A couple of weeks ago I wrote about the modest houses that Warren Buffett and his business partner Charlie Munger, had lived in for most of their lives. (Just in case there is a reader who is not sure, these men have been highly successful investors for decades and are two of the wealthiest men in the world)

Today I have some snippets of advice that I found from their comments, regarding good saving and spending habits for us simple men in the street.

• Avoid debt for depreciating assets (That’s basically everything except a house)
• Be careful of buying too many things you don’t need
• Avoid costly habits, like dining out and designer clothes
• Do not save what is left after spending; spend what is left after saving
• Live below your means
• Maintain a frugal mindset
• “Someone is sitting in the shade today, because someone planted a tree long ago.” (Ignoring the power of compounding. i.e. Time for your investments)
• Invest in assets that generate income
• Track your expenses: know where your money goes

I think they are saying: Save first, then live a simple lifestyle on what you have left.

Food for thought.

I write to you this morning from down south in KwaZulu-Natal, from one of those hundred-and-something year old farm houses scattered across our country by early settlers. Rambling gardens and remnants of days of high society life, when the elite of the area would arrive in their wagons for a spot of tennis or bowls followed by high tea. The big old tree where they would rotate their wagons around and disembark, still stands in front of the old stone front wall. The tennis court and bowling green long gone and overtaken by orchards and plants. Something simple about those days….

Google is a very powerful tool. Most of you will know that it follows what you regularly search for and learns to bring you leads on those subjects. For me it’s motorbikes, history, 70s and 80s music, and yes, financial stuff. I have recently been reading a couple of articles around Warren Buffett and his long time business partner and friend, Charlie Munger. (Charlie passed away last year)

The topic that I’m going to specifically write about today, is that both of these men stayed in their same houses almost all their lives. Buffett bought his first house in 1958 and still lives in it. Munger said that he refused to follow his rich friends who built mega-mansions. He said that in practically every case, a fancy house does not make the person more happy. I am not going to pass a subjective opinion on that – maybe not for me to do. However, I will remind you that the house we live in is not an asset. Yes, we put it on our assets and liabilities, but that’s just so that the bank or SARS can see what they could take away from you.

Why is it not an asset? Because it costs us money while we live in it, because it does not put money into our bank account, and because you cannot access the value of it while you live in it. (Borrowing against it does not mean you’re accessing the value of it.) Yes, whoever inherits your estate could now access the value of it, but it’s not an asset while we live in it.

So, like these two incredibly wealthy men, be careful how much money you spend on your house of residence. It’s wealth you can no longer use.

Yes it is Monday. Friday just got lost somewhere.

Most of you know that I regularly get online presentations to listen to. There are a lot of investment and compliance and regulatory ones that get thrown at us. But every so often, one of the insurance companies that I use puts together a session for us to join and learn from. Last week there was one from Hollard and the topic was disability, and in particular, disability income protection.

But what they did, was spend most of the one hour talking with two actual clients who were living on permanent disability income protection. Being a live session, there was first the settling down stuff of saying: “Can you all hear us? Can you see us? Please have your mics turned off. Thanks for joining.” And so on….

The first client was a lady who, from a physical point of view, was reasonably functional and mobile, but had been driven to the Hollard offices for the interview. For the second interview, the live feed had to be switched to the client’s house, where a remote team was ready for the conversation to happen again. This interview was with a man who was physically immobile and in stayed in bed permanently. He couldn’t move any part of his body, but he was mentally 100% and could listen to questions and respond and speak. The cause of the disability for both clients was a motor vehicle accident. They both finished talking by saying a number of times, ‘please make sure you have disability protection’.

I currently have two clients living on disability income protection. I see and hear and feel what it is to have the benefit, and likewise can see what the result would be if they did not.

For some of you, I find this benefit in your employee benefits – one of the reasons I nag you for your pension fund statement. For others, you have it personally. For some, we might still need to get it sorted out. Most of us won’t ever need it. Thankfully. That’s just how the stats work. More people need to pay than use it. Like the Lotto. And medical aid. But if you’re the one that does need it, and you don’t have it, life will be very difficult and a big and permanent financial drain on people around you.

