Protea Capital Management CEO Jean Pierre Verster advised investors to diversify their portfolios, maintain a long-term perspective, be patient, and have reasonable expectations.
Verster spoke on 702’s The Money Show about how ordinary investors can protect their investment portfolios in light of the significant shocks the local and international markets have endured in 2023.
Protea Capital Management was founded in 2009 when Verster invited a small group of friends and family members to pool their investments, where he, as general partner, would manage their wealth alongside his own.
The core strategy quickly developed into a diversified stock portfolio investing in listed equities, both long and short.
Verster is a highly respected investor in South Africa and has generated substantial returns for investors in his funds.
He is also on the board of Capitec and was formerly a Partner at Fairtree Asset Management, a research analyst at 36ONE Asset Management, and a portfolio manager at Melville Douglas Investment Management.
A summary of Verster’s advice on investing in 2023 and protecting your portfolio is provided below.
Diversify your portfolio
Verster urged investors to protect themselves against things outside their control, saying the future is inherently uncertain.
“The only way to protect yourself against this uncertainty and the unexpected is to have a diversified portfolio.”
Investors must remember to protect themselves through diversification before calamity strikes, and the potential risk becomes a reality.
Diversification needs to happen in the good times, “it is too expensive to protect yourself during a crisis”.
Investors should always ask themselves, “What is the next risk?” and not focus on what is affecting markets now.
Diversification is the biggest differentiator between people who make money consistently from investing and those who have to endure boom and bust cycles.
Avoid emotional decision-making
A common mistake for investors is to act on their behavioural biases, particularly hindsight bias, where an investor thinks past performance guarantees future returns.
This is simply the wrong way to think about markets, according to Verster. “You need to protect your investments from yourself and your emotions.”
Investors must stay calm and avoid rash decisions or extreme bets as “the market will humble you”.
Maintain a long-term perspective and be patient
Modern humans are used to instant gratification and instant feedback loops where we immediately know whether our decisions are correct.
However, the market does not work like this. Investors should delay gratification as long as possible, according to Verster, as they will not know if their decisions were correct in the short term.
“Markets transfer wealth from the impatient to the few who are patient,” he said.
Furthermore, the appreciation in the value of investments is not linear, so investors must ignore short-term fluctuations to reap long-term rewards.
Have reasonable expectations
Investors often fall into the trap of expecting to get rich quickly, thus making extreme bets expecting significant short-term returns.
Verster suggested investors use the interest rate they would get in a savings account as a reasonable barometer.
For taking the additional risk of investing in equities, investors should expect returns of a savings rate plus 2% to 5%.
Thus, with the current interest rates in South Africa, investors should expect a return from equities in the low double digits – from 10% to 15%.
“Anyone offering consistent returns of over 20% per annum is being dishonest and unrealistic,” said Verster.