How I lost R219,083 in 8 months or how I made R335,138 in 12 months


Two years ago I wrote a post “How I made R234,756.31 in 5 days” and it has been the most read article ever since. People love quick schemes. Instant diets. Get rich overnight. Lottery. But more often than not, the things worthwhile and lasting, takes time and extremely hard work.

I’ve always wanted to invest in shares. I’ve started successful businesses, I’ve made money with property and investments but I never tried the share game and I wanted to. But I never did. I always felt that I had to learn more before I dump hard earned cash into the stock market. Until one day, when I received an email that was forwarded to me.

Kevin Leo Smith wrote the following (this was 3 August 2012, Apple shares were trading at R615.70, the ZAR was R8.14 to the USD) – I’ve copied most of the email as I believe anyone who is interested can learn so much from it – Kevin is also on Twitter – @kevinleosmith:

Some information about Apple SSF’s as an investment vehicle through Board of Executors (BoE – part of Nedbank). Fundamentally this works well as Apple is growing like crazy and making piles of money and generating huge amounts of cash. So the results I have achieved from Apple SSF’s cannot easily be replicated in other companies using SSF’s. However SSF’s are in general a high risk high return vehicle for investing. Therefore the usual health warning apply – don’t use your housekeeping, essential retirement or medical money to buy SSF’s. Understand that you can lose more than what you’ve invested as these are geared investments i.e. you are not paying the full price up front and are effectively borrowing the difference. These SSF’s are priced in ZAR and therefore on top of share price fluctuations you also have the USD/ZAR rate risk too.

What are the risk factors:

• Apple share price drops.
• ZAR strengthens against the USD.
• Both happen together – which often happens as does the converse which is good.
• Risks are magnified close to quarterly earnings announcements (next due late Oct) as price swings wildly.

Consequently there are sensible approaches to making this kind of investment and this includes the following:

• Start with the minimum investment accepted which is R100,000.
• Only use 50% of this initial amount to buy SSF’s with (R50,000).
• Hold the balance of R50,000 in cash with BoE.
• Be prepared to top up the R50,000 if you get a margin call (highest risk is in the first 60 days) to protect your initial investment. Generally any margin call should not exceed R15-20,000 and may only be needed for a few days.
• As the trade is squared off at 17h00 every day money is added or deducted from your cash account each day. You need to have a policy on how to deal with gains over time.

At today’s rates an initial investment of R100,000 will secure you around 115 contracts for R50,000 i.e. priced at R435 per SSF. This contract price is changed periodically and will in all likelihood be closer to R500 soon (generally around 10% of the Apple USD price times the current exchange rate).

Example: you buy 115 contracts for R50,000 and hold the other R50,000 in cash. Currently Apple is around $605 per share and the exchange rate around R8.25. Let’s examine what happens when price and/or rate changes.

1. Price drops to $600 but rate stays the same:

115 X ($605-$600 )= loss of $575 X R8.25= -R4,743 and therefore your cash will drop from R50,000 to R45,256

2. Price stays the same and rate strengthens to R8.00/USD

115 X $605 X (R8.00-R8.25) = R18,687 and therefore your cash will drop from R50,000 to R31,312

3. Price drops to $600 and rate strengthens to R8.00/USD

(115 X 605 X 8.25) – (115 X $600 X R8.00) = R573,994 – R552,000 = -R21,994 and therefore your cash will drop from R50,000 to R28,006

Apple can swing as much as 4-5% in one day and this is often accompanied by a change in exchange rate – sometimes this works in your favour as a weak stock market in Europe and USA is often compensated by a weaker rand but not always. To lose your cash cover and get a margin call would require a price drop from $605 to $553 at constant exchange rates or a 8.6% fall in Apple’s price.

The ZAR/USD rate would have to strengthen to R7.53 or 8.7%. While both these moves are possible they are unlikely but what is more likely is a 5% drop in Apple’s price and simultaneous strength from the ZAR to say R8.05. This combination would drop the cash by R42,000 leaving on R8,000 in the account.

