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Investment Guide

The Art of Art

Millions are made every day in the art world, but if you want to invest look before you bid.

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In May, Edvard Munch’s The Scream sold for $120 million becoming the most expensive painting to be sold at auction. A week later, Mark Rothko’s Orange, Red, Yellow sold for nearly $87 million. Irma Stern’s Two Arabs sold for R21 million ($2.5 million) last year, the highest price for a painting sold at auction in South Africa. Eleven of the 20 highest prices fetched at auction in the world and nine of the 10 highest prices in South Africa have occurred since 2008.

The near-collapse of the global economy didn’t stop the market reaching its highs. Wealthy collectors remain wealthy. And top-quality items appreciate even in poorer market contexts. Fine art auction house, Strauss & Co, reported a boom in 2010 with a turnover of R187 million ($22.3 million) and a strong market for 2011 making only slightly less at R170 million ($20.2 million).

Despite hammer prices being up, masterpieces are out of the price range of many collectors and dealers. The high end of the market is one part of the story, it’s the segment that appeals to the popular imagination, and to those of us who are so insanely disconnected from the real world that we continue to hope that one day, we too may be able to buy a Malevich or a Twombly.

“The run-of-the-mill part of the market is in a sorry state,” says fine art expert and auctioneer, Stephan Welz.

“At this end of the market, dealers have in the past bought a large percentage of works as stock-in-trade to sell to the average salaried person who wants one or two nice pieces on the mantelpiece.”

It would be silly not to admit we’ve been affected. Those works least affected are those with rarity value; anything decorative has been devastated,” adds Mark Read, director of the Everard Read gallery.

Steven Wlz at the Strauss and Co auction

Given then that the Old Masters and historic paintings are too expensive for most collectors and dealers and, of course, there are fewer of them, dealers both abroad and locally have turned to contemporary artists, which are normally fragile in the secondary market and a highly speculative sector.

For the last two years, contemporary works have topped auction sales at Christie’s—an international company offering art auctions and private sales to clients. In South Africa, artists like Robert Hodgins, William Kentridge, Walter Battiss and Erik Laubscher are fetching good prices as the market broadens. But there are no guarantees of a handsome profit, even if you’ve studied past performance prices, says Welz, and those are less available for contemporary than older works. Some wonder, too, about the staying power of this market compared to those works time has already validated.

Markets, of course, depend not only on buyers, but also on sellers.

“When the market isn’t favorable, sellers are reluctant to sell, and they’re usually in a position to choose their market,” says Welz.

What’s more, sellers don’t know where else to invest their money since opportunities are currently few—stock markets are down, rates on savings accounts are low and interest is taxed, even gold has been volatile.

A conversation between Sotheby’s chair of contemporary art for Europe, Cheyenne Westphal and an anonymous American collector as reported in the Wall Street Journal serves to illustrate the point: “I phoned him up and told him, ‘Do you realize that in the present market, we can get you $50 million for your Rothko?’ There was a very long silence on the other end of the phone. Eventually, he replied, ‘Well, Ms Westphal, that sure is tremendous news. But what the hell would I do with $50 million in the bank?’”

To try to predict prices and understand trends, we turn to the market intelligence provided by public auctions (auctions are fairly transparent compared to private sales, prices are published and annual reports are available) and historical price indexes. But, even armed with these prognostications, one feels uneasy in generalizing across the market.

Part of the reason that trying to draw any conclusions about the health of the art market is so difficult is because that very term is a misnomer. A number of small markets combine to form the art market and while Old Masters are selling, demand for contemporary or modern art pieces may be declining; buyers supporting the fine arts market are not the same people who are buying decorative art.

The Wall Street Journal last month quoted Christie’s international as saying its art business had proved resilient and that a growing population of super-wealthy collectors were sustaining demand for top works. “We have not seen the global economy affect our business,” said Steven Murphy, Christie’s CE. The Mei Moses All Art Index, which measures art market returns by tracking the sale and resale of major art works, mainly in New York and London, claimed an 11% return for investors in 2011, outpacing stock market returns for a second consecutive year. But the problem is that not all art performs equally and most art never gains enough value to be represented at the kind of auction that index compilers track—it’s an incomplete picture. So studies like these fail to provide any proof that art is a solid investment generally.

Some economists explain the market’s relative buoyancy, saying fine art isn’t part of the global economy. Rather, they say, it is part of the booming economy of a set of super-super rich individuals or ‘Ultra High Net Worth Individuals’ who are just growing richer. For these people, and because a painting is singular and no one else can own it, an astronomically expensive work does an almost unparalleled job of saying just how wealthy and cultivated they are.

