The maths
Diversification is the only free lunch in finance.
A saying credited to Harry Markowitz, who won the 1990 Nobel Prize in Economics for working out why.
Here is the working, for anyone who wants to check it. Change the number and every figure below follows.
We would value your business at R97.5 million.*
* An illustration only. We give you a real price after due diligence: a close look at your financial statements.
Today, everything you own rides on one business
It is one company, in one industry, in one country.
It probably pays your salary too. It may stand behind your home.
If it has a bad ten years, so do you.
Every year is a roll of the dice
A good roll: your business is worth 70% more.
A bad roll: 30% less.
Over many years the rolls average out to about 20% a year. You just never know which roll comes next.
A fall needs a bigger rise to undo it
Lose 30% and R97.5 million becomes R68.3 million.
To get back to R97.5 million, R68.3 million has to grow 43%. Not 30%: 43%.
Every bad year costs more than a good year of the same size gives back.
A global fund is a smooth ride
A global balanced fund owns small pieces of thousands of companies, and lends to governments, all around the world.
On paper it grows less than your business: about 12.5% a year.
But its swings are small, so you keep close to what it promises.
And it does not care how your business is doing.
Two piles of money
Your business is worth R97.5 million. You sell us half.
Now you have two piles of about R48.8 million each: one in the business, one in a global fund.
Then the business has a bad year: down 30%.
The business pile drops to R34.1 million. The fund pile does not care. It grows to R54.8 million.
You have R88.9 million. Keep it all, and you would have R68.3 million.
Will you end up poorer?
We played out 10,000 ten-year futures for a business like yours.
Typical owner: R272 million
Typical owner: R302 million
Possible futures
- One owner
- Typical owner
- Where you started
- Ended up poorer
Typical owner: R272 million21 of 100 end up poorer
Typical owner: R302 million1 of 100 end up poorer
The charts stop at R585m. Some futures go higher.
| Question | Keep it all | Sell us half, keep half |
|---|---|---|
| Typical owner | R272 million | R302 million |
| Unlucky owner | R55.1 million | R156 million |
| Ends up poorer | 1 in 5 | 1 in 100 |
Typical: half do better, half do worse. Unlucky: 1 in 10 does worse.
How we worked these out
- We played out 10,000 possible ten-year futures. In each one, every year is a good or a bad year for your business, and for the fund, picked at random.
- Your business grows 20% a year on average. Its years swing by about 50% either way.
- The fund grows 12.5% a year on average. Its years swing by about 12% either way.
- The two are only loosely linked. A bad year for your business makes a bad year for the fund only a little more likely.
- When you sell half, all of the cash goes into the fund on day one. After that, each half grows on its own.
- We ignore tax on the sale, fees and dividends. The business’s value rises or falls each year as one pot.
- The futures are the same every time the page loads. Your number only scales them.
- The business’s swings are our estimate, based on research on small private businesses.
- Statisticians call this a Monte Carlo simulation.
| Question | Keep it all | Sell us half, keep half |
|---|---|---|
| Typical owner | R272 million | R302 million |
| Unlucky owner | R55.1 million | R156 million |
| Lucky owner | R1.4 billion | R876 million |
| Ends up poorer | 21 in 100 | About 1 in 100 |
What you give up
You trade a lottery ticket for a much safer middle.
If your business is genuinely steadier or faster-growing than this, keeping it all can come out ahead for the typical owner. What does not change much is the protection against ending up poorer.
In return, your chance of being poorer in ten years than you are today falls from one in five to almost nil.