Reuben Beelders – Chief Investment Officer

October 2019

“Rule No. 1, Never lose money.

Rule No. 2, Never forget rule No. 1.”

~Warren Buffet

While Warren Buffet’s “Rules of Investing” are often glibly quoted, how well are they really understood? These rules are the essential component of the design of Gryphon’s multi-asset funds. In our experience investors fail to apply this wisdom in their own investment choices and then also appear to neglect this principle in managing their funds going forward.

Let’s consider a very straightforward scenario. (For the sake of simplicity, we’ll ignore taxation.)

We have two investors who each have R100 to invest:

Toni Turtle, who because of his nature, is only prepared to invest his R100 in a money market fund and earn 6% per annum.

The other investor, Hari Hare finds money market returns at 6% per annum to be pedestrian and believes he can do better in the equity market and thus chooses to invest in an aggressively managed equity fund.

At the end of year 1, Toni Turtle’s investment value is R106. Unfortunately for Hari Hare, equity market returns were poor and to aggravate matters further, his fund manager underperformed leaving him with a capital loss of 20% and an investment now worth only R80.

Critically, Hari Hare’s investment must now return 25% to get back to his original capital value and 33% to match the capital value plus interest earned by Toni Turtle. While this is not improbable, it does, however, illustrate the implications should Hari Hare suffer a loss in value greater than 20%. If this investment had fallen by 30%, then it would need to return more than 50% to reach Toni Turtle’s capital value plus interest.

Taking a longer term view, the compounding effect of Toni Turtle’s annual interest income also compounds the hurdle rate for Hari Hare to match.

Over an investment period of 5 years Toni Turtle’s investment has grown to R133.82. For Hari Hare’s investment to match this return from his year 1 investment value of R80, his investment would have to grow by 67%.

While growth of this nature is not impossible, the purpose of this story is to illustrate the importance of not losing money unnecessarily when it comes to investing.

There always comes a time when risk-adjusted returns are best served by avoiding risk-oriented investments, like equities – and this is when the practical implementation of authentic asset allocation should be applied. Portfolio managers purporting to manage asset allocation portfolios should actively protect investors from the risk (equities) and move into a holding pattern (cash) until such time as value returns to the market…as it always does…

The Gryphon multi asset funds are designed specifically to recognise such periods of excessive risk and move into cash to preserve value during just such a time.

In the words of Charlie Munger, “Take a simple idea, and take it seriously.