Its success lies in its simplicity

People are always looking for the best returns or interest on their investments. They are also always scared that they are not investing in enough different instruments. At the end of the day they have a widely diversified portfolio, with a bit of money in each area – and so the portfolio shows the same kind of growth as the rest of the market: average. The only way you can achieve outstanding results is by specialising.
The master of specialisation, Warren Buffett, said the following:

“Wide diversification is only required when investors do not understand what they are doing.”

I have a very simple calculation that I share with people at my workshops, and each time I am astounded at the impact that it has on the delegates. I think it is the simplicity of the calculation that bowls people over. No-one can argue with it. Not even the most aggressive financial planner!

Let me share the calculation and assumptions with you:

Two years ago someone bought a townhouse on the East Rand with a R600,000 bond, and they are currently letting it out. The value of the bond on the house was R600,000 at the beginning of 2011, and during 2011 the bank valuation grew by 6.2%. (See the ABSA link at the bottom to confirm the growth if you want to.) The monthly shortfall after the bond payment and costs on the house is R2,500 per month. This payment of R2,500, or R30,000 per year, will decrease every year if we increase the rental by the rate of inflation each year. So the question now is whether the R30,000 shortfall in 2011 was a waste of money. I say no – it’s a method of forced saving, and it gives an unusually high return. Let’s look at the calculation:

Simple calculation on East Rand house

R600,000 – House value – This is the value on which the 6.2% East Rand growth is calculated.
R30,000 – Shortfall – This is the amount that is “invested” every year.
R37,200 – Growth on house value – This is the return on the investment.
124% – Gross Return – 37,200×100/30,000

So if you’d “saved” R30,000 last year by using it to cover the shortfall on a townhouse on the East Rand, you would have received 124% “interest” on it. Show me anything that can beat that!

Every time I publish figures like this, there’ll be some of the money powers’ highly trained advisors who take me to task over it. They want you to rather invest your money in their useless savings plans, endowment policies and pension schemes, of course. So they make as if they don’t understand my simple calculation, and they slate it as incomplete, faulty and ridiculous. They want ordinary people to think that it’s complicated to make money, and that only they have the wisdom and knowledge to help you with it. That’s nonsense. You can do it yourself, and you can do it better.

Before they point out to you and me that most properties had negative growth in 2011, I want .........................

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