The Share market - A Learners Guide (Part 1)
I was recently asked "How do you get started as in investor in the Share market". That question has many similarities to that old saying about ways to skin the proverbial cat.
The Share market is a large, complicated and sometimes daunting field. There are over 2500 stocks listed on the Australian Stock Exchange, and every stock has different investment features. For the budding investor it can all look a bit overwhelming. The stock market (known as the ASX) has its own language (words like >tic or ticker codes=, >dividends= >fundamentals=, >market risk=, >momentum= - to name just a few), and it features many myths and horror stories (remember >Poseidon= >Bond Corp= >One Tel=?). And everyone seems to have a sure fire red hot stock tip - even your taxi driver.
If investing in the stock market and getting a reasonable return on your money was easy, everyone would be doing it and we would all be millionaires.
The Australian stock market is still one of the best ways to invest money. $10,000 invested in the Australian stock market in 1987 (30 years ago) would be worth around $135,000 in 2017 - an annual rate of return averaging over 9% (source: fidelity.com.au). Much better than any bank term deposit.
If you are a mum and dad investor, are retired and trying to live on your savings, or trying to run your own Self Managed Superannuation Fund (SMSF) - this is the type of return you would be hoping for.
However gains on the stock market are neither smooth nor predictable. The stock market (and individual stocks) goes up and down from day to day, week to week and month to month. However, overall it has a long history of going up, as long as you have the patience and nerve to ride the bumps. Putting your investment in the bank is safe and predictable, but the returns in recent years have been very poor. During the global financial crisis, however, you would have been much better off with your money in the bank.
The stock market has setbacks from time to time, and overall lost money in eight of the last thirty-five years. Only once (2008) was the loss bigger than 10%. Every other year the Australian stock market went up for the year, and on thirteen occasions the stock market went up by 10% or more in the year (source: thetradinggame.com.au).
If you do it well, investing in the stock exchange is a fairly reliable and profitable way to watch your money grow. But, yes, it can look fairly daunting.
So let us see if we can break it down into some more manageable portions.
There are essentially four different ways to invest in the Australian stock market. Which you choose will depend on your personal circumstances, how much time you are prepared to spend learning about and monitoring your investments, how much control you want in the investment decisions, and your level of interest in current affairs and the state of the economy (which affect the share market).
For simplicity, lets imagine that there are four doors into the stock-market.
The first door requires very little time, little decision making, and no investment experience, skills or knowledge. You just give the job to an expert - a financial advisor or investment service that specialises in the Share market investing - and pay them to do all the work. There are a number of specialist financial advisors who cater for mum and dad investors and small family SMSF=s. These services have specialised skills and knowledge and often many years of experience in share market investing. They do all the heavy lifting, you sit back and count the money.
However there can be some down sides, not least of which is that you are placing your money in someone's hands and hoping they make wise and profitable investment decisions on your behalf. Another down side can be the cost of this service. Make sure you ask lots of questions to make sure you know what your are, and are not, getting for your money. The Federal Government Australian Securities and Investment Commission (ASIC) website has some great tips on how and where to find a reputable financial or investment advisor (https://www.moneysmart.gov.au/investing/financial‑advice/choosing‑a‑financial‑ adviser).
The second door into the stock-market requires a bit more work by you, and more time, but is often much cheaper. This step involves joining an investment or financial service that does all the research which it publishes (usually online) for all its subscribers, leaving you to make the investment decisions and monitor the investment. They don't tell you which stocks to buy, when to buy them, or do any of the paperwork. That is your job. There are some excellent online services that employ a team of specialists who research a wide range of stocks on the stock-market, provide a detailed analysis of each one, have yardsticks to measure performance, and make their recommendations using well-established research methods. Their research is constantly updated and you pay for the service usually by an annual/periodic subscription fee to access their website and/or software. Most "do-it-yourself investors" (door 4, see below) use one or more of these services to provide at least some of the research they need to make investment decisions. If you do a search for >share advice= on Google you will find most of the well-known share market research services. Again it helps to do your research on each service before you buy. Ask your investment friends, or come along to the South Coast Australian Shareholders Association meeting and talk to fellow investors about the services they subscribe to.
