The budget speech delivered by our finance minister this week unveiled the state of our devastated economy with mind-boggling numbers in deficits and loans that left the average South African bewildered and ‘gob smacked’. The big elephant in the room is ‘Why did we allow ourselves to get here in the first place?’ Prevention is always better than cure and now we have to take the hard way…..We could have and should have changed our sails before this storm..it would have been much easier than having to take the hard road ahead.

Yes, we all knew that the lockdown was going to damage our economy but the COVID-19 pandemic merely accelerated us on the path we were heading for anyway. Before lock South Africa was living on borrowed time with a pending downgrade to ‘junk status’. This was quickly implemented when we went into lockdown in March and then soon after came the second downgrade which further degraded us.

What can we take as South Africans take away from this?  

Cling to your job if you have one                                                                

Pay cuts are likely as business needs to contain expenses to survive this storm Unemployment is catapulting into record levels and there will be many South Africans too willing to earn something rather than nothing.

Act quickly if you are on the tipping point of a personal downgrade Face the music with urgency, assessing your own damage. If you took any of the relief packages to assist you in the lock your cost of debt has increased and you have to start paying back soon. Fortunately, we have had a few rate cuts this year opening a small window of opportunity to settle the debt at a lower cost before interest rates move up again. 

Avoid being enticed into quick fixes                                                    

Casinos will be opening soon and there is a very real temptation for some South Africans to look towards gambling as a way out of their financial woes. This is a sure way to further destruction if you gamble with money you can’t afford to lose. Think about it….if you have debt costing say 10%  the money lost at the casino costs you that much more as it could have been used to reduce your debt. You should only be in a casino if your debts are all paid up and you have set aside a meaningful amount for savings.

Leave your retirement fund alone                                                    

 Accessing your retirement savings should be a measure of last resort. The tax payable is probably much more than the interest costs of your debt. Your financial future is also severely damaged as you effectively wipe out the crucial benefit of time required for compounding your investment. 

Real hard times lay ahead. South Africans will need to dig deep into their resilience doing everything possible to stave off the effects of our state of the economy.

Warren Edward Buffett is an American investor, business tycoon, and philanthropist, who is the chairman and CEO of Berkshire Hathaway. He is considered one of the most successful investors in the world and has a net worth of US$88.9 billion as of December 2019, making him the fourth-wealthiest person in the world.- Wikipedia.

Buffett runs Berkshire Hathaway, which owns more than 60 companies, including insurer Geico, battery maker Duracell and restaurant chain Dairy Queen.

So what can we learn from Warren Buffet as we stand stuck in a deep recession wading through a pandemic which has left us guessing at the outcome?

Warren Buffet has some truisms which have navigated his way to his fortunes. Let’s explore some and learn a few things to help us along. 

Invest in what you know…and nothing more.

So when you make a call on Bitcoin or Gold or even the currency, how much do you know about what you are investing in? Far too often we rush into investments 

not doing our homework. Warren Buffet prefers to leave investments he does not understand well alone.

When you buy a stock, plan to hold it forever

“If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.” 

A sound strategy but COVID19 changed all that and he was realistic enough to make an exception to this rule. 

Buffett has remained relatively quiet during the coronavirus market downturn: Rather than make any large acquisitions, he’s trimmed Berkshire’s holdings—mostly banks and airlines so far.

Buffet’s biggest recent move was to sell off 84% of his stake in Goldman Sachs, a longtime holding which he famously invested $5 Billion into during the 2008 financial crisis.

Buffett decreased his stake in Goldman from over 12 million shares to just under 2 million which saw the stock plunge over 30% in the first quarter.

Warren Buffett sold his Airline Stocks during the pandemic because of debt and over capacity. Berkshire Hathaway disinvested in American, Delta Southwest and United Airlines. Another deviation from his rule in the face of the global pandemic. Makes you wonder about SAA and how we carry on pouring money into its debt and overcapacity?

Know the difference between price and value

“Price is what you pay. Value is what you get.” – Warren Buffett

His understanding of value ‘stands out’. Many investors know the price of a stock but not the value. Warren buffet made the point during the 2008 financial crisis 

During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. 

Taking it a bit further, his appreciation of value over price is seen in his lifestyle:

Buffett is reportedly worth more than $80 billion. When he purchased his previous new car in 2006, he chose a cushy, but not outrageous, Cadillac DTS, priced at about $45,000.

Warren Buffet’s Portfolio

It has an enormous pile of cash that earns interest while waiting to be invested in a business or other productive asset.

In this uncertainty we can learn from the most successful investor ever. The biggest lesson from my point of view is ‘keep it simple’ – “do your homework but don’t be stubborn when you need to change’ and ‘know the value of your assets’. 

This has been a strategy applied by investors in the stock market over the years. It is a classic market adage which is also known as the Halloween Theory as the time to re-enter the market is after Halloween. (End of October). The saying dates back to old England when the stockbrokers would go on summer vacation in May and not return until September.

Changes were gazetted on the 1st of June governing conditions regulating living annuities. This is an attempt to help retirees have more access to their funds if they have been affected financially by the lockdown through COVID-19.

What is a living annuity?
When you retire you have two types of pension to choose from:

A life annuity – is a pension offered by a service provider which is guaranteed for the rest of your life. The liability of delivering the pension belongs to the service provider.

A living annuity – a pension which you are responsible for and manage. You decide where to invest and how much to draw as a pension. The main risk is drawing more than the fund is returning over time. For example, if the fund returns 5% in a year and your draw 10%, you reduce your investment by 5%. Over time, your capital reduces more rapidly as your income needs to take more of it.

The temporary changes

Living annuities allow you to draw between 2,5% and 17,5% per annum of the value of the fund.

Investors who want to change the income level of their living annuity have the opportunity to do so before their living annuity’s next income review (anniversary) date. The range has also been adjusted to a minimum of 0,5% (for those who feel they would like to protect more capital) and 20% (for those who need more income).
Changes can be made up to 30 September 2020 when they will revert back to the previous range.

So what should you consider?
If your living annuity has lost value this year as the markets crashed in March and then recovered, somewhat, you will need to assess the percentage you are drawing relative to the value of your fund. If you increase your income level in this interim period you could well eat into your capital which will deplete your funds in the future.

If you have other resources you could reduce your percentage drawdown and leave more capital behind for growth.

Another significant change
Before the 1st of June, you could cash in your living annuity if the value was below R75 000. This limit has now been lifted to R125 000. Be careful as tax could be applied. You should get a simulated tax directive in the first instance to determine if it’s worthwhile cashing in the fund versus drawing the income and paying less tax over time.

The bottom line is found in drawing less than your returns over time allowing your capital to grow. You may need the extra income now to help through this pandemic but be mindful of the impact on your living annuity into the future. Be careful not to get lulled into taking on risky investments with an unrealistic expectation of higher returns which are not likely as we unwind the lockdown and discover the damage to the economy.