When Braam van der Mescht, managing director of RPS, was selected and invited by J P Morgan Investor Services to attend the 2005 Annual General Meeting of Berkshire Hathaway Inc in Omaha in the USA, he met with Warren Buffett, investor guru of the company and at some stage second richest man in the world. The experience that Braam has gained during this expedition still motivates us here at RPS to invest like Buffett and according to his rules, but without trying to be Buffett:
- Rule number One: Don’t lose any money.
- Rule number Two: Don’t forget rule number one.
We will only invest our clients’ money where we invest our own money – like Warren Buffett does in his Berkshire Hathaway Company. We also only invest with fund managers whom we know personally and with whom we stay in touch on an ongoing basis. We regard these investment managers as our associates and business partners.
We choose and manage our fund managers on the principle of the One Pocket investment philosophy. This means that we make sure that they apply the One Pocket principle when placing investments with no other investment portfolios on the side.
In effect, at the time when Warren Buffett rescued Berkshire Hathaway from the dead end of the textile industry in the 1960’s and started to build it to become the American multinational conglomerate that it is today, he had just one pocket left. This pocket was Berkshire Hathaway in which he invested. He had no other investment portfolio on the side and virtually no personal investments. Berkshire itself was his personal investment and remains his only investment.
To quote Buffett: “I just like it, Berkshire is something I would be in for the rest of my life. It is public, but it is almost like the family business now.”
Buffett’s commitment was not long-term, but for the rest of his life. His career – in a sense, his life – was subsumed in that one company. Everything he did, each investment, would add a stroke to that never-to-be-finished canvas.
(Source: Roger Lowenstein – Buffett: The Making of an American Capitalist.)
Products and Services
Today’s fast changing financial services environment necessitates the active management by and continuous advice of an experienced and knowledgeable financial advisor. Our carefully guarded independence allows us to choose the right financial products to meet each client’s risk profile and needs as outlined in our strategic planning process.
Many excellent financial products and instruments continuously reach the market. As an independent service provider we are able to choose products from all the major asset managers, unit trust companies, linked investment services providers but, only on request, from insurance and assurance companies. These products include:
- Managed unit trust portfolios
- Money market investments
- Living annuities
- Retirement annuities
- Individual preservation funds (pension and provident funds)
- Capital investments (with or without income)
- Direct Offshore investments
We don’t make a claim to being brilliant. But we pride ourselves on being highly competent, careful and conservative (yet not old fashioned!). Our primary aim is to conserve our clients’ money over the years to produce a conservatively acceptable rate of growth in capital and thereby also in income. We offer what the defensive investor expects from us. We never forget that we are handling other people’s money and therefore go out of our way not to lose it, or any part of it. Money is real to us and that is why we have such an intense belief in the Margin of Safety principle of Benjamin Graham and David Dodd – laid down in their book, Security Analysis in 1934 – and along with them, Warren Buffett.
Margin of Safety
(Source: Peters MacGregor Capital Management)
Benjamin Graham’s definition of investing could not be clearer:
- "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.
- People who invest make money for themselves; People who speculate make money for their brokers.
- Confusing speculation with investment is always a mistake.
- To distill the secret of sound investment into three words, we venture the motto MARGIN OF SAFETY. This is the thread that runs through all discussion of investment policy – often explicitly, sometimes in a less direct fashion.
- Timing is of no real value to the investor unless it coincides with pricing. By pricing we mean the endeavour to buy stocks when they are quoted below their fair value and to sell them when they rise above such value… make sure that when you buy you do not pay too much for your stocks. This may suffice for the defensive investor whose emphasis is on long-pull holding.”
(From the book Security Analysis by Benjamin Graham and David Dodd.)
Investment Philosophy – 20 Points
- We firmly believe in the MARGIN OF SAFETY investment principle as laid down by Benjamin Graham and David Dodd in their book, Security Analysis in 1934 and followed by Warren Buffet throughout his life. We are, therefore, committed to a consistent and predictable investment philosophy.
- We invest only in unit trusts of fund managers who strictly adhere to these principles in their investments and who state unequivocally and publicly that they do so.
- We invest in unit trust models to outperform the market defensively. There is nothing to it to achieve capital growth in a bull market. But not to lose money in a bear market is an art.
- We invest with the objective of not losing an investor’s money or part thereof.