The third door into the stock-market involves a bit more research, a bit more time and gives you a lot more control over your money. This step involves buying shares in investment or managed funds. There are hundreds of these available. These businesses research and buy a large parcel of shares in a wide variety of businesses listed on the stock exchange, and manage these shares - collect dividends, do all the paperwork, and make decisions on when to buy and when to sell. Some of these managed funds are listed on the stock exchange (e.g. Argo Investments, Australian Foundation Investments, Clime Capital etc. etc.) and are known as Listed Investment Companies (or LIC=s) - do a search on the ASX website to find a full list (http://www.asx.com.au/products/etf/managed‑funds‑etp‑product‑list.htm), or on the Morningstar website (www.morningstar.com.au/LICs) , while other managed funds can be found through a financial advisor or by doing a search on the internet - search >managed funds=. As investors what would we do without the internet?. When you buy a share in a managed fund (or LIC) you are buying a share of many companies at the same time. A managed fund may hold shares in up to 20 or 30 other companies. You can buy into the managed fund (usually) at any time, and if you are not happy with the fund=s performance, you can usually get out at any time. Again the ASIC website has some great information on choosing a managed fund (https://www.moneysmart.gov.au/investing/managed‑funds/ choosing‑a‑managed‑fund).
Not all managed funds are the same. Each has a different investing philosophy, choose different types of shares for different reasons, or target different types of shares (e.g. large companies, small companies, emerging companies, Australian shares, overseas shares etc.). Again, ask lots of questions particularly about the methods used to choose stocks, investment philosophy, and costs/fees etc.
A couple of words of caution when using any of these doors to investment (and the fourth door - which I will discuss later). The first is one of Warren Buffetts' investment rules - never investing in something you do not understand. Before you hand over your hard earned cash, make sure you have a long list of questions and make sure you are happy with the answers. And past performance is no indication of future performance. An investment service or managed fund that has done well over the past twelve months or several years is not a predictor of how well they might perform in the future. Warren Buffett - often called the world's greatest investor - has said there are two rules to investing. The first rule is to not lose money. The second rule is not to forget the first rule.
All types of investment involved a degree of risk. Regardless of where you invest your money there is always a risk that you can lose some or all of it. Even the biggest of companies and even national banks can go broke (recently in Italy, not long ago banks in Greece and in USA, anyone remember the State Savings Bank of Victoria?). A lot of people thought Bond Corp (remember Alan Bond?), Quintex (Christopher Skase?) and Poseidon (each were once one of Australia=s largest companies) were too big to go broke. They all did.
Most importantly do your research and spend some time learning about the stock market before dipping your toe in the water. There are some great books on investment and some of the best (IMHO) have been written by Australians. For the novice investor "The Aggressive Investor" and "Building Wealth in the Stock Market" (both by Colin Nicholson) are classics - easy to read and understand, easy to follow and well researched. "Stock Market Secrets - An Essential Guide for the Self-Managed Investor and Trader" by Marcus Padley is probably one of the most insightful and helpful (and at times humourous) books I have ever read on the topic of investing (again in IMHO!).
The fourth door to investing in the stock market is the "do it yourself" method. This method means you do all the research (or subscribe to one or more research services to do it for you), you choose the shares, you decide how much and when to invest, you monitor the investments and do all the paperwork, and you decide when to sell. This journey is very challenging, but exciting. It can offer great rewards, but it takes time, a willingness to learn, and hard work. Beware - this method can quickly move from a hobby to a passion. This door is a topic on its own and will be the subject of my next investment column in The Beagle in a couple of weeks time.
In the meantime I will put in a plug for the newly formed South Coast Australian Shareholders Association discussion group. This group meets once a month and is a discussion and self education forum for new and experienced investors. We primarily focus on investing in the Australian stock-market. While many of our members have little or no experience in investing in the stock market and are on a steep learning curve, some of the members of our group have many years of experience and skills to share with others. For more information please email me at email@example.com or phone me on 0419612401.
I am a self-taught investor and I am not a licensed financial advisor. You should always consult a licensed financial advisor before making any investment decisions. Bill Radley