Until now, most episodes of The Fat Wallet dealt with investment concepts. When it comes to money, however, smaller personal finance choices can arguably have a much more profound impact on your financial well-being. We address this often when we talk about keeping your lifestyle costs in check.
A concept as simple as “value for money” can be immensely complex, as we discover in this episode. When you have all the information to quantify value in terms of price per unit or use, you can make an informed decision pretty easily. The trouble is, when it comes to consumer goods there’s a huge incentive not to make all the information available. Add to that the amount of options available to consumers and you soon find yourself paralysed by indecision in a straightener isle on voting day. I know this pain.
In this episode I rally the forces. Simon Brown, Petri Redelinghuys and Dineo Tsamela all pitch in to help me figure out how to quantify value when you don’t have all the information. While all of us have excellent ideas, I’m afraid there’s once again no tidy answer. This is probably the most frustrating thing about money - tidy answers are few and far between.
That, by the way, is also why we don’t check our language in this show. Money is a bastard. It ruins lives, it causes divorce, it drives people to do crazy things. Corporates have to gloss over the very messy, dangerous underbelly of money to sell you products that make you feel safe. As consumers of those products, we feel everything but safe and comfortable in the world of money. We hope having frank, messy conversations about money helps you to do the same.
Kris
We spend a lot of time at listening to debates on whether low-cost index investing is better than paying someone to manage your money. During these debates, there’s invariably a chart that compares the performance of a fund against an index. The problem is that fund returns aren’t always represented in the same way. Sometimes the reported returns are annualised, sometimes since fund inception. Sometimes costs and performance fees are deducted, sometimes not.
Interpreting fund returns is as important for investors considering a fund as it is for index investors looking to gloat over how little their investments are costing them. In this episode of The Fat Wallet Show, Simon and I try our best to park our predilection for index investing and throw a bone to our friends in the active space. I pick Simon’s brain to find the best way to interpret active management fact sheets. Unsurprisingly we both end up gushing over index investments. We tried, though.
Kris
Are share buybacks an indication that a company is trading on the cheap, or a sure sign that management has run out of good business ideas?
In this episode of The Fat Wallet Show, I try to figure out how share buybacks affect investors. From time to time, a company will buy and destroy some of its own shares. While the reduction in shares theoretically reduces the amount of claims on dividends, is this type of corporate action really in the best interest of shareholders?
I’m surprised to learn that share buybacks happen on the open market at market value. Doesn’t that indicate that a company is trading below its net asset value? Wouldn’t that be my cue to jump in and grab shares at a reduced price? Simon isn’t convinced.
I think it comes down to a bigger question: Why did I buy this share to begin with? If I hold a share because I understand the business, believe in its ability to make money in the future and think the management team know what they’re about, the buyback might be an opportunity for me to pick up some more. If I hold the share as part of a momentum portfolio, on the other hand, I might see the buyback as an uninspired use of free cash. The moral: know thy companies.
Given our political history, it’s hardly surprising that South Africans take homeownership very seriously. Many young South Africans will be the first homeowners in their family. Like so many financial decisions, homeownership is emotionally charged. However, once you start running the numbers it’s difficult to make a financial case for buying a home.
In this episode of The Fat Wallet Show Simon and I open ourselves up to a world of outrage by doing the maths. We are unsurprised to find that owning a home is an exercise that has more to do with the feels than economics.
It is, of course, perfectly acceptable to buy a home for emotional reasons. If it makes you feel safe and happy to own your place, why shouldn’t you? We do encourage you to go through a similar process we went through in this episode before you commit to buying, though. Understanding the full financial impact of your decisions is a really big part of responsible adulting.
Below is a list of the factors we included in the price of buying a home. I assumed structural insurance is always part of the deal, but Simon pointed out that it might be included in levies. The insurance number was a thumb-suck based on what Simon, the homeowner, currently pays, with allowances made for smaller excess amounts. Before you start this calculation, phone your current insurer for a quote to get a more accurate number and confirm whether structural insurance is included in your levy.
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