- We invest in the knowledge that markets do not always rise and can fall in the short term. However, it is in times such as these that the markets rate good shares incorrectly and provide our fund managers with buying opportunities.
- The best performance our investments can achieve is to outperform a down market. This amounts to managing investments well to enable us to create sleep-well-at-night reassurances.
- We invest only in unit trusts that we can monitor on our systems daily.
- We are constantly in contact with our fund managers. We continually conduct research on their views and handling of the market as well as on their outlook on the market. Fund managers cannot do something that we are not aware of. Our technology is too comprehensive and refined.
- We will not hesitate to leave fund managers should we discover that they or their companies are doing things that we do not agree with. Anyone can make mistakes at times. So can they.
- We do not invest in haste in an attempt to time the market.
- Good investments are purchased and need not be sold. For this reason we do not invite prospective investors to use our investment services. They must do so of their own volition after thorough training in our investment philosophy.
- Our investments, fees and administration charges are completely transparent.
- We never try to change a client’s view on the market – conservative remains conservative, balanced remains balanced and high growth remains defensive for high growth.
- We never argue with clients about their preferred investments. We respect every person’s views on investments. Like the universe itself, the investment universe is vast.
- The equity market is not a place where we try to quickly make money for our clients. In fact, it is a dangerous place where most participants attempt to get rich quickly by speculating.
- Our investments are inevitably long-term investments. It will not create wealth overnight, but will do so in the long term.
- We believe that "the further backward you look the further forward you can see." (Churchill)
- We do not know what will happen in the markets tomorrow, or next week or next month. However, we do have a good idea of what will happen in the future.
- We do not write lengthy reports, investment letters and market reports. They are all of a historical nature and about things that are in the past. Writers write and investors invest.
- We accept the truth of the following: All things excellent are as difficult as they are rare. (Spinoza)
Functioning as a multi-manager
Multi-managers are asset managers who do not manage the investments themselves, but rather manage through different asset managers. They therefore do research on different asset managers in the quest to identify the best, to choose them, invest in their funds and combine these funds in order to create different portfolios which each have their own risk and return targets. No single asset class or portfolio manager will always be the best performer.
RPS is authorised and licensed by the Financial Services Board (FSB) as a Discretionary Financial Services Provider (FSP2). We are therefore authorised to make investment decisions for our clients by investing in different fund managers’ funds in order to achieve the best possible returns for our clients based on their risk profiles and investment goals.
We believe that different fund managers have different skills and excel in different areas. Furthermore, no portfolio management style will stay on top during all types of market conditions. By exposure to different asset classes, markets, managers and styles, we strive to attain above average return on investments at lower than average levels of risk.
We might struggle to outperform the equity bull markets because our portfolios are diversified. By making use of different asset classes and underlying managers, multi-managers manage to protect the capital in falling or volatile markets. If an investor should lose 50% of his investment capital in one year, it takes another 100% in returns just to compensate for the loss. It therefore makes sense to gradually accumulate capital instead of being reckless and burning one’s fingers. By producing second-quartile (average) returns on a consecutive basis, a fund manager eventually achieves top-quartile status. “Predictable” is therefore not necessarily boring. Many investors, especially those who need a retirement income, cannot afford huge market volatility. A well-diversified portfolio ensures systematic growth and helps investors to sleep well at night.
In South Africa there is currently billions of rands managed by multi-managers. Recent growth was in line with international growth trends.
The benefits of multi-management
- Clients get the benefits of different levels of diversification without necessarily giving up returns. We manage the risk by diversifying between asset managers, asset classes and management styles.
- Portfolios are blended optimally. We compose our clients’ portfolios by appointing different asset managers to ensure that the desired level of risk and return is generated in line with our clients’ investment goals and risk profiles.
- Our administrative abilities, together with state of the art technology, benefit clients as the portfolios of all the underlying investment managers are monitored and checked on a daily basis.
- Although we monitor our portfolios on a daily basis, we avoid unnecessary switching or churning in our funds. We have a habit of forming partnerships with our underlying fund managers.
- We offer our clients an additional level of compliance monitoring to ensure that the portfolios adhere to the necessary legal requirements.
- Other benefits include consolidated reporting and cost effectiveness, as well as the fact that smaller clients get access to new generation asset classes.