Tinus Rautenbach from Clarity by Investec is passionate about the markets and the full spectrum of its participants, from traders through to long-term investors. Clarity caters to them all, with Tinus joining me to share useful tips and insights into how volatility should be managed by different types of equity enthusiasts.

We covered concepts like the sources of volatility and its importance for long-term investors and traders alike, recognising the different goals of these players in the market. We also talked about how critical money management and position sizing are to the overall goal of protecting capital. The various tools used in risk management came up, as did the different kinds of inputs that traders and investors use in their processes.

For newer and more experienced investors and traders alike, this is a great overview of many of the most important elements of a successful market strategy.

As always, nothing you hear on this podcast should be taken as advice. Investec Corporate and Institutional Banking is a division of Investec Bank Limited, a licensed over-the-counter derivatives provider and an authorised Financial Services Provider, FSP number 11750.

Listen to the podcast here:

Transcript:

The Finance Ghost: Welcome to this episode of the Ghost Stories podcast. We’re going to be speaking to Tinus Rautenbach from Clarity by Investec and we’re going to be talking about a topic that is close to all of our hearts, I think, as market participants, and that is tips for traders specifically, but certainly some tips for investors as well in navigating market volatility. And if there’s one thing that the markets are so good at dishing out, it’s volatility. I think especially this year, there’s been no shortage of that going on. I’ve actually been checking out some of the international investment banking results and it’s amazing just how much money they make from volatile markets. And that really has been the flavour of offshore markets, the flavour of local markets – what a fascinating time it’s been on the JSE.

Tinus, this is why we do it, right? We love this stuff and it’s great to have you here with me today.

Tinus Rautenbach: Thanks. Thanks for the intro. And yeah, the market’s been volatile, but also fascinating. Who would have thought we would have had all the Trump noise in the last year and how the market has responded to – in the beginning, responding to everything he said and then as the year went on, maybe slightly more muted responses and now it’s become a little bit more nuanced, right? So you’ve got these political swings driving markets, but this is why we do it. You never know what’s going to happen tomorrow and it’s about how we respond to it.

The Finance Ghost: Exactly. And if there was no volatility, you also wouldn’t be able to get the returns that we are able to get in the market. So at the end of the day, volatility is just part of the journey. Gotta accept it, learn to deal with it – and that’s a big part of achieving success in the market.

Obviously the background to this podcast is the Clarity offering at Investec, the ability to participate in the market. I think it’s a relatively new market entrant and it’s quite exciting to see the traction that’s coming through – I’m looking forward to understanding a little bit more as well about some of the tools that are on Clarity to help traders and we’ll certainly get to that later in the show.

But I think before we get there, let’s just talk about the spectrum of people in the markets and how they play this game. And it ranges really from very long-term investors who are maybe putting money in every month they have a debit order, whatever they do – or maybe they just max their tax-free savings every year, which is also great. And they just build up this wealth over time. It’s really great. Obviously we encourage that very much.

And then right at the other end of the spectrum, you’ve got your intraday traders. People who are basically scalping the market, they’re looking to make tiny little gains all the time. I think that really is the full spectrum. And then along the way you’ve got lots of different things. You’ve got stuff like swing trading coming through, which is something quite interesting.

Just to set the scene of some of the users you’ve got in Clarity and just some of the data you get to see as a result – and some of what we’ll talk about today – do you find that users of Clarity tend to be at a particular point on that spectrum and do you also have situations where people are doing a little bit of both? Maybe they’re doing some long-term investments and then the same users are also doing some more opportunistic kind of trades. What do you see from a behaviour perspective in that user base?

Tinus Rautenbach: You’re right. We’ve got really good insight through retail investors and traders and how they engage with the market. And as you correctly say, people think about the market fundamentally and about what’s the fundamental valuation of a stock or a specific position. But others just look at it technically and think, well, this is a good level to enter the market or exit the market. And some of it is really short term and some of it could be multi-year, obviously long-term investment.

So, on the platform, we see both – we’ve got an account that allows you to be fully funded or fully invested, which means these are generally people that rather just buy and hold or don’t necessarily change their positions that often. And we see people quite often taking positions in ETFs which is a nice, diversified investment option. Then on the other side we have an account, both local and foreign where clients can trade with gearing. Usually, we have more speculative and high frequency trading in those accounts from minutes to hours and you know, as you said, some of it is news driven. So what’s in the news today, what’s moving the market today and being part of that flow. The others are technical, it’s just picking certain levels and there’s a whole host of different reasons to get in and out of the market.