Let me illustrate what I mean. As I stood in front of the Stern on auction, Arab, I felt a little let down. It was small (66,5 x 65,5cm) and it was beautifully painted, the frame hand-carved, but I couldn’t help asking myself, ‘How can it possibly be worth R9 million [R17 million ($2.0 million) as it turned out]’, and that’s the thing, it isn’t, it signals that you’re spending money, squandering money even because what you’re buying can’t be worth that much. And it’s this fact, the fact that it isn’t a sensible way to make money that drives the trophy hunters.

But perhaps in comparing Arab to the value I would place on a house, I would be too narrowly defining an investment. Today, the value of an artwork is often determined by collectors for whom there is nothing more at stake than making money. Previously, critics and connoisseurs had some influence on which pieces were perceived to be good. “Today’s art market is by and large misinformed,” said veteran advisor Thea Westreich in the New York magazine. “People are using their ears, not their eyes, to select works, buying based on market trends rather than art-historical standards.”

The critic, Clement Greenberg, was right when he said of culture and its place in the economy of life, “a poor life is lived by anyone who doesn’t regularly take time out to stand and gaze… without any further end in mind, simply for the satisfaction gotten from that which is gazed at…” He also said, “there are, of course, more important things than art, life itself, what actually happens to you”.

Overseas, the art market is huge and growing—there is a new class of people buying art. But in South Africa, the market is incredibly small, says Stefan Hundt of Sanlam Private Investments’ art advisory service. “If we have 5,000 serious buyers, it’s a lot,” and adds it’s for this reason that an art fund wouldn’t survive.

If the economy continues to stagnate, Welz and Read anticipate tough times to come. Even if it starts to grow, since the art economy lags behind the normal economy by about a year, it will be some time before private collectors and corporates have any disposable income to invest in art.

Let art be first a pleasure, the prevailing wisdom goes, then an asset. That way, the quality verdicts of the public, which make it a capricious investment, won’t matter so much. As an asset market, says international-capital-markets expert Amir Shariat in the New York magazine, “art remains non-transparent, overly prone to taste and fashions, and extremely illiquid. People forget that illiquid doesn’t mean ‘low price’. It means ‘no price’.”

Perhaps art isn’t even an investment or perhaps it’s an investment of a different nature. There’s an intangible pleasure in owning a painting and, unlike stocks, art doesn’t earn dividends and it costs to keep—you have to look after it, make sure it doesn’t deteriorate and insure it and then there are steep transaction costs. Unlike other investments, the art object is unique, “detached from the sanity of a cause” in Samuel Beckett’s words (though less so when we look at overpriced contemporary works like Damien Hirst’s, which are made with the sale in mind). In being inexplicable, to take Beckett’s reasoning to its conclusion, art objects may be a source of enchantment, and in following the trading of these in the financial arena, emptied for a moment of the wonder they can inspire in quieter moments, we can forget that.

Investment Guide

How to invest in uncertain times: 6 Essential tips you should follow

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Currently we all are experiencing uncertain times & everyone is worried about their investments & savings. The COVID-19 pandemic has caused many South Africans to be concerned about the state of the SA economy and its long-term future recovery, with most countries under some sort of lockdown.

Since the start of 2020, many of the JSE’s Top 40 stocks have lost as high as 38% of their market capitalization from the year high to mid-March low, but since then market has recovered some of its losses as of April.

The South African Rand has depreciated to its all-time low touching R19 in the start of April, which is almost 30% fall against the US Dollar since the start of year, this has happened as foreign investors are choosing risk aversion.

When the global markets are in free fall during a crisis, it may seem that investing during such times is an unwise decision, however, the opposite may be a smarter move. 

If the markets fall due to widespread panic and uncertainty, it may seem like you need to cash out to protect your capital. But withdrawing your investments at such a time may be a bad move since you will get a low value for your investments and it is very likely that the markets will rise again once the uncertainty passes. In fact, investing even more in good companies when the markets are low may be a wiser decision.

The decision to invest more or withdraw your investments should depend on your personal and financial circumstances. If you have lost your source of income, then it may be a better choice to hold off investing & focus on paying your bills until you regain financial stability.

But if you have spare cash, here are a few important things you should keep in mind before making investment decisions in such times.

