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Share
investing can be a minefield at times, currently this appears to be an
understatement yet our educational fund is up over 23.6% in 7 months just
from investing in and trading stocks. These were larger stocks not super high
risk juniors that got lucky. Over the course of over 30 years investing in
stocks I have made all of the mistakes, even discovered a few new ones I am
sure. This is experience I do not regret, I bought it and it was a bargain I
can now exploit. Many investors have put share investment in the too hard
basket yet the rewards are fantastic once you have your financial education
up to scratch. Since this is an activity that will draw many new and
inexperienced investors over coming years I want to lay down a ground rule or
two of my own and some alternate understanding.
Shares are
quick and easy to buy and sell which is a significant advantage during a debt
collapse. You want to stay liquid for a number of very important reasons.
Shares are a very liquid investment. We are in uncertain times and if you are
not fearful about the economy then your financial education is lacking, or
you are invested in gold. Many asset classes that are normally considered
safe have been a very risky choice recently, and will remain so for some time
to come. There is hope, opportunity and light at the
end of the tunnel however there are traps if you don't understand the
deleveraging game, the debt collapse shuffle.
Superficial
long term analysis of share performance often points to the long uptrend of
broad index charts like the S&P500, FTSE, DAX or the ASX. The argument
goes something like this. "Shares have outperformed housing and all
other investment classes by "x" amount over the past 80 years"
and "as you see, shares have enjoyed a steady gain over the last
100+ years". "There are ups and downs however look at the trend;
even if you buy at the peaks you still make money over time". This is
not me talking in this paragraph this is what I hear and read at times, even
as a subtle message.
People get
into share investing and lose money especially during choppy times like we
have faced for the past few years. They also see very intelligent
well-meaning Superannuation Funds lose money in this market (some years) and
therefore shy away from this activity themselves as "too risky".
After all if the professionals get it wrong how can they make a profit?
Self-managed
Super has become a major trend in Australia with over 430,000 people taking
the choice to go it alone. As a firm believer that economic education is
essential at the personal level I applaud this. I suspect many of these
people removed their super from the professional funds after 2008 in response
to major losses. Now they need to get up to speed and fast if they are to
retire in comfort and do the things they worked so hard for over their
working life.
There are
long economic cycles where average investors can make money buying just about
anything and this tends to give a false sense of security. The very notion of
long term investment in the market in general is dangerous, particularly
during a period of massive deleveraging like we are currently seeing in this
debt collapse. Deleveraging refers to the winding down of debt levels in an
economy, amongst Governments, States, municipalities, corporations, SME's
(small to medium enterprises) and households. Investors that are using models
that worked for the last 60 years will get it wrong because this is a very long
cycle wave event. I cover this in depth in my newsletter education.
There is
another group of glaring mistakes in the long term buy and hold analysis
which I want to share with you, in addition to the investment response needed
by people who wish to enjoy the spectacular gains that can be made investing
in the stock markets.
Companies
come and go; they are formed and floated onto stock exchanges, they go into
liquidation, they merge to form new larger enterprises or engage in
acquisition and hostile takeovers. They can also demerge on exchanges at
times, split into two companies in order to create greater value for
investors. This is called corporate activity.
Whoa back up
a little did I say "go into liquidation" yes that is right gone,
money lost, minus 100% return on investment (ROI). They also have
their hay day, a time of maximum popularity and profitability when
investors pile in; some of them loading up then holding at exactly the wrong
time. Their investment never reaches the price they paid, never ever again.
But shares go
up over time you say,
look at the index chart it is in a long uptrend. Yes they do and no; this
does not mean it is easy to make money investing in shares. Here is the
reality check in the equation; you can buy the right stock at the wrong time.
You can even buy bank stocks and blue chip companies and lose money without research
and timing skills. These are two of the primary keys to profitable
share investment, part of solution.
Let me
explain what an index is and how this works before I come to the investment
solutions I have developed. I will use the S&P500 as an example. The
S&P500 is a composite index, meaning it is calculated using the total
market capitalization of the top 500 companies. The total market capitalization
is the total number of shares on issue times the share price of each company.
Without
getting too complex the total value of the company's in the S&P are then
indexed to a base, which is a previous point in time in this case 1941 to
1943. This is a brilliant index do not get me wrong; there are even Index
Maintenance calculations to keep the index comparable over time. As a means
of measuring the whole markets performance over time; it is genius. However
it has some obvious limitations not understood by the novice and less
experienced investors. Many moderately experienced investors may not have
understood this fully.
To keep the
index from changing due to corporate actions there is a complex system of
adjustments. This does not take into account more minor share issuance by
companies (less than 5%) which causes dilution of a company and which is not
always reflected in the share price. This is another distortion in the long
term share investment model; this time not related to individual companies.
My point is that it is impossible for any index to keep an exact record for
all the variables in an investment model. So don't take the index literally
it does its job well however it is not a silver bullet, not a path to riches.
