Wednesday, 11 April 2012 - 20:00
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Compounding for the Long Run Most investors have heard the saying, generally attributed to Albert Einstein, that compounding is the eighth wonder of the world. Compounding is a fairly straightforward concept (making gains on prior gains) but it can be very difficult to completely grasp as its effects are only truly felt over the extremely long term (think 20 years and more).
At the beginning of this year the Seed Weekly Report looked at 2 investors that invested a lump sum into the SA market (via the ALSI) for a 10 year period. Investor B used the dividends paid out to enhance his lifestyle, while Investor A slavishly reinvested the dividends. At the end of the period Investor A had 33% more invested than Investor B. While it is obvious that Investor A is better off, there can be the argument that the fruits that Investor B enjoyed as a result of his withdrawals could equal the financial value that he lost out on.
Agreed. Over a 10 year period, while compounding is good for your investments, the added benefits do not obviously always outweigh the opportunities lost. Over longer periods, however, the added benefits become more and more obvious.
For the purposes of this article, let’s assume that two 25 year olds each inherit R 100 000 from a distant aunt. They both decide that it’s not enough that they are able to stop working, but it’s a sizable amount that they want to invest in the stock market (ALSI – as they are able to take on the full market risk). Here their 2 strategies diverge slightly (or at least they don’t think there’s much difference at the outset).
The first recipient decides to reinvest his dividends with the following mindset, “This money is a windfall to me, and I don’t need to look at it or use it until I retire. I therefore want all my dividends reinvested”.
The second recipient is disciplined in that he wants to invest the inheritance, but would like to have a bit of extra cash each year to splurge, “I’m being responsible by investing the inheritance, but it won’t make much difference if I just have the dividends paid out to me as they are declared rather than having them reinvested”.
In the first 5 – 10 years the second recipient boasts that he’s a) got an investment that has grown nicely in real terms, and b) has ALSO been able to go on a few nice holidays and buy some new gadgets. The first recipient just keeps his head down, knowing full well that the power of compounding will kick in down the line.
At age 65 (retirement) the difference in size between the two portfolios is mindboggling! The portfolio that had the dividends reinvested is now over 5 times larger than the one that had the dividends continuously withdrawn. Both men have been made wealthy by their investments, but the one that reinvested his dividends has created significantly more wealth than his counterpart. The chart below shows the difference between the two portfolios using ALSI data over the past 40 years.
Less than 40% of the difference between the two portfolios can be attributed to the money that was spent on the holidays and gadgets. The remainder, over 60%, is the opportunity cost of not reinvesting the dividends. In this example, nearly R50m extra is generated through returns on the reinvested dividends!
While we agree that money can’t buy happiness, each investor needs to assess the pro’s of instant gratification versus the con’s of the opportunity cost of missing out on the compounding effect. Further, both investors did well by investing their inheritance rather than immediately spending it on a new car (or other depreciating ‘assets’), or a trip around the world, but one just did a WHOLE lot better than the other!
Take care,
Mike Browne
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966
Wed, 11 Apr 2012
Top News