It was quite something … quite moving…. to listen to the two clients talk. They spoke about how they lived, what they missed doing, what they couldn’t do… with their children. Kick a ball to his son, the man said.

Today is that dark day when many people go shopping for things they don’t need with money they don’t have. It’s a have-to-do thing for many I suppose. The feeling of ‘I’ll miss out’ is very overpowering for some. If it is something you really would use or need anyway, then that’s good.

The slogan that always bother me, is: ‘Buy this for only R1,999 and save R500.’ We don’t save by spending. It doesn’t make sense. You didn’t save it – you simply didn’t spend it.

But how it is possible – to save the savings if you really needed to buy that thing – is to actually ensure you put that R500 somewhere, because you would have spent it on this thing when the price was higher. So move another R500 into your home loan account, or put it into your motorcar HP, or let’s add it to one of your investments, or continue to build the cash you keep in a savings account for emergencies. These things would be saving the savings.

The biggest winners today are probably the banks, because so many folk will shop with money they don’t have, meaning they spend on their credit cards, which is borrowing money from the bank who then charge us interest.

Me… I don’t do crowds or queues very well. So I’ll just hide indoors today and avoid the shops.

I had a surprising number of you readers reply to my Thoughts last week regarding that Ponzi scheme I wrote about, saying you know someone who was in it and lost all their money, or who were lucky enough to have withdrawn their funds in time. I just want to make a few additional comments regarding all this.

The ‘brokerage’ was…is…. a Trust, with Trustees to make decisions and taking ‘due care’ – already a lower level of regulatory control than if it was a Company. It seems that Investors into this structure paid their money to the Trust’s Bank account and not directly to the investment manager. My point here is never pay your money to the broker’s / brokerage’s bank account. If you are asked to pay your funds to the Brokerage’s Bank account, that’s a red flag.

When you ask myself or Adrienne or Jacki to help you do an additional investment, we always either give you the banking details of Allan Gray or Marriott or our offshore investment managers etc, so that you can do the EFT directly to them, or we create those instructions whereby they withdraw the funds from your bank account. Money paid first to the brokerage’s account has time to sit before they do the pay-away to the investment manager, and then, maybe it doesn’t even get paid-away, or maybe it’s not being paid away to an investment manager at all, but becoming part of an ‘investment structure’, that has different variables to it. All difficult to track. And that’s what happened here….. someone had the ability to do things with the money coming in.

This week’s Daily Maverick had an interest article on this scheme. Plus there are other big investment managers making comments as to if and how they had any dealings with one of the underlying investment managers that did seem to receive funds. I follow with interest.

I’m going to be controversial here. If I worked for a corporate I might have been called in and told that I cannot express my opinion in this way. But thank goodness I’m unemployed, so I can have my say. And sorry, the letter is a bit long this week.

Yet again, over the last 2 weeks another ‘Ponzi’ scheme has been in the news because it collapsed. Billions of Rands of investor money gone. Many investors have lost everything, maybe some will get back a few cents in the Rand when investigations and winds up are all done. The principal owner/operator has turned himself in at a police station, thinking he will be safer in jail than on the street.

Why was this money lost? Because it actually never owned anything, any assets. I have gone on at times about how your money in a unit trust fund actually owns assets, either actual shares of companies, or bonds or listed property, etc. In such a scheme as the above, it is very hard to know what’s being owned, if anything at all. People begin to get great ‘returns’, but these are shown either by statements that simply get generated but mean nothing, or through income payments on a monthly or whatever basis. All appears very good so they tell their mates. The operating company/guy even does presentations to people, showing these ‘returns’. It might run very successfully for years, for many years, while money keeps coming in. It eventually collapses, either because whatever electronic game and equation that was being played in the background to manipulate the ‘potential’ value of the investments backfires, (because nothing is actually being owned) and/or because a few investors begin wanting to draw all or a lot of their money out and the system suddenly begins to have a cash flow problem. Your income is initially paid out from the funds received by the scheme, but later, the income might be getting paid out by the next inflow. Not good….