  1. Make a Financial Plan

A sound financial plan is a strategy that takes into account your current financial situation and aligns it with your overall financial goals. A financial plan doesn’t simply mean investing.

Your financial plan needs to have clear goals. Make an estimate of the kind of returns that you would need from your investments to achieve your financial goals. Take into account the kind of risk that you can bear in case the investment goes wrong. Do not invest in high-risk portfolios that promise high returns unless you have the appetite for such risk.

Once you have calculated how much you want to invest, review the different investment strategies & options that are available, that align with your goals and risk-taking ability. Select a strategy that works for you.

Your financial plan should be made taking into consideration several factors such as the purpose of investing, the time-period of your investments, and projected inflation in the country during that period.

  1. Review Your Budget

The most critical aspect of your financial plan is your budget.

A budget is a breakdown of your earnings, savings, and expenditure. While making your budget, you should calculate your monthly expenditure, how much you need for essentials, your rent expenditure, how much you need for emergencies, your children’s education, loan repayments, insurance premiums, and any other expenses.

Once you have a budget in place, you are in a better position to know how much you can afford to invest and the level of risk that you can bear.

As a rule of thumb, you should only invest the money that you can afford to lose. If you can’t lose any of your capital but still want to invest, then consider highly safe options such as fixed deposits at banks.

  1. Look for Opportunities

Depending on your investment strategy, conduct market research to spot the best opportunities.

If you’re looking to invest in equities, check the sectors that are performing & expected to do well during the current market slowdown. Review the fundamentals of top companies in these sectors to judge whether they will continue to grow long-term. For example, pharmaceuticals and FMCGs are currently outperforming other sectors, due to the rush for essentials.

Are these stocks available at a good discounted price? Look into the dividends they have distributed in the last 5 years and the earnings per share (EPS).

Currently, the Johannesburg Stock Exchange has lost over R4.5 trillion in market capitalisation since the beginning of the year. This is a good opportunity since most blue-chip companies are trading at a severe discount of around thirty per cent (compared to 52-week high). Try to invest in safe blue-chip companies rather than high-risk stocks in difficult times.

If you’re looking to trade in currencies and derivatives, then this may be a good time since the market is experiencing the highest levels of volatility in nearly 5 years. Currencies that have been relatively stable for many years without much movements such as the EUR/USD are now experiencing high volatility.

While currencies of emerging economies like Rand (ZAR), Brazilian Real, Russin Ruble, Nigerian Naira have depreciated considerably (as high as 30% since the beginning of the year), due to a rush towards risk aversion. But analysts say that worst might be over for Rand & expect it to rebound by the end of the year, which might present more opportunities for currency traders.

Many global forex brokers are now reporting as high as 200-400% increase in trading volume due to growth in currency speculation.

If you are a currency day trader focusing on speculation & short-term gains, this may be a good time to take advantage of the volatility.

FX pairs can be traded at regulated forex brokers or through an exchange like JSE, which offers it as Futures & Options derivative instrument.

For Commodity traders: Prices of commodities like gold and silver may rise as people look for a safe investment. Gold has been viewed in the past as a safe investment during uncertain times.

The price of WTI oil has fallen considerably from close to $60 at the start of the year to as low as $19 per barrel due to OPEC+ price wars due to supply agreement issues from the falling oil demand during this crisis. The oil price could rise in the short term if there is some deal to slash output, and in the long term when the demand for oil rises again once the global economies open up. Commodities including – Oil, Gold & Silver are mostly traded as derivatives at major exchanges like JSE or at CFD brokers.

Investing in derivatives like – Commodities & Forex may carry much higher risk and you should only invest or trade in such products if you are comfortable with the risks these instruments carry and understand the underlying trading fundamentals.

  1. Focus on Long-Term Goals

If you are investing in uncertain times, it is best to look at your long-term goals. Short term gains may be limited in a receding volatile market, but that doesn’t mean that your investments do not have long term potential.

Do not judge your investments by their current status since they may be undervalued or underperforming due to market turbulence. But at the same time, be wise to understand the risk of your investment & how does the current situation affect its long term outlook.

When seeking long-term growth, consider your investment strategy. Are you looking to make money from stock dividends in blue-chip high EPS companies? Are you looking to invest in high-growth companies that are poised for high valuations but are not necessarily concerned about short term profitability? Or do you want to make short term gains by speculating on the current volatility of the stock & other markets?