As a long-time market participant, it’s not always so much how you get into the position, it’s around how you manage the position, how you ultimately are able to get out of that position and when you step out. So we see that the duration of trade, the profit target, stop loss and considering all of those tools that you have as part of how you invest and how you trade as important.

But I think we see both – we’ve got more the longer-term investors and we specifically created it on platform so that you’ve got these two pockets, principally a pocket where you want to do your longer-term investment, ungeared but you can just be in the position for the long-term and then on the other side you’ve got your more speculative positions and it’s easy for you to move money between those two accounts. But then ultimately once you’re in your speculative positions you can – we generally see people taking a shorter term position because that’s a geared position and people express a short-term view or market position that way.

The Finance Ghost: So a term that people will be familiar with is CFDs. And I’m guessing that that’s the way Clarity works, certainly from a – is it only from a trading perspective then, and the investing side – that other pocket – is classic share ownership for want of a better description rather than CFDs? Or how exactly does that work in terms of the mechanism through which people are able to participate?

Tinus Rautenbach: Let’s split it up into those two. In the geared or what you refer to as the traditional way of thinking about CFDs, where you roughly get 7 to 10 times gearing on your positions – so if I have R10 I can potentially buy exposure to a share up to R100 that’s on our geared account and works similar to other providers in that space. We provide longs, you can go short and so you can express a view on both sides whether you think the market or the instrument is going up or down. The way that we implement and that you get exposure to the fully funded contracts as well, is we also provide that as a CFD, although it’s fully funded. So you are buying an exposure – you’ve got R100, you’re buying exposure to Anglo American for R100 and for every R1 that Anglos go up, you get R1 rand return in your contract. So it is akin to buying the share, but we deliver it as a CFD.

There’s a number of reasons why we do that. Partly it is we can then provide you with access to parts of shares because then you don’t have to buy a full share. So that’s one reason why even in your fully funded account, you can execute a position like that. But also, it provides us a way to be able to provide the product at the pricing that we’ve been able to achieve in Clarity. And for that reason, we provide it as a contract, so we refer to it as a contract with Investec. You’ve got the exposure to the shares, it’s fully funded, so you don’t take incremental risk for every one rand invested, but you get the return of the reference instrument that you wanted to get your exposure to.

The Finance Ghost: Thanks. And the reason I asked for the clarity on Clarity is because obviously that helps with us understanding the volatility and how to navigate it, which is of course the overarching theme here. There is a big difference between trading CFDs, for example, and long-term investing and the way you need to think about volatility in both situations.

In long-term investing, for example, you’re never a forced seller, you can choose to exit, but you don’t have a situation where because you’ve bought the thing on leverage, you are potentially having to get out of a position. And so you can make quite different decisions around position sizing, time horizon, potentially risk. And it’s not that one is good and one is bad, it’s just these are two different ways of participating in the markets. It’s like playing two different sports. You’ve got to understand the rules of both.

That’s what I want to dig into now from your side, because again, for long-term investors, volatility is almost something you just need to manage in terms of your emotions. It’s going to happen and it is part of why you make money long-term. But the real reason you make money long-term is because you pick the right stuff at the right price. Whereas for traders, volatility for them is much more their bread and butter, right? If prices don’t move, then there’s no way to actually lock in those profits.

So I want to ask that next, really, Tinus is just around: how do you think about volatility? How do you think traders and investors should be thinking about volatility? What are some of the key points there that you think users of Clarity and general market participants should be keeping in mind?

Tinus Rautenbach: So let’s think about volatility as a measure for the risk that you’re going to take on when you invest in something, and I want to start on the left hand side, or if you just put money in a bank and you earn a certain interest rate, then there’s very little volatility, no volatility, but a very certain return. But let’s just assume that that’s roughly at a risk-free rate. So in South Africa that will be, call it at the moment 7-odd percent. That’s our risk-free rate because that’s where repo is.