South Africa's rand weakened against the dollar on Wednesday, holding around the 8 rand level after testing 2-1/2 month lows earlier in the session during a softer trend for the currency caused by a bleak global growth outlook. Full story
South African stocks ended slightly up on Wednesday in a volatile session were mining stocks including gold producers and ferrochrome firm Merafe helped push the market higher. Full story |
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A powerful 8.6 magnitude earthquake and a series of strong aftershocks struck off Indonesia on Wednesday, sending people scurrying from buildings as far away as southern India, but there seemed little risk of a disastrous tsunami as in 2004. Full storySyria promised to observe a U.N.-backed ceasefire starting on Thursday, but its forces kept up fierce attacks on opposition neighbourhoods in the hours before the deadline. Full storyPresident-elect Vladimir Putin urged his opponents on Wednesday to bury their differences with him for the sake of Russia's economic and political future after months of protests and elections that divided the country. Full story |
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Markets | European stocks rose on
Wednesday, halting a week-long slide as recently battered banks
rallied, although the rebound was seen as technical and could. . . Full story | | U.S. and European equities
rebounded on Wednesday after a string of heavy losses that had
been stoked by fears over a weakening global. . . Full story | | U.S. stocks rose on
Wednesday, bouncing back after five days of sharp losses that
pushed the S&P 500 and the Nasdaq below their. . . Full story | | Britain's top share index
rebounded from a three-session slide on Wednesday as a rise in
banking stocks following a positive broker comment and. . . Full story |
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| European stocks ended higher on
Wednesday, halting a week-long slide as recently battered banks
rallied, although the rebound was seen as technical and. . . Full story | | Gold steadied on Wednesday,
after rising for four days straight, as the intensifying euro
zone debt crisis threatened to undermine the euro and. . . Full story | | U.S. stocks extended gains on
Wednesday, pushing the Dow average up more than 1 percent as the
market rebounded after five days of. . . Full story | | U.S. stocks bounced back at
the open Wednesday after five days of losses on the S&P 500 that
brought the benchmark index down. . . Full story |
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SA Business | Growth in South Africa's manufacturing output outpaced expectations in February, adding to signs that domestic demand is recovering and backing the. . . Full story | | South Africa's Standard Bank plans to as much as quadruple its branch network in Angola by the end of this year,. . . Full story | | South Africa's competition authority said on Wednesday it had given an unconditional green light to global miner Anglo American's $5.1 billion. . . Full story | | South Africa's rand recouped some of its losses against the dollar on Wednesday but could remain under pressure as a negative. . . Full story |
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| Anglo American plans to build a 450 MW power plant in South Africa to supply electricity to its platinum subsidiary Anglo American Platinum, the Business Day newspaper reported on Wednesday.. . . Full story |
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Company News | Holders of Vukile linked units ("linked units") are referred to the vendor placement announcement released on SENS today, 11 April 2012,. . . Full story | | Shareholders are advised that, further to the SENS announcement released on 30 March 2012, Investec Ltd has obtained the requisite SARB. . . Full story | | | | Holders of Vukile linked units ("linked units") are referred to the circular issued by Vukile on 31 January 2012, the general. . . Full story |
