I have been investing in shares since I was 20 years old. I don’t invest a lot in fact it’s usually on $1000.00 per buy but until six years ago I was buying them on my own in no particular order often because I liked the name or what they did; I picked them the same way I pick horses at the races, then I met Iain {well we have never met just email and phone} but he has been buying and advising me on shares ever since.
So as part of my money series {and it’s not sponsored} to explore investment options, money handling budget ideas etc I asked him to write a piece for me on buying shares because you always ask an expert and {clearly picking shares because you like the name does not make you an expert} this is what he had to share..it should be noted before making any decision you should always seek the advice of a professional..
Investing in shares.
In my 15 years as an advisor, I can assure you that the most successful methods of creating wealth are the age old tried and tested ways.
First a couple of quick points.
Risk/Reward.
There is always a tradeoff between risk/reward in all aspects of life, from heading down to the casino on one end of the spectrum and risking everything to make massive multiples, to just having cash in your savings account earning 3% pa but with virtually no risk of loss. The stock market is infamous for suffering big shocks and crashes. But it’s still here, and its done better than property/cash/fixed interest over the long-term.
Outguessing and ‘beating’ the market
The highest paid hedge fund managers in the world are paid to ‘beat the market’, or generate a better return then what the stock market has done. And these guys can do anything to achieve this not just by buying shares like most of us, but they can also use derivatives (like futures/options), and hence also have the ability to make money when the market is going down. Some use extremely expensive and sophisticated computer systems to ‘beat the market’. So much so that it is estimated 70% of all trading on US markets are driven by computer programmes these days.
During the GFC, when US markets fell 30% in 2008, the average hedge fund return was -30%. Remember these guys can make money on the market going down!! and yet they couldn’t beat the market.
Sure there would’ve been some that did better, or some that did a lot worse. But it is extremely rare to be able to consistently beat the market. So far this year, the average hedge fund return is way below what US stock market returns have been. I repeat this is an average, so there some that have done very well, and ones which have done worse .. but to consistently do it over time is extremely difficult. Some of the most famous investors in the world have had years of massive losses.
In fact the most consistent hedge fund manager in the world over the long-term has averaged around 9-10% pa.
So if these guys on multimillion salaries can’t beat the market, what’s the point?
To build wealth over time, it can be done, just follow some rules. Here are some of the important ones ; they even have some sayings attached because they are so well-regarded ;
1.. “It’s not timing the market, its your time in the market.”
Its investing, it’s not gambling or punting. when you buy a property, you don’t value it every day. with financial markets you have an asset valuation every second of everyday, and hence its driven a lot by human emotion in the short-term, primarily greed/fear.
Your timeframe should be 2-3 years AT LEAST, but more likely like 5-10years. If not, then maybe it’s not for you. Look for stocks with dividend reinvestment plans to build wealth. There is no question that over the past 100 years, the stock market has provided the best returns then any asset class, but there were big fluctuations in between. if you keep looking at the prices each day and try to work out small short-term movements in the market, it’ll drive you mad. No one knows what’s happening in the short-term.
2. Dollar cost averaging. following from point 1. I can’t emphasise this enough. Keep buying shares regularly to get the best average price over time. You will not be able to consistently pick lows or highs of the market, sometimes you will sometimes you won’t. We’re in the game of investing, and increasing the probability of success, not punting. By buying slowly and regularly it attempts to create a discipline and reduce ‘market risk’ or the risk of trying to predict what the market will do.
3. ‘The stock market is where wealth gets transferred from the impatient to the patient’ Warren Buffet. Yes I’ll say it again, it takes patience. And it takes time, but so does investing in property, or cash or work. People are so attracted to financial markets because they hear or see companies pop up 20-30% etc.. in a day. Believe me there are an equal number of stocks falling by that amount as well. But trying to play that part of the market is dangerous, and its the main reason why most people are turned off by the market (being burnt here). Stick with top 200, 100 or even top 50 stocks depending on how conservative you are. Playing the small speculative side is fraught with danger, and the payoffs are similar to going to the casino. With top 100 stocks, they have an amazing track record and the vast majority of the time, they’ll still be around in 10 years, and if they fall they generally get back up. It’s hard to say for the speccies which are generally just the flavour of the month.
