Clients/investors are now passengers on a ship in turbulent seas

As is the case with natural disasters, it is crucial that there is constant and clear communication with investors during the present financial storm to prevent panic and to ensure that clients stick to survival plans. It also offers once-in-a-lifetime opportunities in the long run, writes Heinrich Kruger.
I recently watched a television documentary about a group of petrified tourists trapped on the dining-room floor of a cruise ship during a hurricane, sliding flat on their backs from one end of the room to the other in a disorderly fashion, whilst the ship tilted dangerously from side to side and front to back, amidst the howling noise of the sea and wind.

Imagine the reaction from those panic-stricken people, having booked a trip to travel around the world and then being unsure whether they would survive the ordeal or not.

My first thought was how these poor, bruised and seasick people reminded me of investors in the current world financial markets.

The second, was how they would react if anyone would try to sell to them – there where they were sprawled on the deck – their next boat trip!

This led me to thinking how South African investors currently react when you talk to them about making new investments, particularly overseas investments. If you look at the enormity of the current recession in relation to previous market crashes in our lifetime, according to popular analyst consensus it is one of only four that occurred in 100 years. The most recent experience of such a crash was the Great Depression of the late 1920s and early ‘30s – 80 years ago, in the previous century.

This even reminds one of the 2004 Asian Tsunami that occurred mainly in Indonesia, killing more than 225 000 people in 11 countries and impacting millions around the world. It was
the result of a 9.3 magnitude undersea earthquake, the second largest ever recorded on a seismograph, with the faulting of nearly 10 minutes – the longest duration of an earthquake ever observed.

It caused the entire planet to vibrate 1cm and triggered other earthquakes around the globe as far away as Alaska, according to Wikipedia (www.wikipedia.org).

My point is that there is no human being and no country in the world that will not be affected financially by the current recession. Not even South Africa.

Which brings me back to the seasick tourists in the potentially fatal cruise aboard a ship: What do they need?

They have to be calmed and controlled – told to sit down on the floor in the middle of the ship until they get the captain’s order to evacuate if necessary. Not adhering to the emergency plan may cause injury to both themselves and other passengers, if they fled in panic and fell because of the instability of the ship, shifted the balance of ship and caused it to sink, or even drowned if they jumped into the water.

The same is true for investors in current market conditions. When markets are in turmoil, they tend firstly to blame their financial adviser for their perceived fate, thereafter the specific financial institution with which they do business, and next is probably the government. People even blame George W. Bush and America for their fate in South Africa.

Then the panic sets in. A typical example of panic action in South Africa was the outflow from equity unit trusts in the past year and the flow of 80% of all collective investments to money
market funds and even numerous queries whether it would not be safer to keep one’s money under the mattress. This can be likened to jumping overboard into stormy, perhaps shark-infested waters from the ill-fated cruise ship.

Investors or clients should now be calmed by giving them relevant, understandable information and a ‘rescue’ plan. They should be informed of the purpose of the plan, which is largely also to prevent them from harming themselves due to disorderly action that is not based on facts, but on perceived half-truths, misinformation, perceptions and above all, emotions.

Consistent communication with clients, reinforcing information and the plan in a time like this, can prevent the loss of their income base. It can further prevent clients from taking uninformed, emotional steps that could harm themselves and other investors financially if they started a run on a fund or an investment.

It is extremely important to look beyond the potential disaster. If handled correctly, it could even take the focus away from the fear at hand. Life can go on after disaster strikes.

Those who do not want to plan because they are paralysed by fear, will be in deeper trouble after the storm if they survive.

Therefore, it is important to talk to and advise clients and investors during the storm about investments with the view on the longer term.

A storm tends to reduce people’s minds to short-term views, ignoring life after the storm. Making short-term knee-jerk decisions with long-term money during the storm – like jumping from equity and/or foreign investments into local money market – causes irreparable damage to a long-term financial plan.

Because many South Africans believe that the current global financial crisis is not a South African but an American one, they repatriate their foreign investments.

Others do not want to hear about making offshore investments. Any long-term financial investment plan has to include money for the very long term.

For five- and 10-year plus investments, it is local equities on the JSE. Many of these companies earn their income offshore.

Then there are the investments that have to survive in the portfolio for 15 or 20 years or longer. Any investment underlying foreign currency falls into this category.

The opportunities in foreign investments for South African investors with such a long-term view are currently begging.

The fact of the matter is that the bottom of the market after a crash is usually a once-in-a-decade, and currently probably a once-in-a-lifetime, opportunity to buy bargain investments never to be repeated again.

One never knows when the market will turn. Those who wait for the turn always miss it and never catch up – to their peril.

Don’t cause the ship to sink with short-sighted, panic-stricken behaviour. Forget about the short-term storm and look to the future and grab the opportunities it offers.

Heinrich Kruger is the founder and CEO and CIO of Kruger International – www.krugerinternational.co.za