barbarians who burned a convent alive because they didn’t get the raping spree that they felt they were due.

But history, amirite?

The reason I bring this up is this podcast from Freakonomics Radio: What Do Medieval Nuns and Bo Jackson Have In Common? And the interesting part was the social experiments, but before I get to them:

What Is Spite?

Stephen Dubner and Steve Levitt spend a fair amount of time floating around this problem of a definition, and trying to separate it from “revenge”. Basically, where they end up:

“Spite is a behavior where an individual is ready to harm him or herself at own cost to harm somebody else without creating anything good for a third party.”

Which seems a totally boring definition for such an interesting vice. I’d prefer that old folk tale about a genie who offers to grant a man any wish, with the caveat that his (hated) neighbour will get double whatever he wishes for. And that man says “I wish for you to put out one of my eyes.” But anyway.

At this point, the two Steves move off in a direction that sounds a lot like:

  1. But, you know, we’re not considering the fact that there are other benefits at play here.
  2. Like there’s the emotional benefit of seeing your neighbour put down.
  3. Forget homo economicus – we’re homo rivalis.
  4. It’s not about how much you get, it’s about getting more than the other guy.
  5. So when we’re looking at this – we’re looking at it all wrong.
  6. We just don’t appreciate what the benefits are in the mind of the person that we see as “spiteful”.
  7. And if there is an emotional benefit that outweights the physical cost, then spite doesn’t really exist…


Uh no.

That’s not particularly helpful. Saying “Spite doesn’t exist because the person that’s doing it gets such an emotional kick out of watching you suffer that it outweighs any cost to them” does not exactly fill one with comfort.

Also, I think spite quite clearly exists. You can be relative all you like – but actually, we can be objective here. When you look at a spiteful situation, like the genie situation, it is objectively clear that the man could have unlimited wealth and happiness. But he chooses to forgo all of that in favour of blinding someone that he hates. There is a near-sightedness to the decision-making that shows the decision to be far from rational.

But I’m getting distracted. Back to the experiments.

Experiment Number 1: The Ultimatum Game

The game works as follows:

  1. Two players must decide how to divide a sum of money between them.
  2. Player 1 gets to decide the split.
  3. Player 2 gets to either accept or reject the split.
  4. If Player 2 rejects the split, then both players leave with nothing.

An example:

  1. The sum of money is $100.
  2. Player 1 decides on a 50:50 split.
  3. Player 2 accepts.
  4. Both players leave with $50 each.

Another example:

  1. Same sum of money.
  2. Player 1 decides on a 90:10 split.
  3. Player 2 rejects.
  4. Both players leave with nothing.

In that second example, the real question is: why did player 2 reject the split?

After all, he could have had $10. Which is $10 more than he had before. Only he decides not to take that $10 in order to force someone that he doesn’t know to not have $90.

In practice, here’s what happens:

  1. Anything less than an 80:20 split usually gets rejected.
  2. However, if the decision is delayed, then people reject the “unfair” split less often.

But this experiment is not all that clean. Despite what it suggests, there is still the possibility that some notion of social justice, of a desire for equality, is getting in the way. What we need is an experiment that really cuts Player 2 out of the equation – because Player 2 may have some sense of being “socially-wronged”.

Experiment 2: The Pure Spite Experiment

Benedikt Herrmann is an economist that has devoted much time to the topic of spite in experimental economics. He has played with the Ultimatum Game rules to produce the following variant:

  1. Players 1 and Player 2 are both given $100.
  2. But Player 1 is given the option of surrendering $10 of his allocation in exchange for destroying $50 of Player 2′s allocation.

The results?

About 10% of the subjects routinely took Mr Herrmann up on his offer.

Herrmann calls these individuals “difference maximisers”.

I would call them “mean ass sons of bitches”.

But perhaps that’s just me.

When you extrapolate that out: 10% of our population have the tendency to create conflict and cause chaos for no reason other than being excited to see suffering happen.

The One Consolation

As Steve Levitt points out, this did take place in a lab, where Player 2 was faceless. In the real world, there is more social convention and Player 2 is has a face, which could appeal to the humanity of this 10%? I guess?

But really though?

The alternative viewpoint: this experiment took place in a lab where the test subjects knew that they were being watched – and in particular, they knew that their individual reactions were being watched.

What happens when you take those same subjects and insert them into a mob or a faction, where personal responsibility gets lost in the cause of the group as a whole?


Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at