The South African Boiler Room

James Fitzpatrick
January 13, 2021

Everyone is a Bitcoin expert and book clubs have turned into boiler rooms.

Long before COVID-19, South Africans were schooled in the fable of the frog in boiling water. The fable tells of a frog who when dropped into a pot in boiling water immediately jumps out. If this same frog would have instead been placed in water that had been gradually heated, it would have remained in the water not having noticed the rise in temperature. Ultimately this frog would have boiled to death.

You will be forgiven for perhaps re-thinking your recent rash decision to buy Bitcoin. We are however not referring to Bitcoin but something quite different. Every time South Africa experiences a negative economic or social event, someone is bound to wave about the old frog fable as a reminder that one must not become too complacent with the social and economic environment, as it may one day become unbearable.  

We can’t be too critical of the South African “frog”. Local stock market returns are healthy which would suggest that the environment cannot be that bad. The chart below of the JSE top 40 shares shows that after 10 years the top 40 shares in South Africa would have returned about 95% on capital (excluding dividends). This is an average compound return of about 7% per year; on the face of it, this appears a ‘decent’ annualised return. If you are a happy South African “frog” who is satisfied with these returns in their pension, grab your sunscreen and head for the beach or braai. Read no further...

Hoping that we still have your attention, if we look at the same top 40 shares over the same period, but instead of pricing them in Rands we price them in US Dollars, we get a more accurate picture of the real returns (including inflation). The graph below shows a capital return in USD of -13%. A compound annual return of -1.4%; the biggest contributor being the weak South African currency that fell approximately 55% over this period.

If you are one of the South African “frogs” still reading and you are thinking that now is the time to jump, I would encourage you to continue reading to the end. There are many South African “comfortable frogs” that have been enjoying the heat without the fear of boiling. These “frogs” have invested their pensions in a secure offshore jurisdiction and established a diversified investment portfolio with experienced investment managers in place. As an example, the chart below shows the return of the top 500 shares in the United States over the same 10-year period priced in USD. They would have returned 195% on capital (excluding dividends) in USD or 11.4% average compound return per year in real terms for 10 years.

Whilst it is always important to remember that stock market returns are never certain and past returns are not a predictor of future returns, the performance of the S&P500 is a stark reminder of the benefits of holding a diversified investment portfolio. It certainly does help to diversify away much of the country specific risks that continue to plague the South African investor. Perhaps this is the antidote for the frog and the boiling water; I would suggest that both the Bitcoin trader and the South African “frog” could both benefit from taking heed of this fable.