Trading vs investment

If you’re choosing between being an investor or a trader, then you need to be consistent in
that claim and stick to your chosen strategy. You obviously need to identify first which
strategy you will take. In terms of identifying the differences: 80% of trading vs investing can
be explained by timing. Trading = Short-term. Investing = Long-term. The timing difference
described is given to be 1 year i.e. more than 1 year represents investing (most likely).

Traders use things like multiples (P/E ratio) to make trades. An investor will use more DCF
and NPV calculations. Also, if you’re putting a lot of time into understanding or calculating
certain aspects within a company – then you probably have investing intentions.

In trading, making a quick buck can be calculated by there is also a luck aspect to it.

DELAYED GRATIFICATION is scientifically proven to increase your chances of success.

For the assignment, you want to choose your 3 stocks from a trading POV. Look for high-
volatility shares. Look at high-return days and low-return days and then relate them to the
news if you can.

In terms of the JSE Challenge: Watch the news on shares, and act on this news by predicting
which shares you should buy or sell.

FUNDAMENTAL ANALYSIS: Looking inside the business and relating back to Warren
Buffett’s thinking.

TECHNICAL ANALYSIS:

Some more examples of differences:

• Short-term versus long-term.

• Amount of work done to understand the company and how it actually works.
• Profit from capital gains versus dividends and growth in dividends.
• Attitude towards risk. A trader is usually more risk-taking while an investor more risk-
averse perhaps.
• Is margin trading investment?
• Is short selling ever an investment?
• Humility.
• Trading and insider trading go together.
Question from 2018

OPPORTUNITY?
You are an equity analyst. As part of getting to know potential investment opportunities you
frequently visit the operations of listed companies and have conversations with management.
You are interested in Company X because you estimate the value per share to be more than
the current price per share and because you believe that including Company X in your
portfolio would benefit the overall risk profile.

At a recent visit to Company X the CEO, because of your interest, told you that the company
had signed a substantial new contract with the government that will increase Company X’s
turnover by 20%. The good news will be released to the market with a SENS announcement
together with Company X’s annual results in a week’s time. You have no relationship with
the CEO.

REQUIRED: Argue whether you should invest in Company X to profit from the expected
short-term and long-term increase in the share price. (5 marks)

Johannesburg Securities Exchange (JSE)

He won’t ask direct questions on the JSE i.e. is the JSE the 16th or 17th largest exchange in the
world?

The JSE is the monopoly of the financial markets in South Africa. They tend to be more
expensive and move slowly relative to the world (like a large slow dinosaur).

In Finance we speak about the return signature of companies on the JSE. This refers to what
types of sectors these companies come from i.e. are they industrial? Are they commodity
trading companies?
• Oldest still listed share is DRDGold listed in 1895.
• 2001 JSE takes over SAFEX (futures exchange). They took control over SA Commodities
Derivatives.
• 2003 JSE starts ALTX (alternative exchange). The ALTX is meant for medium and small-
sized shares. What does remain of ALTX? It’s easier to list the requirements and it isn’t as
complex as listing on the JSE.
• 2009 JSE takes over Bond exchange. The bond market remains OTC – it’s merely a
subsidiary of the JSE.

Players in South Africa

Large investors:
– The Public Investment Commissioners (PIC) is the Asset Manager for the government of
the Pension Funds (own 20% of JSE).
– Insurance companies (Own 10% of JSE).
– Investment managers
– Unit trusts (We have more unit trusts than shares in the JSE).
– Pension and Provident funds (These are the actual players in the asset managers).

Brokers:
• The Financial Services Conduct Authority (FSCA). They regulate the JSE. They recently
took back the licensing of ZARX as the exchange is too small and they do not have enough
liquidity.
• The Johannesburg Securities Exchange (JSE).
• Other small exchanges like ZARX, A2X (Dual-Listings) and 4AX (changed to the Cape
Town Stock Exchange and they mainly sell smaller companies’ shares on the exchange), and
the one “non-x” EESE.
• EasyEquities

JSE Stats & Facts

Some of these facts are old (from 2019). We currently are +- the 19th largest stock exchange
in the world. We are much bigger than the other African stock exchanges, but significantly
smaller than the American Stock Exchanges and the German Stock Exchange.

• Daily trade averages over $1 201 million.

