Should you have any alternative investments?
A listed company is a company whose shares trade on a public stock exchange. Buying a share in a company means the buyer of the share will own a stake in the business entitling them to voting rights and profit sharing. The business will use the money raised from the sale of their shares to fund business interests such as expansion plans or acquisitions.
This is a process used by millions of people to buy stakes in large businesses which in turn grow and give the shareholder a return on their investment over time whether this is by distributing profits in the form of dividends or through growth in value of the shares they own.
A stock exchange (such as the JSE) ensures that companies listing on their exchange comply with strict listing requirements.
These requirements include:
The company needs to produce a pre-listing statement containing certain prescribed information concerning the company, this allows investors to make informed decisions on whether to buy the company’s shares
A subscribed capital of at least R50 000 000 – this is a the total capital initially raised based on the number of shares that the public subscribe to buying when the share lists
Not less than 25 000 000 equity shares in issue
A 3 year audited profit history, the last year of which needs to be a profit of more than R15 000 000 before tax
20% of each class of shares need to be held by the public to ensure liquidity
Companies must publish results twice a year (interim and full-year) – this must include reports such as income statements, cash flow statements, a balance sheet, profit/loss statements, dividend announcements and commentary from the company on how it is doing as well as future views
A comprehensive and well governed set of requirements such as these ensures that:
our shares are easy to sell (have good liquidity) when we want to sell them to another party as there is a marketplace of buyers and sellers
the companies we own shares in are transparent with their information and their dealings, allowing us easy access to the information we require to make investment decisions
comprehensive and regular auditing processes to ensure that financials are on time and accurate
Source for JSE listing requirement can be found in the following document: JSE Listing Requirements
Every now and then there are a couple of alternative investments products that we are confronted with, for example I have recently come to terms with section 12J companies and impact farming initiatives. Others such as bitcoin, whiskey, gold, and classic cars have been popular in the past.
These often look enticing at first because they are different from what we are used to. Most of the time these investments do not have the same structures in place as listed companies do, they do not have the strict framework which a listed company needs to follow and information or contact can be hard to come by. Liquidity is your biggest issue. The market place of buyers and sellers on one of these investments is generally much smaller this means if everything about this investment turns out not to be what the sticker said it would be, getting out can often be impossible as you have a very small pool of people to try and sell your investment to.
Businesses like the section 12J and impact farming ones even offer tax breaks for those contributing to them. This is often a big selling point. This is great, but just like a retirement annuity no tax break is good enough if the quality of what is in my investment is not at the required level, and if you can’t liquidate your investment on your terms.
Let’s not fall into the trap of assuming that because a share is listed it is boring and over-subscribed to. The governance that a stock exchange provides us with is a truly valuable one.
I am not the kind of person to say you shouldn’t invest in any alternative products, I think you need to make those calls by doing all the research and investigating all the options yourself, who knows at some point I may get involved with one myself. But just like with buying an investment property there is something to be said with portfolio contribution. I don’t want to buy a flat/apartment to rent out and have that asset dwarf the other assets in my portfolio. I need proper diversification across asset classes. When it comes to alternative investment products if these are going to be included they should form a very small contribution to our total investment portfolio and have a long-term time horizon. This will minimise our risk if something unexpected were to happen with this investment and ensures we have enough time to get out of this investment when needed.