Playing the market is still a good move – if you have your priorities in order
You would be forgiven for thinking that we are in the middle of a depression if you read the headlines on the newsstands: to hear the papers tell it, the share market is crashing and we all should be hording gold under our beds. Being a glass half-full sort of person, I wanted to investigate this a bit further and see if things are as bad as others are making out. Could the media possibly be talking the market down further? Perish the thought!
Over half of all adult Australians own shares either directly or indirectly through managed funds. This is a staggering figure when you think about it: more Australians own shares than don’t. It is not a secret club anymore and that means that share ownership now seems much more safe and secure given the wide spread of equity within Australian families. More importantly, Australian Stock Exchange (ASX) research reveals that most small investors remain loyal to the shares that they own. So, in racing parlance, it seems that shares, in general, are a safe bet. The question remains, of course, as to how exactly to place one’s bets. I’m no Clarence the Clocker but let’s look at the share market race.
WHERE TO FIRST?
The first step you need to take to take before you even open the finance pages of your newspaper is to be SMART. Get a paper and pen…go on, do it now while you are reading this. Now write down your own personal vision, mission, and goals. I am not trying to sound like some sort of American motivational speaker, but all successful people in all walks of life will tell you they write down their goals – and no, keeping them in you head does not count. So let’s remind ourselves about what I am talking about:
Vision: This is a written statement of your fundamental aspirations, and purpose. Your vision usually appeals to your heart and not just your mind. This is your dream of where, and what, you want to be.
Mission: Your current purpose or reason for existing. Your raison d’etre, so to speak.
Goals: What you are committed to achieving? Your goals should enable the achievement of your mission and vision. More importantly, your goals must be Specific, Measurable, Achievable, Realistic and Time-constrained (SMART). If your goals are not SMART then they are not goals.
Your written goals will set a framework and give you direction on how to approach your investment decisions. Do you want long term capital growth? How long term is long term? Do you want regular cash flow? Do you want positive or negative gearing? Do you want to be a million dollars richer in three, five or ten years? Remember, goals should be realistic. How speculative do you want to be? Do you want security or to live on the edge? Do you want to access cash in an emergency?
These are only some of the questions you need to answer in order to write down your SMART goals. Now if you think this is all a bit silly, remember: the common link between all successful and professional investors is that they write down their goals. It also requires you to better understand yourself and what your priorities are at the moment. If you already have a vision, mission, and goals written down, remember, it doesn’t stop there. They need to be reviewed and rewritten at least every twelve months.
The share market at the moment is going through a ‘correction’, which is marketese for ‘it went too far in one direction and now it’s coming back a bit’. This is what I call the Pendulum Principle. Another definition of a ‘correction’ is ‘losing money quickly’. Always remember that you do not lose any money at all until you actually sell your shares. Until you sell, it is all just lines on paper.
So if we look at the current state of the All Ordinaries it is fair to say that we are on a downward tend – i.e., we are in a bear market.
So does that mean that times are grim and we head to the door screaming out ‘sell, sell, sell’? Well no, not really. In reality it means that there are bargains to be bought if you are careful and thoughtful in your selection of shares. Indeed, many people have made their fortunes as a result of their buying during a bear run.
Let’s look at things on a wider perspective: if you look at the All Ords going back to 1980 you will see that there have been many corrections, but also that the general trend is upward. Furthermore, after every downward spiral there has been a subsequent upward trend.
The trick with all of this is the selection of shares that you buy, and this is where I must cut out of this particular dance. There are many methods and many ‘experts’ that can advise on selection of specific shares. My own approach is methodical, mathematical, and painfully drawn out, but it has served me well. I will spend weeks or even months researching specific shares before I part with my hard-earned. In my opinion, the only way to select and build a share portfolio is to understand and look at all the performance indices and build a mixed portfolio that represents all sectors.
The one method that I can actively discourage is the ‘My uncle/friend/boss/milkman/second cousin twice-removed knows of a sure thing’.
As with horse racing, there is no such thing as a sure thing in the stock market. And like horse racing, for every hundred tips from people in the know only one usually comes good. Finally, like horse racing, you only hear about people’s winners and never their losses. The sharemarket is partly a gamble but that should not be the main driver in your decision process. The real secret is hard work and research.
My approach to the current climate is, first, don’t panic. And definitely don’t sell shares that you already own, unless there is a good reason to do so. My own opinion is that the harbingers of doom that declare the dream run is over and warn that we must prepare for a bumpy crash are looking exceptionally short term and have not fully evaluated the opportunities.
More importantly, treat a bear market as an opportunity. Do what the big boys do: look for bargains and analyse scientifically. John Mars (owner of the Mars Corporation, which claims to be the largest privately-owned company in the world) once said to me over dinner, ‘Son, if you want to be rich don’t do what everyone else does. When they buy, you sell. When they sell, you buy. And don’t waiver.’
WHAT EVER HAPPENED TO…?
A bit of an update. For those that read my column in the April edition on the latest tricks used by credit card providers to turn your plastic into their gold: I gave a real life example of a Mr J who had been corresponding with the National Australia Bank to try and get some answers to some very reasonable questions about a problem with a credit card transaction. At time of writing he had exchanged twelve emails since last January, at a rate of about one a week. Most said that his questions were being escalated to the next level. The last email he received stated, ‘I have no details as to what your enquiry is about. Should you have any further queries do not hesitate to contact us’. Looks like he was escalated right out of the bank.
We will keep following the plight of Mr J because he himself is not going to let bureaucratic chicanery stop him from getting basic customer service. Watch this space. But have you had similar experiences to Mr J? Have you got so fed up with the run-around from your bank that you just gave up? Mr J’s experience with bureaucracies going into their corporate shell was with the National Australia Bank. What institutions have you dealt with that sacrificed basic customer service in favour of an attitude that says, ‘Work would be fulfilling if it weren’t for the customers’? If you do have any experiences that you would like to discuss, aired publicly, or investigated a bit more, send me a letter with your story. Address it to: Peter Higgins, Money Editor, Investigate Magazine. PO Box 602 Bondi Junction NSW 1355, or e-mail email@example.com.
Remember, you have nothing to lose except your Terms and Conditions Manuals.
See you around the traps.
ALL ORDINARIES (ALL ORDS)
The index is made up of the weighted share prices of about 500 of the largest Australian companies. Established by ASX at 500 points in January 1980, it is the predominant measure of the overall performance of the Australian sharemarket. The companies are weighted according to their size in terms of market capitalisation – i.e., the total market value of a company’s shares. The All Ords, therefore, is a good measure of how capital growth of the overall market is performing.