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| Keaton reported substantial across-the-board production increases from its South African operations in the financial year ended 31 March 2012. The company's Vanggatfontein Colliery in Mpumalanga province delivered 955 376t of washed 4- and 2-Seam thermal coal to power utility Eskom between. . . Full story | | Shareholders of the company are advised that the European benchmark ferrochrome price has been settled at USD1.35 per pound for the second quarter of 2012, an increase of 17% from the USD1.15 per pound price in the first quarter of 2012.. . . Full story |
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Company Results | Investment income for the year ended 29 February 2012 soared to R63.7 million (2010: R22.8 million). Operating activities climbed to R342.1 million (2010: R283.3 million), while profit for the year increased to R334.6 million (2010: R259.1 million). Furthermore, headline earnings per share jumped to 30.7cps (2010: 18.9cps).
Dividend
A final ordinary dividend of 4cps (2011: 4cps), in respect of the financial year ended 29 February 2012, was declared on 7 March 2012 and paid on 2 April. . . Full story |
World Markets (Spot Prices)
Name | Time | RP | Move | % Move | JSE Overall | 17:00 | 33632.76 | 15.02 | 0.04% | JSE Top 40 | 17:00 | 29669.84 | 33.84 | 0.11% | JSE Gold | 17:00 | 2316.73 | 53.85 | 2.38% | JSE Financial | 17:00 | 24815.44 | 4.84 | 0.02% | JSE Industrial | 17:00 | 37892.68 | -152.48 | -0.40% | JSE Indust 25 | 17:00 | 31763.99 | -139.93 | -0.44% | JSE Resource | 17:00 | 48693.67 | 339.28 | 0.70% | DJ Futures | 19:46 | 12760.00 | 57.00 | 0.45% | DJ Ind | 19:45 | 12841.00 | 125.07 | 0.98% | SP 500 | 20:00 | 1372.71 | 14.12 | 1.04% | Nasdaq | 20:00 | 3021.93 | 30.71 | 1.03% | FTSE 100 | 17:35 | 5634.74 | 39.19 | 0.70% | DAX | 18:06 | 6674.73 | 68.30 | 1.03% | CAC40 | 18:06 | 3237.69 | 20.09 | 0.62% | Nikkei | 08:26 | 9458.74 | -87.52 | -0.92% | Shanghai | 09:26 | 2308.92 | 23.15 | 1.01% | Hang-Seng | 10:26 | 20140.67 | -452.33 | -2.20% | All Ords | 08:47 | 4327.30 | -46.40 | -1.06% | NZSE 50 | 07:46 | 3465.39 | -2.59 | -0.07% |
| | Name | Time | RP | Move | % Move | Gold | 19:58 | 1657.90 | -.32 | -0.02% | Gold/Rand | 20:00 | 13227.72 | 306.60 | 2.37% | Gold/R kg | 20:00 | 425271 | 3185 | 0.75% | Silver | 19:58 | 31.5300 | -.2300 | -0.72% | Platinum | 19:57 | 1577.60 | -15.40 | -0.97% | Palladium | 19:58 | 635.90 | 2.20 | 0.35% | R157 | 17:02 | 6.74 | -.05 | -0.66% | R204 | 17:02 | 7.64 | -.03 | -0.33% | Brent Crude | 19:46 | 120.51 | .11 | 0.09% | Rand / Dollar | 19:58 | 7.9786 | -0.0091 | -0.11% | Rand / Pound | 19:55 | 12.6637 | 0.0223 | 0.18% | Rand / Euro | 19:55 | 10.4607 | 0.0102 | 0.10% | Rand / NZD | 19:57 | 6.5361 | 0.0193 | 0.30% | Rand / AUD | 19:55 | 8.2328 | 0.0353 | 0.43% | Yen / Dollar | 19:58 | 81.0300 | 0.3360 | 0.42% | Euro / Dollar | 19:55 | 0.7626 | -0.0015 | -0.20% | Dollar / Euro | 19:58 | 1.3106 | 0.0024 | 0.18% | Pound / Dollar | 19:55 | 0.6284 | -0.0018 | -0.29% |
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Click here for the Sharenet Spot Price page
The JSE Today
Trading Statistics
Date | Adv. | Decl. | Unch. | Actives | Volume | Value | Trades | Orders |
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11/04/2012 | 153 | 176 | 88 | 417 | 279,528,789 | R14,741,923,052 | 106247 | 2657328 | 10/04/2012 | 159 | 167 | 87 | 413 | 224,071,342 | R14,947,206,687 | 107999 | 2506758 | 05/04/2012 | 193 | 139 | 75 | 407 | 232,371,780 | R13,841,369,385 | 114433 | 2955298 | 04/04/2012 | 85 | 262 | 64 | 411 | 290,522,919 | R18,259,222,036 | 130076 | 2808605 | 03/04/2012 | 239 | 141 | 73 | 453 | 271,086,135 | R16,825,623,259 | 120825 | 2530060 |
* Includes all listed instruments on the JSE