• Total Market Cap (JSE): $958 208 million. Latest is 1.2 trillion dollars.
• 19th in the world by Market Cap.
• Largest of the 29 African markets by far.
• Market liquidity (2019): 33%. Getting worse.
• Privately owned and funded (public Ltd company). The JSE is listed on the JSE itself.
• Governed by a Board of Directors.
• Functions as both primary and secondary equities exchange.
• Equities markets regulated by the Financial Markets Act of 2012
JSE Equity Components

January 2019 it had 359 companies listed in total (the latest is 305) of which 71 foreign. The
JSE is losing listing on its exchanges. This is similar to the rest of the world. Perhaps they do
not need the equity capital from share listings anymore.

Main Board:
– Larger, established companies.
– Higher compliance cost and regulatory oversight.

ALTx:
– Intended for smaller, new companies
– (incl. family-owned, BEE, junior mining).
– Costs and regulatory requirements lower.
– In May 2018 they had 49 companies listed.

Many African governments require you to list your company on their stock exchange if you
want to do business in their country.
What is an ADR? It is an American Depository Receipt. It’s kind of like a derivative on a
share.

Reasons for dual listing

A lot of this has to do with companies’ egos. “I’m a big company now and I have grown up,
hence you should take me seriously so I’m going to list myself on multiple exchanges.
• Broader diversification of capital across countries.
• Reduces chances of takeovers by domestic competitors.
• Provides access to additional capital (bigger capital markets such as the US).
• Creates an international profile for a company.
• May be politically appropriate if a company has operations in a foreign country.
• You can attract more investors to improve your liquidity on your shares.

(There are many other reasons and you can try and make up your own appropriate reasons).
 JSE Listing Requirements (Shares)

*FREE FLOAT ~

Concentration on the JSE – large and small companies

The shares have changed but the constituents haven’t.

Where do JSE returns come from?

It is usually argued that share returns are a function of systemic risk exposure (beta model)
According to Prof. Paul van Rensburg: On the JSE returns are a function of exposure to
finance and industrial systemic factors + exposure to commodities systemic factors.

Johannesburg Securities Exchange and other

How does the JSE maintain their monopoly on the exchange market?
They could create red tape i.e. make it difficult for companies to exit the JSE by adding
complicated regulations.

Let’s now think about Monopolies and why society does not want this. There are usually
higher prices because the monopoly has control. There is also a lower supply than in a
perfectly competitive market. There are also less widgets available than in a perfectly
completive market. There is also no need for innovation from a monopolists POV – they
don’t need to be innovative. This ties into how the JSE helps companies adapt to their needs.
Often, they will be too stubborn to allow companies to ‘get special treatment’.

The JSE is however losing listings and they have been losing listings over the past couple
years.

Corporate Governance ~ Red tape

Interesting to note is that the JSE requires the CEO, CFO, and the chairman of the business to
be different people. They also require companies to submit integrated FS’s.

*Prosus is a spin-off of NASPERS.

Prof. did an interview with some old students who decided to list their company on the CTSE
rather than the JSE.

“Three major drivers:

- Cost: The cost to list on the CTSE compared to the JSE is significantly less.
- Flexibility: There are less onerous requirements on the CTSE.
- Ecosystem: Their business is built on financial engineering. They list a whole lot of
shares other than themselves. The CTSE also has a debt and equity market.

What you’re doing now is starting a journey that may last 40-50 years. Find the things that
you’re genuinely interested in the financial markets. Find the companies and industries that
you are interested in and follow them.”

Do infrastructure companies usually hand out dividends twice a year?

Test structure:

2/3 Phillips work and 1/3 Pradeeps work.

Phillip says try to look at a share listed on two different exchanges and then arbitrage them.

Value Drivers

We look at financial analysis and trend analysis. We are looking for strong performance wrt
revenue, profit and cash flows. Cash flow is essential to the growth of a business – we want
to see strong cash flows for the company we choose to invest in.

Qualified audit  You are in the red and neep to ‘report to parliament’ for auditing. High
chance that standards in corporate governance are not being followed.

Drivers of Business Value

2) Diversification: We can view companies that sell niche products with a good product as a
good investment as they offer something that is rare. Chances are there is not a large, diverse
supply of these products in the market.