People get scared when they see the market falling, or the value of their investments falling rapidly with the market. Remember its the liquidity of financial markets that sees asset valuation every second (the settlement period being 3 days as opposed to property which could be months). You don’t get that with other asset classes. But the fear makes people sell when others are, and buy when others are, that old herd mentality. But with property for instance, if you get a valuation suggesting a loss, what do you do, you generally will hold waiting for a better time. If you are in quality blue chip stocks, they will pay there way over time.
4. Don’t have all your eggs in one basket (Diversify) Boring but true, a one egg basket falls and you’ll be in tears. Diversify to get exposure to a cross-section of sectors/aspects of the economy, which would include exposure to the AUD, to interest rates etc .. So if one goes sour for a time, the overall basket won’t. Over the past 15 years there’s been a tech boom, mining boom, which in itself had booms in gold / uranium / iron ore / oil, but they all came to an end. It’s difficult to pick these trends up and more importantly know when they’ll end. Diversification will smooth out returns and you won’t have to be reading the Australian Financial Review everyday and losing any sleep.
The stocks I suggest below fall into that category. And by diversifying .. this would also include having money spread across all asset classes, ie : property/cash/fixed interest too .. not just the stock market.
5. Start as soon as you can! Start now it’s not too late!! It’s never too late to start. As they say we all wish we knew what we know now when we were young .. I know its true with investing .. first hand!! And time goes by so quick. Think about where you want to be in 5 or 10 years, and how much money you want to have. As with exercising and diet, it’s a discipline and lifestyle change that may start with $200-500 a month. It’s always difficult to think about our far future, but we all appreciate how life passes us by so quickly, and before you know it it’s like ‘damn I wish I did something about it earlier’.
Use a diversified fund like Argo, Milton, Australian Foundation, or Australian Leaders fund, (you are buying a basket full of blue-chip Australian stocks, so instant diversification and exposure to primarily the Australian economy but it also includes a bit of global exposure as well).
Use Dividend reinvestment for a compounding wealth creation effect. The sooner you start, the sooner the compounding can begin.
We love it when clients buy stocks for kids because they can’t touch the money until they’re 18. Its true long-term investing, and can sometimes pay for a tertiary education.
You may not be a kid, but in 10 years time , you’ll be 10 years older, and hopefully in a better financial position than today.
The stock market is not a casino, and like with so many aspects of life, it can be ‘daunting’, dare I say it ‘boring’ for many. But it’s not complicated. It’s basically a marketplace for raising money for businesses/companies to go and do things. And money gets attracted to the businesses that use it the best, or generate the best return on that money through earnings. And it looks ahead, not back, the market doesn’t care what you did last year, its only interested in what you’ll do next year :what percentage earnings growth you’ll generate.
Eyes glazed over yet?
I do it because I do have a passion for it, and its great to build wealth for clients for better lives. But I don’t know how to put a nail in the wall, or how my car works, if there’s something wrong with the latter I take it to the mechanic. If you worried about your money, that’s what I’m here for. I do enjoy helping and educating people who want to learn more, so shoot us an email with some questions if you’ve got them.
It’s definitely not the glamour of Wolf of Wall St, or even the original Wall St. I spend my working life reading/watching financial news and numbers going up and down on a screen.
But its an asset class which can be very rewarding with the right perspective and guidance.
Iain Cooper B.Bus (BankFin) ADA MAppFin Dip.TA (ATAA) Prof Dip Stockbroking
Senior Advisor | Authorised Representative: 259239
Email: iain.cooper@morgans.com.au
Direct: 07 4222 0555 | Fax: 07 4222 0500 | morgans.com.au/cairns