If you then start going up and you experience more price uncertainty, you would want to be paid for that price uncertainty. And so over a long period, as you said, if I’m a long-term investor, I would expect that a good equity portfolio should give me risk free +5%. It’s generally the benchmark. And you’ll say okay, if I go into equities, I’m going to live through the ups and downs over the years. I can’t necessarily say that I know that one year from now I’ll be up risk free plus 5%, but I know that if I can go through the ups and the down cycles over a longer period of time and let’s call it more like 5-to-10, 10-to-15 years, then you would opportunity to go through the ups and downs and you should earn the risk premium in the asset. And in this case we’re talking equities and we can talk an ETF, which is a diversified portfolio of equities.

For the long-term holder, I think about volatility in that context. I think about the risk premium I should earn over a long period of time because I’m willing to take some uncertainty in this price in the shorter term. But I expect that over the longer term I should earn more than just putting my money in the bank. And that’s sort of the one context for volatility. On the other side I say okay, if I’m a short-term trader, I need the prices to move on the day or within two days for me to be able to earn – even if it’s a small difference in the price, we can say I could maybe only target like a 2% return in this specific transaction, but I need that shorter term volatility. So it really is about how do you think about volatility within the context of how you engage with the market.

Longer term, you think about it’s going to provide me with uncertainty, but I really should be achieving higher than inflation returns over that long period. But if I’m a short-term trader, less about inflation, less about a risk-free rate. When you think about short-term trading, you think more around craft and skill. It’s almost like what I do from day to day, it’s my job. And then I think more around I need volatility to be able to show how I apply this craft in the really short-term to be able to outperform the market. You sometimes think about earning a living, not necessarily investing for the long term to outperform inflation or outperform risk-free.

And so it’s important to think about volatility, in my mind, in those two things. The one is I need volatility because I want to earn short-term returns. Maybe not a living, but even if you do it as part-time, not your full-time job, you still want to spend the time and you want to try and have a process and a way of engaging with a market that you can outperform the market in the short-term. But you’re thinking in absolute, you’re thinking about I’m going to buy something for R100 rand, I’m hoping for it to go to R102. There’s volatility in that.

But when I think about long-term investing and the volatility, I know that over time I need to sit with uncertainty, that equities are not just going to go in a straight line up and up and up like a savings account, but because I’m willing to sit with that bit of uncertainty over time – and as you mentioned previously, you said I wouldn’t be a forced seller at some point, right? That means I can sit through this uncertainty and it gives me a higher than inflation or higher than risk-free type return.

The Finance Ghost: Lots of great points in there. Some stuff to pick out definitely is around, again, time horizon. If you’re a long-term investor, you’re getting paid to hang around, you’re getting paid to wear some of that volatility over time. Time is your friend. It’s that old story. It’s not timing the market, it’s time in the market – that works for long-term. When you’re a short-term trader, it is literally timing the market. That is what you are trying to do is get the timing right because you’re not sticking around for long enough for a time horizon to reward you.

As you say, you’ve got to actually target specific either rand value returns, or for those who maybe it’s not their full-time job, maybe they have figured out trading strategies where they can actually do a little bit of trading, a little bit of long-term. Some people are just looking to really add some outperformance to their portfolio through trading profits over and above long-term gains, that elusive alpha that gets spoken of. I like the point you’ve made around treating this as income, treating this as a job. Because I think what people need to remember is trading in particular can be quite time consuming unless you set up very specific rules-based things. But even then, you’re still going to be investing your time. And yes, long-term investing, there’s an element of that, without a doubt you’ve got to sit and read stuff if you’re not just going to buy the market ETF. And even then you’ve got to decide which market ETF, it’s still going to use some of your time. So, it’s got to be something you enjoy doing, otherwise you’re going to hand over the reins completely to an advisor, which there’s also nothing wrong with. But if it’s going to be something that you do, you’re putting time into it. But if you’re trading, I think you’re putting even more time into it. And then you need to earn a return on your time, not just a return on your capital. It doesn’t help to spend eight hours a day and make R100 and say, yes, this was a very successful day of trading, right?

Tinus Rautenbach: 100%. That’s a good summary. I’m investing a certain amount of time and in the short-term, I need that little bit of volatility to be able to extract some value out of that volatility for the time that I’ve spent on this trading endeavour. Whether it’s for a living or as a hobby, I think it’s the same principle.

