THE FIVE COMMANDMENTS: KEY INVESTMENT LESSONS FOR A VOLATILE WORLD

Transcription

1 THE FIVE COMMANDMENTS: KEY INVESTMENT LESSONS FOR A VOLATILE WORLD Web-based seminar 12/08/2009

2 HOST Mohammed El Kuwaiz Founding partner and Managing Director Derayah 2

3 1. Don t panic 3

4 Despite the sharp decline over the past few years, the performance of the Saudi stock market has been very good over the long run. Return on Saudi equities compared with various indices around the world Values assigned to index 100 in Saudi Emerging markets S&P 500 MSCI world SAR interbank Rate of annual return % Source: datastream, Bloomberg

5 Investors are quickly affected by market fluctuations, which leads them to bouts of fear or greed! Dow Jones index You might think these magazine But fact covers are from Sept Magazine cover in the early seventies Magazine cover in

6 Allow us to introduce you to your new partner!! But this partner has one problem: he is a manic depressive If you are an investor, then the market is your partner The key to winning is to sell when it is high, and to buy when it is low. -Warren Buffet Sometimes: Depressed Doesn t mind selling you his shares for 1/3 their value Sometimes manic Would like to buy your share for 3x their value 6

7 1. Don t panic 2. Diversify 7

8 The world of investment: what are the different forms and types of investments? Asset classes Markets Securities Mutual funds Saving accounts Money Mkt. / Murabaha Deposits / Musharaba Riyal Etc DollarRiyal trading fund Dollar trading fund Bonds / Sukook Saudi Debentures European Debentures Etc Saudi Government SABIC Etc Saudi bond fund Saudi Debenture fund The world of investment Real estate Equities Commodities \ metals Saudi real estate American real estate Etc Saudi shares Kuwaiti shares American shares Etc Property 1 Property 2 Etc SABIC Communication s Etc Oil Gold Etc Saudi real estate fund 1 Saudi real estate fund 2 Saudi share fund 1 Saudi share fund 2 Commodity trading fund Metal trading fund Private equity Saudi companies Chinese companies Etc Company 1 Company 2 Etc Private investment fund 1 Private investment fund 2 Derivatives Forward sale contracts Option contracts Etc Forward oil contracts Forward contracts Etc Hedge fund 1 Hedge fund 2 8 Currencies Antiquities and possessions Dollar Euro Etc Currency fund 1 Currency fund 2

9 The importance of diversification Abu Mohammed and Abu Msameh s sales over the year Sales Abu Mohamed s ice cream Average Abu Msameh s doughnuts Month 9

10 What do we mean by diversification? Different securities Diversification In different markets In Different asset classes Murabaha Sukook Equities Real estate Commodities and Metals 10

11 1. Don t panic 2. Diversify 3. Invest for the long run 11

12 In which of the two markets would you like to invest? S&P 500: Oct Oct S&P 500:

13 Even if the market is performing at its best, it must decline on the short run S&P 500: Jan Dec One of the best periods of performance: the internet bubble The more limited your investment horizon is, the more vulnerable you are to market fluctuations, without benefiting from the rising stream over the long run Dec-98 Feb-99 Apr-99 Jun-99 Aug-99 Oct-99 Dec-99 13

14 1. Don t panic 2. Diversify 3. Invest for the long run 4. Don t be tempted by profits and consider the risks 14

15 Which of the two investments is better? Investment (2) is more fluctuating than investment (1), therefore it is more risky. Annual return: 29.2% Risk: 15.3% Annual return: 29.2% Risk: 3.1% looking for returns only without considering the risks is like buying a fast car with no brakes!!

16 1. Don t panic 2. Diversify 3. Invest for the long run 4. Don t be tempted by profits and look out for the risks 5. Invest by yourself only if you have a relative advantage 16

17 The performance of mutual funds, over various periods of time, was better than the overall index Saudi market: index performance Vs mutual funds March 11 th, 2009, % Mutual funds average Index 6 شهور شهر 3 سنوات سنة 5 سنوات 1 month 6 months 1 year 3 years 5 years Why? Different experiences Different resources Information not available for everyone 17

18 What are the benefits of investing in mutual funds? 1. Economies of scale Huge amounts of capital invested, thus the investor benefits from the advantages associated with such immensity (example: discounts in exchange commissions, having access to company managers). 2. Professional management Fund managers are highly experienced and skilled in the field of investment, in addition, they are working full time / available, which brings benefits to the inexperienced investors. 3. Minimal capital requirements The minimum capital required to invest in mutual funds is low, which enables investors with little money to buy the fund shares in amounts appropriate to their income. 4. Asset diversification Due to capital abundance, funds are able to diversify assets and balance risks through enabling the investor to invest in a variety of companies at once. 5. Less risks, more peace of mind Professional management and asset diversification decrease the danger (and burden) of making a wrong decision, which consequently enables the investor to be free and focus on other aspects of his life and work. 18

19 When can you invest by yourself? More knowledge and experience If you have a relative advantage More resources and staff Better information More time If you don t have any of these relative advantages: Then let the professionals handle your investments

20 1. Don t panic 2. Diversify 3. Invest for the long run 4. Don t be tempted by profits and look out for the risks 5. Invest by yourself only if you have a relative advantage 20

21 Conclusion Remember The purpose of investing is to succeed in life. But the purpose of life is not to succeed in investing. 21

22 22 ADDITIONAL

23 Returns and risks: comparing different investment types Lowest year Return Year % Highest year Return Year % Rate of fluctuatio n (risks) %0.6 Rate of return %5.06 Time period 31/12/ /12/1984 Investment type Cash %-4.2 %-29.2 %-31.0 %-49.9 %-21.0 %-59.4 % %31.8 %37.7 %74.0 %105.4 %34.6 %63.4 % %3.8 %14.2 %22.6 %39.9 %18.1 %28.6 %18.8 %6.24 %8.22 %16.34 %18.95 %6.21 %8.24 % /12/ /12/ /12/ /01/ /12/ /12/ /12/ /12/ /12/ /12/ /12/ /12/ /12/ /12/1987 Bonds Shares Advanced countries shares Developing countries shares Saudi shares Real estate Advanced countries real estate Developing countries real estate Commodities looking for returns only without considering the risks is like buying a fast car with no brakes!! % % %25.5 % /12/ /12/1989 metals

24 The performance of mutual funds, over various periods of time, was better than the overall index. Saudi market: index performance Vs mutual funds March 11 th, 2009, % Mutual funds average 6 شهور شهر 3 سنوات سنة 5 سنوات 1 month 6 months 1 year 3 years 5 years 8.93 Index Source: Tadawul, and Derayah analyses

25 There has been a wide disparity in the performance of Saudi mutual funds over different periods of time Best performance Comparing the average performance of Saudi mutual funds with the best and worst performance in each period March 11 th, 2009 index Performance average 5 سنوات 3 سنوات سنة 6 شهور شهر 1 month 6 months 1 year 3 years 5 years Worst performance 35.06% 8.93% -8.31% % % -14.8% % % % % % % % % % % % % % % Source: Tadawul, and Derayah analyses

26 Diversifying the investments would have decreased the investor s risks and potential losses Comparing the Saudi shares with other stock markets and other investments types Yearly performance for the year 2008 Saudi shares American shares Chinese shares Shares Indian shares Bonds 4% Real estate Credit sales 3% Commodities and metals The average -38% -40% -56% -55% -47% -51% -65% The average reflects the performance of a portfolio diversified equally over the eight investment types mentioned above. Source: Bloomberg and Derayah analyses