Inflation is
not factored in for a start. Periods of high inflation distort the purchasing
power of the index. Selling your shares when the index has gone up 5% over 12
months will result in a net loss of 5% if inflation was 10%. This is a whole
index distortion as far as profitable investing is concerned. In that long
term 100 year chart there are periods when the S&P tracked sideways for a
considerable period of time. Inflation devastated the purchasing power of
investors that sat for the same of dividends during suck periods. Bankruptcies
ripped portfolios apart; bubbles in select sectors and hay day wonders came
and went with the hopes and aspirations of many investors.
Whoa back up
again. Bubbles in select sectors, there is another whole market distortion.
The top 500 companies change over time as bubble participants come and go.
Get yourself in the wrong sector at the wrong time and you have yourself the
equivalent of the hay day stock on a broad scale. The S&P smooths the performance of the combined leaders over time
however it could not possibly smooth the ride you will have in the wrong
sector, this is not its task. Again the less experienced do not take this
into account when they view the index performance over time. If you think the
index loses value once inflation is factored in overtime then think about the
loss of sitting in a stock over time waiting for its sector to recover.
Business is
fluid meaning that conditions change drastically over time, they are always
in motion. Various market forces push business in different directions. This
is how bubbles form and collapse. Factors like globalization have changed
operating conditions as manufacturing moved offshore out of mature economies.
Costs spike at different times, regulation changes operating conditions;
there are a myriad of changing circumstances. The business cycle itself
describes boom and bust conditions.
This is part
of what I talking about when I mentioned long cycle wave above and how
investors with a short education span, less than 60 years will get this one
wrong. This will continue to be devastating throughout the course of this
next ten years for investors who refuse to let go of investment models that
are now broken.
I have hinted
at the solution. Share investment is not a free ride however it can be highly
rewarding and not just from an investment angle. Being right is a pretty nice
place to be we all enjoy this it is a good feeling. The markets have a way of
humbling all of us even the experienced and this is part of experience
itself; you can't afford to get emotional. Tax issues aside you have to know
when to buy and sell. This sounds simple however you will find timing the
most demanding aspect of this game. Even some highly successful investors I
have met were no good at it. Many believe it is impossible, I happen to
disagree.
Getting the
timing right can make an enormous difference to your return on investment
(ROI) in percentage terms. It can enable you to turn a magnificent profit in
a ranging market, one that goes nowhere but sideways for long periods. With
this skill in place you don't lose on inflation during such periods. More
importantly this skill enables you to be able to get out when you need to,
closing a profitable investment with your money moved to the bank and the tax
man. This is the most important skill in my opinion however it is not
essential if you have to other two key ingredients at your disposal.
An
understanding of macroeconomics is one of these. In a broader sense it also
comes down to timing. You decide to get into gold stocks or dot com or bank
shares due to the big picture analysis and you ride the trend. If you have
this complex study in hand and stay on top of it you can make your fortune
from share investing. This will lead you to choose the right sector at the
right time. This study can take on an advanced state with understanding of
individual asset classes and their interrelationships and other factors.
The final
solution is your ability to study a company in a given sector. How to read
the balance sheet, to decide if the strategy will work or not, to judge the
Management, in the case of mining the ground position and business of mining
itself are all important. If you are to run your own superannuation fund you
need these skills. They are not taught in school however the methods by which
you will acquire them were. If you want some insight about what we do there
is now an option to purchase a look at our Educational Portfolio and 5
Newsletters for only $25 at our store, you can even upgrade from there as
part of the cost if you find our education helpful.
Good trading
/ investing.
Neil Charnock
Editor, Goldoz.com.au
REGISTERED ADVISOR – WHO THE ADVICE COMES FROM
IN THE GOLDOZ NEWSLETTER:
Colin Emery is currently a Branch Manger and Senior Client
Adviser of a Stock Broking Company in Queensland Australia. Prior to his work
in Share broking he spent nearly 20 years in Senior Management and Trading
positions in Treasuries for major International Banks such as Bank Of
America, Banque Indosuez, Barclays Bank, Bank Of
Tokyo and Deutsche Bank AG. He spent a number of years as a Senior trader in
New York, London, Singapore, Tokyo and Hong Kong with these institutions. He
also was Global Head of emerging energy, emission and commodity products for the
leading Energy and Commodities brokerage firm of Prebon
Yamane Ltd – Prebon Energy for four years
before moving to Cairns in 2003 to focus on the Stock market and Private
consulting work. The private consulting and advisory work currently
undertaken is with companies involved in Resources, Energy and Renewable
Energy and Forestry.
Neil Charnock is not a
registered investment advisor. He is a private investor who, in addition to
his essay publication offerings, has now assembled a highly experienced panel
to assist in the presentation of various research information services. The
opinions and statements made in the above publication are the result of
extensive research and are believed to be accurate and from reliable sources.
The contents are my current opinion only, further more conditions may cause
my opinions to change without notice. The insights herein published are made
solely for international and educational purposes. The contents in this
publication are not to be construed as solicitation or recommendation to be
used for formulation of investment decisions in any type of market
whatsoever. WARNING share market investment or speculation is a high risk
activity. Investors enter such activity at their own risk and must conduct
their own due diligence to research and verify all aspects of any investment
decision, if necessary seeking competent professional assistance.
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