Index Summary Index Name | RP | Move | % Move | Top 40 | 29,669.84 | 33.84 | 0.11% | Industrial | 37,892.68 | -152.48 | -0.40% | Mid Cap | 48,231.85 | -150.92 | -0.31% | Small Cap | 36,120.46 | -46.21 | -0.13% | Resource 20 | 48,693.67 | 339.28 | 0.70% | Industrial 25 | 31,763.99 | -139.93 | -0.44% | Financial 15 | 9,401.53 | 10.89 | 0.12% | Financial & Ind. 30 | 35,313.74 | -93.37 | -0.26% | All Share | 33,632.76 | 15.02 | 0.04% | Oil & Gas | 27,505.43 | 149.08 | 0.54% | Mining | 31,365.22 | 230.68 | 0.74% | Gold Mining | 2,316.73 | 53.85 | 2.38% | Platinum Mining | 57.29 | .07 | 0.12% | GENERAL MINING | 7,959.68 | 37.94 | 0.48% | Oil & Gas Producers | 14,789.16 | 80.15 | 0.54% | Basic Materials | 26,880.10 | 201.86 | 0.76% | Chemicals | 14,865.52 | -260.63 | -1.72% | Forestry & Paper | 14,021.32 | 270.42 | 1.97% | Industrial Metals | 29,916.53 | 292.53 | 0.99% | Industrials | 33,297.83 | -256.49 | -0.76% | General Industrials | 90,254.29 | -1102.68 | -1.21% | Consumer Goods | 32,860.84 | -224.43 | -0.68% | Automobiles & Parts | 5,697.38 | 237.77 | 4.36% | Household Goods | 184.95 | -1 | -0.60% | Health Care | 40,876.67 | -133.43 | -0.33% | Beverages | 107.68 | -1.12 | -1.03% |
| | Index Name | RP | Move | % Move | Food Producers | 59,543.55 | -352.44 | -0.59% | Personal Goods | 486.60 | -1.00 | -0.21% | Consumer Services | 65,539.76 | -115.12 | -0.18% | General Retailers | 54,344.04 | -389.85 | -0.71% | Travel & Leisure | 3,713.60 | -43.90 | -1.17% | Media | 97.89 | .37 | 0.38% | Support Services | 2,377.90 | -27.99 | -1.16% | Telecommunications | 65,960.08 | -138.75 | -0.21% | Financials | 24,815.44 | 4.84 | 0.02% | Banks | 46,830.77 | -225.37 | -0.48% | Non-life Insurance | 42,239.25 | 237.35 | 0.57% | Life Insurance | 20,274.61 | 268.84 | 1.34% | General Financial | 2,312.87 | 5.68 | 0.25% | Technology | 28,096.99 | -122.33 | -0.43% | SHARIAH TOP40 | 3,006.14 | 12 | 0.41% | FTSE/JSE SHARIAH ALL | 3,127.66 | 10 | 0.32% | COAL MINING | 28,351.36 | 146 | 0.52% | FTSE JSE Fledgling | 5,411.88 | -2 | -0.03% | FTSE/JSE Alt X | 1,276.11 | -9 | -0.72% | SA LISTED PROPERTY | 406.19 | | -0.75% | CAPPED PROPERTY | 330.05 | | -0.54% | RESOURCE | 26,908.84 | 190 | 0.71% | DIVIDEND PLUS | 197.05 | -0 | -0.22% | FTSE/JSE RAFI 40 | 7,026.30 | 14 | 0.20% | Capped Top 40 | 15,666.56 | 15 | 0.10% | Capped All Share | 17,014.33 | 7 | 0.04% | JSE TABACO | 5,069.64 | -38 | -0.75% |
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Click here for the Sharenet Index Summary page
Latest Consensus Changes** Code | Company Name | Status | Updated | NED | NEDBANK GROUP LTD | HOLD | 05 Apr | SBK | STANDARD BANK GROUP LIMIT... | SELL | 05 Apr | AIP | ADCOCK INGRAM HLGS LD | HOLD | 05 Apr | IPF | INVESTEC PROPERTY FUND LT... | HOLD | 05 Apr | LHC | LIFE HEALTHCARE GRP HLDG ... | BUY | 05 Apr |
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Results Expected** Expected | Company Name | Fin. Date | 16 Apr 2012 | MAS | November 2011 (Q) | 16 Apr 2012 | PSG | February 2012 (Final) | 16 Apr 2012 | PSGFIN PREF | February 2012 (Final) | 17 Apr 2012 | DCENTRIX | February 2012 (Final) | 18 Apr 2012 | AFEAGLE | December 2011 (Final) |
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Recent Dividends** Share Name | Dec-Date | LDT | Pay-Date | Amount | VIVIDEND | 12-04-05 | 12-04-25 | 12-05-07 | R 0.2450 | ARROWB | 12-04-04 | 12-04-19 | 12-04-30 | R 0.0309 | ARROWA | 12-04-04 | 12-04-19 | 12-04-30 | R 0.0500 | SHFINV-PREF | 12-04-03 | 12-04-13 | 12-04-23 | R 3.7400 | CADIZ | 12-04-03 | 12-04-25 | 12-05-07 | R 0.5000 |
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Ex Div** Share Name | Dec-Date | LDT | Pay-Date | Amount | SASOL | 12-03-12 | 12-04-04 | 12-04-16 | R 5.7000 | CASHBIL | 12-03-20 | 12-04-04 | 12-04-16 | R 2.9600 | BIDVEST | 12-02-27 | 12-04-04 | 12-04-16 | R 2.8000 | AECI | 12-02-21 | 12-04-04 | 12-04-16 | R 1.7900 | WBHO | 12-02-20 | 12-04-04 | 12-04-16 | R 1.1000 |
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Upcoming AGMs** Code | Company Name | Date | Status | CIL | Consolidated Infrastructure Group Ltd. | 16/04/2012 | Confirmed |
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