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The past 12 months have been eventful. Some big events were positive while many others where less so, to say the least. We sometimes refer to these big once-off, unpredicted events as black swan events. The most recent black swan was Brexit. Although the topic no longer dominates dinner party conversations, it remains highly relevant as negotiations are ongoing and the outcome still uncertain. What we do know is that following the landmark referendum the value of listed UK properties fell, the...  Full story

Seed Weekly - Black Swans & Ugly Ducklings

The past 12 months have been eventful. Some big events were positive while many others where less so, to say the least. We sometimes refer to these big once-off, unpredicted events as black swan events.

The most recent black swan was Brexit. Although the topic no longer dominates dinner party conversations, it remains highly relevant as negotiations are ongoing and the outcome still uncertain. What we do know is that following the landmark referendum the value of listed UK properties fell, the Pound depreciated and UK interest rates were dropped to their lowest level in history on the back of renewed growth uncertainty. There were also a few days of panic in which most equity markets across the world were sold down, however most have since recovered.

On the day the results were announced you either owned assets, such as London property or the Pound, or you didn't. If you held these on the day you would have suffered a loss which has not recovered much of its value since. Nothing you did after the fact could change this. Panicked selling or emotional reactions following Brexit would most likely have exacerbated your headache.

South Africa experienced its own black swan event in December last year when our finance minister was replaced without reason or forewarning, twice. It caused the value of the Rand to plummet and government bond yields to spike. Some panicked and decided to sell their Rands after the sudden drop when the value was at a historic weak point. Since then, the Rand actually strengthened against most developed market currencies, and many who made the decision to sell the Rand immediately after the tumultuous 3 days in December can chalk up the loss to a sub-optimal, panicked decision.

Of course we aren't, for the purposes of this article, considering the merits of investing in hard currency or even touching on the topic of how much hard currency one should hold. We are just looking purely at the decision to sell an asset following a black swan event and the loss suffered because of this.
Not all black swan events are negative. Every SAB shareholder will forever remember the day the merger with ABInbev was announced and the share price shot up by +- 27% in one day. The story is similar to the above negative black swan events, either you owned the asset on the day and made a huge profit or you didn't. What made the SAB black swan event different, was the fact that since the announcement of the merger the Rand share price has in fact increased, although it came with significant downside risk if the deal didn't go through.

Before the announcement of the merger there wasn't much excitement about SAB. The share was expensive and trading within a band. It was by no means a bad company to invest into as it was profitable and generating cash, but nothing really ground-breaking was going on to get investors excited. The proverbial ugly duckling matured into a graceful white swan.

Events such as these, whether positive or negative, will always be a part of investing. It undoubtedly changes the fundamentals and outlook, and you should always look to re-evaluate your positions based on the revised outlook. Take a deep breath, and make the calculation whether holding onto the asset is worthwhile despite the recent shock, and if the asset is trading at fair value. When making decisions in a fit of panic, you will almost always find yourself looking back to discover an even bigger negative effect. It is as hard as it is simple - accept what happened as a sunk cost and move on.

Kind regards,

Stefan Keeve

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Wed, 10 Aug 2016

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