When deciding on your investments look at how they have performed in the last three to five years as this may give you a better idea of the kind of future performance you can expect. Check the 3-5 year CAGR (or the Compound Annual Growth Rate) of your investments.

Remember that the fundamentals of a good company with sound management do not change depending on short-term market volatility. You should rely on the fundamentals to make your investment choices.

A good investment strategy would be to invest in companies that are currently undervalued but have strong fundamentals and scope for growth.

  1. Don’t Rely on the Advice of “Experts” and Don’t Panic

Instead of relying on specific advice from experts on investment choices, you should seek to learn how to judge fundamentals and the technical aspects of trading. Solely investing based on recommendation or expert advice is notorious for being misleading and it is better to rely on your own informed judgment.

Due to uncertainty in the market, the valuations and prices of several investments are abnormal. Do not buy into the short-lived panic and exercise cool judgment to make your decisions.

The current market volatility is an excellent opportunity for day traders, especially in currency markets. Also, if you are an equity investor, remember that strong fundamentals will win over short-term volatility in the long run.

  1. Conduct Proper Risk Management and Assessment

Every type of investment carries its own risk profile. Study the kinds of risk that are involved with each type of investment and assess the risk of your overall portfolio.

Remember, do not invest more money than you can afford to lose. Every investment carries a certain amount of risk and do not trust “guaranteed profits”. You should err on the side of caution and only make investments that you understand.

Investing in uncertain times may carry more risk but they also carry greater opportunity for better price discovery. There is a greater possibility of finding good long-term investments at lower prices.

Instead of staying off investments during such times, it is advisable to spend more time studying the markets and investing cautiously. 

Content Supplied by Forex Brokers SA

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Economy

Cryptocurrency for Africans

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George Gordon is on a quest to revolutionize the financial system. The director of Africa Master Blockchain Company talks digital currencies, blind risks and board games.


What is this new African cryptocurrency you are offering?

Where the majority of current digital currencies are based on speculative models, AfriUnion Coin (AUC) and the AfriNational Tokens (ANT)are designed for a transactional purpose allowing international payments, remittances, foreign direct investment as well as day-to-day transactions at local retail stores and other outlets. While the option for speculative trade is available with AUC, the focus is not around that.

Each African country will have a specially-designed ANT which will allow users to pay for goods and services and bills easily through completely digital means without requiring any bank account. AUC and ANT will be fully interchangeable to one another and there will be no fees for the user.

It’s the natural next step for digital finance from mobile banking which most Africans are accustomed to. The ability to freely have the power to send and receive money locally and internationally will allow the freedom of choice and spending power many Africans don’t have currently.

What is your own investment philosophy?

I am a gambler! I believe in taking risks and putting things on the line. That being said, blind risk or whimsical guesses don’t get you very far. Always acquire enough information to understand to a reasonable level what the thing you are planning on investing is or how it works and then trust your instinct and gut feel.

What advice would you give entrepreneurs wanting to invest in blockchain?

First, do some research in terms of what the blockchain technology is being applied for or created in terms of its application to an industry or project. Thereafter, check the white paper for the design of the platform as well as its functionality and applicability to what it is trying to achieve. If it aligns with your personal investment rules, then go for it,however, remember that blockchain is continuously evolving and thus you need to explore outside the usual and standard.

First cash-less, now card-less. What is the future of online banking?

If we are looking into what is currently science fiction, I would say the future is digital contact lenses that will be able to connect you to all your social media accounts, internet, news as well as make payments by just looking at QR codes or specialized barcodes to approve and accept payments.

Now, realistically we are not far off from such innovation and technology, but for the time being, I think the next step is scanning of QR codes at retailers and having the transaction automated from your wallet to the retailers digitally.

What is your most prized investment and why?

My mind. I believe that the work I have put into developing my mind, and continue to do so every day, is the number one investment that I have ever done. It allows me to look at things in a unique perspective as well as provides me with the tools to push boundaries and create new opportunities.

Money, success, fame? Which is most important to you?

I would have to say success… because it is most likely going to bring the other two as well, right? But success in the form of starting something and letting it grow and succeed and knowing that something new exists because of your efforts.

What do you spend your money on mostly?

Board games. I love board games and believe it’s a fantastic way to expand your mind as well as have fun with friends.

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Investment Guide

King Price CEO On Why He Invested On Insurance

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King Price Insurance’s CEO Gideon Galloway, who built an insurance company in South Africa worth over $226 million in six years, talks investments, industry trends and how self-driving cars will change the entire car insurance landscape.

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