Why do people go here? Many folk want to make their own choices for investing, not using the right process to identify something that might not work, not using the right person or not knowing how to really dig down, determine, ask the right questions, see what’s going on. Many investors in this example were even advised to go in by registered Financial Advisors and apparently the offering was even registered with our industry authorities. (But in my opinion, the people working in these industry regulatory spaces – they are just humans, not necessarily knowing themselves what to ask)

I have had an ‘investment scheme’ presented to me many years ago. It was a property syndication that eventually collapsed. You didn’t get your money back. The guy who brought this to me….. the numbers simply didn’t make sense to my simple brain. Expected returns were claimed to be xyz. I said to him your return figures are irrelevant because you cannot control an expected return. Commissions were too much: this is how they succeed in getting some advisors to market their product – they offer to pay us too much. He couldn’t explain the underlying ownership well enough and clients wouldn’t be able to draw their funds out for an initial time period. That’s always a raised flag to me: all assets based on the stock market are saleable within a few days. Anyway… I invited the guy to leave my office and that was that. I had colleagues that invested their clients in this, and these colleagues were so distraught when their clients lost their money. I said to them but this and that and the other… They said but they thought this and that. Too late.

I have written about this a couple of years ago, but it will be good to mention it again, especially after my trilogy early this year about the workings of unit trust funds.

For those of you who watch your investment values (too) often, you will have notices drops in value of 3 or 4 or 5% in the last month or so. If you are adding to your investment’s on a monthly basis, either through debit orders into unit trust funds or retirement annuities, or monthly contributions into your employer pension fund, or if you are not using all your income from your Marriott funds and you have reinvesting income (which to me is like doing monthly savings), then it is actually good for your investments to sometimes have these drops in market values. This because your money being added during these ‘down months’ is buying cheaper units in your funds and therefore buying more units (more assets) for you than you would have been buying, had the markets not gone down.

Using some simple numbers, let’s say the market went down 5% in the middle of September. Your debit order now in October bought units at a 5% lower price than in September. Then let’s assume the markets go up by 3% again by the beginning of December. The value of the units you bought in October and November, have now gone up by that 3%, yes? However, the units you owned before this, have now only recovered 3% of their loss, and hence are still down 2%.

This is also an argument for increasing your Retirement Annuity monthly contributions vs. making too large a once-off addition at the end of the tax year.

I hope my basic example sort of makes sense.

Then….. maybe it’s important to go back to my story of a few weeks ago, around the matter of medical aids paying for treatment and hospitalisation for riding unlicensed and non-road legal motorbikes in the forest…. Well, this week I found my original notes around that topic and I see that I wrote down that I would not get cover for accidents if riding in Lesotho, Namibia etc. We all think of international travel insurance for going overseas, but I definitely have never thought about this for popping over into Lesotho for a couple of days. Just a thought for those of us who might do that little holiday visit into Lesotho, Swaziland, Botswana, Zimbabwe, Mozambique etc.

We’re busy changing medical aids at the moment, due to some particular reasons. Going through the process and reading all about the exclusions of benefits the various medicals aids I looked at all have, I remembered a conversation with my medical aid about 13 or 14 years ago.

I had just bought old offroad motorbikes for my son and I. The obvious ‘Dad’ excuse for getting his own toy as well, being that ‘my boy can’t ride alone in the bush’. Only after buying them, did the thought go through my mind of whether medical aid would pay for injuries sustained while riding these things. So I phoned my medical aid.

I asked the consultant who answered if my underage son riding an unlicenced motorbike offroad in the forests and the bush would be covered for injuries and hospitalisation if he had an accident. Question 2 was; if we’re riding these bikes down a public road to get to the forests and we have an accident, what then? I remember these questions sending the consultant off to the underwriters in the back office to get accurate answers.