And I think you should really only end up in that side of the spectrum if you love the markets, if you really enjoy reading about it, if it is fulfilling, if you appreciate all the nuances in what can move the market, if you wake up in the morning and you worry about what Trump has said overnight, or if you go to bed and you worry about what happens in the Middle East and whether that’s going to impact you – you find that you love being in that information flow. Then spending some time in the shorter end of this timescale is an interesting way to apply your time and to see whether you can find your way to have an edge in the market. And it’s nuanced for everyone.

The Finance Ghost: Yeah, a lot of people do it as a hobby and it’s one of the rare examples of a hobby where if you get it right, it pays you – most hobbies cost you a lot of money! You get it wrong, it can cost you money too, of course, that’s the risk.

And what I like there is you’ve also picked out a couple of the sources of volatility because sometimes people hear this term “volatility” and they don’t understand where this is coming from. A lot of it’s coming from geopolitical movements, macro factors, changes in interest rates, changes in economic indicators. And then if you’re doing single stocks, it’s coming from company news, it’s coming from sector news, it’s coming from all those announcements. It’s this whole wonderful world of updates that basically get fed into this big machine called the market. And then everyone decides what to do with that information: buy or sell. Of course for trade to go through, someone needs to be willing to buy and someone else needs to be willing to sell at the same price, which of course is part of what makes this game so interesting.

There are so many sources of volatility and obviously risk management is a very big part of finding success in the markets and there are many, many ways to manage risk. And again, if you’re a long-term investor versus a trader, there might be some overlap, but there’s also going to be some stuff that is just much more appropriate for one than the other. For example, you won’t really hear investors talking about a stop loss very often – their language is more around “buy the dip” right? It’s oh, this thing I own went down, this is a great opportunity to buy more. And sometimes it is, yeah, average in – sometimes it is and sometimes it’s not. Whereas for traders it’s very much stuff like letting your winners run and putting in stop losses to avoid big losses, all of that kind of thing.

What tools are there on Clarity to help with risk management for these people using the system to either trade or invest or both?

Tinus Rautenbach: So I think let’s before we go system specific, I think you’ve pulled there on a thread around money management. And for me that is really the principal tool and principal part of learning and understanding around managing a trading account. If you don’t understand money management, then start with how do I do money management? Because it keeps you in the game, keeps you in the market. And so the first bit is to understand what money management is.

As a very high level, quick explanation, it’s about choosing what percentage of your capital you are willing to risk per any one trade. And once you’ve made that decision, once you’ve decided how big that is or what value of your portfolio that is, then you can size your trade so that if you get it wrong, you know where you’re going to get out of that position and you know that you’re going to be left with X amount of capital so that you don’t bet everything on one transaction and if you get it wrong, you are wiped out and you can’t trade again or your capital has been really eroded to such an extent that you don’t really have a chance again. So the first thing is money management. So go and read up about it. Go and understand how you think and your risk appetite. And this is where psychology comes into trading in the markets. As we said earlier, it’s a roller coaster. It goes up and down and left and right. But the psychology of how you respond and the size of risk that you’re willing to take is going to be different to the Ghost’s and the Ghost will have much higher risk appetite than anyone else. And you know, the rest of us are quite…

The Finance Ghost: …not always, not always. Sometimes I’m just this nice, conservative guy. No, I’m kidding. But you’re right, everyone is different. 100% right.

Tinus Rautenbach: And so now you go and you work out, okay, how much of my portfolio am I willing to risk at any one stage? And then you size your positions accordingly. Now once you’ve sized your positions, then you want to say, okay, how can I now make sure that that risk is only the amount of risk that I wanted to take? And so on the platform, we have tools where you can set the stop-loss when you enter a transaction and you can set a take-profit. So if you’ve got a very specific way, and sometimes that’s quite technical in the way you want to trade, then you can set those levels and you can set the levels of the trade how you want to get out of those positions when you enter the trade.

And that’s probably the best discipline. The best discipline is to have a target both for when you know you’ve got it wrong and for when you know you’ve got it right. And it’s a really good discipline to have those levels in mind when you actually enter the trade and not to try and only set that later on and then it becomes a little bit of a hope maybe. And so we have those kind of tools to help you to implement some of that money management. But prior to thinking about the tools and the platform that you do it again, just want to reiterate, go back to just understanding clearly what money management is.