Now let’s look at the upside:

I believe that Apple will rise to $1,000 within 12 months. It will also pay around a 1.8% cash dividend 4 times per year. I will not make any assumptions about buying more SSF’s as your cash balances rise – simply that you hold your gains and dividends in cash and that you can earn around 5% on average cash balances (this assumes that the amounts don’t fluctuate daily which they do and that the shares rise linearly in price which they don’t). I have assumed a 3% depreciation in the ZAR rate to compensate for inflation differences. I have also not deducted the “cost” of holding the position which is roll over fees every 3 months (these are 3 month options at the end of the day) and the bank financing for the unpaid for position which amounts to about 6% of the difference between the entry price and exit price and is too difficult to model). These expenses are not material in a strongly rising share price earning good dividends.

This is what will happen:

USD Gain ($1,000- $605) X 115 = $45,425
$45,425 X R8.50 = R 386,113
Interest received = R 9,000 (real guess)
Dividends paid (allowing for constant Apple price rise) = R 15,000

Total gain =R414,000 (approx)
Less initial investment R100,000

Effective gain R314,000 in 12 months.

I know it sounds like believing in Father Christmas but it could also not do as well if the ZAR gets very strong or the share prices crater – neither of which I assess to be major risks right now.

If you want to take it further you need to contact Andrew Bryson or Henre Herselmann whose contact info I have attached. Just let me know so I can tell them to expect your call as they are cautious unless people are properly briefed of the downside.

This was it. I had to get in. I had to learn more about share investing and the only way I was going to learn more was to put real money on the table. And I did. I followed Kevin’s advice and invested R100,000 into 82 Apple SSF contracts. The share price was $662 at the time with ZAR trading at R9.08 to the USD…

And then Apple shares came crushing down… Luckily the rand weakened against the dollar but I had to continue to fund the shortfall on the losses. It was that or you lose your initial investment. I kept on funding hoping for a turnaround. By June 2013 Apple was trading at $391 (ZAR/USD at R9.88). My loss and the cash that I had to put in was sitting at:

(102 X $662 X R9.08) – (102 X $391 X R9.88) = R613,117 – R394,034 = -R219,083

Nice, a R220,000 loss on a R100,000 investment and I was R320,000.00 in the red.

But I believed in Apple’s turnaround and by this time, I’ve known a lot more than what I did 8 months ago. I held on, kept on funding the loss. And then it happened, the share price turned around and to date made a 100% recovery. What didn’t recover was the weak rand, and the ZAR is now trading at R10.75 to the USD with my current PROFIT sitting at:

(102 X $662 X R9.08) – (102 X $665 X R10.75) = R613,117 – R729,172 = R116,055

A profit of R116,055 on a R100,000 investment in 20 months. Now that’s damn good. But had I invested the R100k in June 2013, the profit would have been R335,138 (in 12 months).

Profit or loss, that’s irrelevant, what’s relevant is that I’ve learned so much about shares. I’ve bought many more SSF’s, I’ve invested in the JSE and I’ve made more cash in the last month than I did with any other investment (including property) in the last 5 years.

To those people who love the quick schemes, the instant diets, the lottery. Shares would probably not be for you as you will only lose out. But if you buy at the right time (remember it is not about selling at the right price, it is all about buying at the right price) and you have enough patience, then I’m convinced that you will always make money with shares. It is an endless pit but you need to put in the effort to understand it.

Feel free to follow me on Twitter, Facebook or LindkedIn.

Happy investing.

Marnus

PS. I’m forever grateful for Kevin Leo Smith who made me take the leap. Thank you.

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1 Comment

  • Fire
    September 9, 2016 at 10:30 pm — Reply

    Sounds a bit too risky for me and too stressful. Ill attempt this once i have more cash to play around with.

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