On question two, we would get no benefits paid while riding unlicenced motorbikes on a public road and we had an accident.

On questions one, yes, the medical scheme would pay for treatment and hospitalisation for my son if injured riding in the forest even though underage, unlicensed and on a non-road legal vehicle.

So, a reminder that breaking the law can result in no benefits being paid for by your medical scheme. Each one might have slightly different exclusions, and it’s worth going and reading up on them. With my example above, it was that grey area of were we breaking the law, that made me pick up the phone.

My random topic this week might be of interest to many of you. And many others will know all this happens and will indeed be doing it in their own businesses.

Each month I ‘park’ the VAT that I must pay to SARS in my property bonds, and when they are too low and have no more capacity to hold anymore, I move the rest to a Marriott Money Market account that I keep for this sort of purpose. Then when I must pay it across, I draw it back out of wherever and pay it to our friends down the road. I have been doing this for years and years. So I have made money from hanging on to my VAT for a while, either from reduced interest on my property bonds, or from positive interest paid to my money market account. Scaling this example up a bit…. Let me use an example of a Superspar store, although a Pick ʼn Pay or Makro or etc will do just as well.

Large consumer stores like these can have huge sales every day, some even a million Rand a day or much more. But let’s use that figure. The VAT on a million Rand is about R130,000. (Some of you are thinking why is it not R150,000 – that looking like 15%. The maths down the sum to find 15% of the sale price is different to the maths back up the sum. Arbitrary information for a Friday…..)

So your Superspar down the road is able to put R130,000 a day of Vat into some interest bearing account that this particular store is able to benefit from and keep. And they will benefit from this money for anywhere from 30 to 90 days. (the Vat from May and June for example, must be paid by the end of July).

But we’re not finished. Let’s now talk about the products on the shelf. Stores like these will demand (probably) 90 days to pay for the goods they have bought to sell. Let’s pretend your local Superspar had that large delivery truck arrive yesterday – that one that messes up the traffic while trying to get into the delivery yard – and they unpacked a whole lot of Lux soap (produced by Unilever which you own through your unit trust funds. But I digress – yet again) and put it on their shelves. You go in today and buy your bar of Lux. The store gets paid for it today, by you. And if you didn’t have the cash, you borrowed it from your bank through your credit card. But the store still gets paid today. However, it now has the proceeds from the sale of the soap but it still has 89 days to pay the supplier the cost price of the item. The bar of soap moved in and out in a day, the store got paid, and they can now sit on the money from the sale for another 89 days.

Therefore between the Vat and the sale of the item, can you see how much money a store like this will have to put away into some or other account where the store can keep and enjoy the interest. They make a massive amount of income simply by playing with these sums of money that they can enjoy for a while.

So, when you go into your Spar or Woollies Food today, bear in mind that besides their mark up, they are actually making a lot of their income from simply sitting on money that is not theirs but they can enjoy for anywhere from 30 to 90 days. (And of course, every month another cycle of 30 to 90 days is beginning, so the process is never ending)

And you thought they only made their money from selling that bar of soap.

On Wednesday this week I had a “working” lunch with (virtually) the most senior fund manager from Marriott. I try and get his undivided attention about every three months.

He brings subject material to the table, but so I do. I always have some or other agenda in my mind. This week I had examples and questions from the very things I have been busy with for three of you reading this. So my head is always around what I’m doing or attempting to understand better for my clients. We spoke about local fund mixes I use, consistency of distributions (income) being paid by funds and global property valuations and the things affecting them. He took me through what many of us might have noticed on the news for property owners in the UK, that being interest rate hikes from the base of 0% in covid now heading to 5%. The conversations included two computer screens with lots of graphs going on and then real-time London Stock Exchange price searches. All rounded off with a very decent fillet steak.

It’s both wonderful and a privilege to have time alone with him. Not forgetting the free lunch as well!!