When you’re on the longer-term investing side, it’s maybe less around money management, it’s more around that discipline around saving and trying to dollar-cost average or try and invest as much in the market as often as possible. Compounded growth at, as I mentioned earlier, let’s call it if you’re in equities, hopefully inflation plus 5% or risk-free plus 5% over a long period of time, that is the difference. And so you think less around money management, but you think more around just consistent saving.

But if you want to do this as a craft and you think about short-term and how I invest my time in it, then you want to think about money management. Go and read up so that you make sure you give yourself as long a time to be in the market as possible and that you don’t get it wrong and therefore blow up your trading account and then can’t come back.

The Finance Ghost: It’s the “to finish first, first you have to finish” joke, right? And that’s if you blow up your portfolio along the way, then the only thing that will be finished is your money.

This is the thing with long-term is that you’ve got to get really unlucky. I think on a diversified portfolio over decades your money’s not going to go down. We have a zillion statistics to show this. But on a single stock you can definitely get unlucky, for sure. You’re taking much more risk on a single stock than you are on just buying the broader market. That’s why the lowest risk way to buy equities is long-term ETFs, a diversified basket, away you go. And the highest risk way would be trading single stocks. But the higher the risk, the higher the potential reward.

And as you say, figuring out where you are on that spectrum is such an important part of the journey. And then using the tools like a proper trading plan, etc. the tools available on the platform to actually have these targets in place, to go in with a strategy as well.

Part of that I guess is also to just keep an eye on the information that is flowing through the market, the stuff that’s coming in, the stuff that’s driving the levels we see of these various assets. And I know from speaking to traders and from being a long-term investor myself, it’s generally a mix of fundamental stuff and then technical analytical tools, specific charting elements, etc. And I think the shorter your time horizon, the more the charting side matters, right? So maybe we can just talk a little bit about that, the kind of stuff you can actually do on Clarity.

Tinus Rautenbach: I think part of it is, yes, the shorter you go, the, the more the technical bits. But I want to go somewhere between technical and news flow because some really short-term traders will not really care about any technical levels. They would really just care about the news flow and understanding what the market will sometimes refer to as order book imbalance. Because there’s some news flow and the order book is showing you that the market is going in a certain direction, and they would try and use that as information to express a really short-term view.

But it’s on the back of company results potentially or some other macro news that came out. And then you go a little bit further and then there are the really technical traders that just look at technical analysis, which is a whole craft on its own. There’s hundreds of different technical indicators that you can use to try and time the market. There’s a whole craft there and there’s a whole lot that you can really learn and understand and try to understand why someone uses a certain technical indicator.

I think that quite often the most successful people are those that are able to have a blend of multiple input pieces and filter it and then be able to enter a transaction. And it’s really this thinking of the market, not one dimensionally, because no market – the market is not one dimensional. It’s very – if it was easy and if there was one thing that would have made you 100% return every day, then everyone would be doing it. So it doesn’t work. If it sounds too good to be true, it probably is, which means you have to over time learn the craft. And the craft is to understand that it’s more than just one thing. It’s more than just technical analysis. It’s technical analysis plus understanding what the flow is, plus potentially also understanding why certain companies, if you are trading single stocks, why certain companies are valued at a certain level and what’s going on in the bigger market.

But that’s why this is so interesting. That’s why this is a way to spend your time and learn about the market and learn about yourself is such a good endeavour. And as you said, it’s a hobby that it’s better to be lucky than good – that’s a saying in the market and you can just spend some time and sometimes the hobby pays you, but you learn a lot over time. There are people that are obviously very successful in applying their craft over the years.

The Finance Ghost: Yeah, the version of that saying that I’ve heard a lot is would you rather be right or would you rather be rich? Talking directly to – you can make all these academic arguments about where the market should go, but at the end of the day, if you had the right position at the right time in the right place, that’s the scoreboard that actually counts, right? At the end of the day, is having that success in the market.

I think, last question just to bring this to a close – and it’s been such a great whirlwind conversation around some of these concepts. Each of these questions could be an entire podcast. But I think what’s great is this really shows the breadth of the thinking behind Clarity and just the number of users that you have in terms of how different their strategies are and how versatile the platform is to be able to actually address all of this.

Last question, let’s just deal with some of the emotions in the markets, because that’s a big part of this game, right? It’s why you find that traders seek out other traders, very often they try and seek out little trading communities to be part of on social media, whatever the case may be. They’re looking for other people to be able to share this with. It’s much like entrepreneurs, who actually do exactly the same thing, people looking for other people going through a similar thing or dealing with a similar thing to learn from and to grow with. And that’s because there are a lot of emotions in the markets. There’s a lot of human nature. There’s a lot of stuff like just loss aversion and all the cognitive biases that we all have. And even when you know about cognitive bias, you still have them and you’ve got to try and obviously manage them accordingly.

I think just some closing comments from you, I suppose around some of these areas and where you think people should focus around emotions, biases and how this influences performance in the market?

Tinus Rautenbach: You call out cognitive biases, but there’s a whole field called behavioural finance, which is such an interesting area to go and read up about and to pick out some of the anchoring – and there are so many of these different concepts. Again, such an interesting area to learn about and understand.

We know that “the market is always right” and that you have to respond to the market because you can’t tell the market what is right and what is wrong and you are responding to something that you see. And so therefore it is so important that you have a handle on some of these blind spots that you could potentially have and the psychology with how you deal with it.

And I think that to me is – it’s just again, as I said earlier, technical analysis, there’s so much to learn there and fundamental analysis, there’s so much to learn there. But definitely your behavioural response and your behavioural finance and how you respond to the market and how you respond to either your account going up or your account going down is a big learning point. And such an interesting part of this as an endeavour. It’s interesting and challenging and how we respond is so important.

The Finance Ghost: I think the point you’ve touched on there that is such a good place to leave it is it’s so important how you respond to your portfolio going up and down because people think, oh, it’s just how you respond to the tough stuff. No, it’s about how you respond to letting your winners run as well. It’s about how you respond to getting back into a position on a stock that you’ve possibly owned before. Maybe it hurt you before, maybe it loved you before.

There’s so much around this and as you say, it’s very much how you respond to the ups and the downs. That’s what makes you a successful trader in the market and certainly a long-term investor as well. We’ve kind of made it sound like this stuff really only matters for traders, but it’s not true – for long-term investors, it’s almost as important. You’ve also got to understand how to respond to this stuff. It might take longer, you might not be doing it intraday or over lunchtime. You might be looking at the end of the month and saying, okay, it’s my time to put money into the account now, where’s it going? But the principles are not different and that’s what makes the markets fun, obviously.

Tinus Rautenbach: Yeah, the psychology of both of those, whether it’s once a month or once a minute, the psychology of how you respond to it, I think that’s a good call out. I think that the other bit I wanted to just touch on is it could be a very lonely place sitting in front of your screen, trying to pick the market every minute, etc. and creating these communities and being part of communities where you can share ideas and you can share the craft and you can share thinking about the market is such a good thing. So it’s good to try and connect with other people that have got a similar mindset, a similar view of the market and share ideas because it could be a lonely place. And so calling out that there’s these communities to be part of is a good way to connect with other people. We are social beings and that’s what makes this interesting.

The Finance Ghost: Absolutely. And I think we will leave it there, Tinus. This has been such a good conversation.

For those interested in learning more about Clarity, you can go to nowclarity.com go and check it out or just Google Clarity by Investec. You can go and find the app, you can find them on the socials etc.

Tinus, just wishing you all the best with this. It’s always good to see these platforms coming through into the South African market and I am an Investec client from a private banking perspective, it’s nice to see this stuff coming through. So well done to you and the team and I particularly like the fact that it’s got the tools there for both long-term investing and those who do want to dip their toes into short-term trading and potentially even take it more seriously because that really is the full spectrum of what you can do in the markets. And I encourage people to read about this stuff, learn about all of it and then find the thing that suits your personality. Not everyone is a trader, not everyone is a long-term investor and at least the initial journey in the markets is to figure out where you are on that spectrum and how you want to spend your time.

Tinus, thank you and well done to the team and I look forward to watching this journey.

Tinus Rautenbach: Thanks. Appreciate it. Good chat.