There are thousands of stories of stockmarket bloopers and the fools who made them. Even the most successful investors admit to making some howlers. But the thing that separates successful investors from the rest is that they learn from mistakes and profit from the experience. Here are some of the dumbest things you can do with shares.
The list is not exhaustive and some points may appear contradictory. Investment is an art, not a science, and the most successful investors not only have a long-term strategy but they are flexible enough to adjust it when circumstances warrant.
According to Blomfield, the time to decide when to sell is before you buy. That is, if you buy a stock at $5 you might decide to sell and take a profit if it hits $6.50 or cut your losses if it falls to $4. "I encourage clients to write this down in advance, like an agreement made with themselves," he says.
On a similar note, if investors buy more of a favourite stock when its price dips to average down their entry price, they need to adjust their predetermined selling levels.
Blomfield applauds the growing awareness among
retail investors that bad share days can throw up some
good buying opportunities, but warns that a share that
falls 20 per cent is not likely to recover overnight. He says
investors need a time frame – some idea how long they
are willing to give a stock to make their desired return.
No amount of gadgetry will compensate for a lack of research or an understanding of how the market works. Professional trader and author Daryl Guppy says one of the most important rules is to trade in the direction the share price is going.
In other words, buy in a clear up trend and sell in a clear down trend. "Look at the [share price] chart. If it's going down it's likely to continue to do so," he says. This advice holds for investors as well as traders. For example, Orica is a blue chip stock that has been in a clear up trend for a year. By comparison, there was a lot of loose talk about AMP as a recovery stock in mid- October but, as Guppy puts it, "It's been doing an elegant swan dive [since the start of the year], the chances of it defying gravity are low."
Michael Dunn, director of consumer communications at the Australian Securities and Investments Commission (ASIC), says people should first decide if direct shares, rather than managed funds, are for them. If so, they need to know how shares fit into their financial plan.
Once you make the decision to invest, ASIC recommends investors do their homework, buy shares in companies they understand, know how long they plan to hold the shares, learn the lessons of history, have realistic expectations of share market returns, understand the risk-return trade-off and your own tolerance for risk.
Over the very long term, the Australian market has delivered real returns (after inflation) of about 7 per cent a year. "These are very good returns and mean investors double their money every seven years," says Dunn. Even though individual stocks may significantly outperform the market average, he says, investors who expect real returns of 10 to 20 per cent plus are being unrealistic.
Guppy says in his latest book, Snapshot Trading (Wrightbooks, $39.95), that the single most powerful self-defeating excuse for poor trading performance is the idea that success depends on exclusive news. Guppy's book is aimed at day traders but the principle applies equally to investors. These days, by and large, each investor is privy to the same news at the same time as everyone else. Insider trading and market manipulation does exist but it is not the all-pervading problem many people fear.
Guppy gives a recent example of an opportunity open to any astute investor. Newspapers reported on November 21 that MIM was a takeover target, normally a sure sign that the share price will rise rapidly on high volume. Anyone reading the news over breakfast could have bought MIM for $1.38 to $1.41 that morning before the shares raced to $1.52 later in the day. As most takeovers play out over several months, there is often the possibility of a raised offer or a counter bid. If snap decisions are too scary, Guppy points out that many good opportunities are around for months at a time, such as the Orica example earlier.
Nick Renton, actuary, founder, first president of the Australian Shareholders' Association and author of many investment books, argues that constantly switching investments in pursuit of elusive big returns not only encourages overtrading but buying and selling at the wrong time.
"If you sell CBA to buy ANZ then sell ANZ to buy CBA back again, have you achieved anything but generate brokerage fees for your adviser and capital gains tax for the government?" asks Renton.
This indicates that many shareholders are accidental investors – thanks to big public issues such as Telstra and IAG – who probably need to give some thought to developing a more balanced share portfolio. However, there are times when more is less.
Renton figures the benefits of diversification are lost
after 15 to 20 stocks, mathematically speaking. If your
money is spread evenly across 20 stocks and one goes
AWOL, you lose 5 per cent of your capital. If you spread
it across 100 stocks and one crashes, you lose 1 per cent.
According to Renton, the difference (between 1 and 5
per cent) is not enough to offset the added costs of
maintaining a portfolio of 100 stocks. If you are going
to play the entire field, you might as well buy a
managed fund that aims to match the performance of
a particular market index, and be done with it.
Just as importantly, Renton says, failing to learn about investment products and markets results in missed opportunities. One such opportunity he discusses in his latest commonsense book, Learn More about Shares (Wrightbooks, $24.95), is the anomaly in the pricing of News Corp ordinary and preference shares.
Historically, News ordinary shares sell for a premium of up to 16 per cent because they carry full voting rights, whereas the "preferred limited voting ordinary shares" have limited voting rights and sell at a discount.
However, preference shareholders are compensated with a higher dividend (7.5c compared with 3c) and they qualify for the dividend reinvestment plan. In other words, the preference shares offer more bang for your bucks. "Why buy the voting shares when you can get 15 to 20 per cent more by buying non-voting shares?" asks Renton.
Answering his own question, Renton says investors lose out because they don't like fancy sounding names and their brokers don't bother mentioning the alternatives when clients ring and place a buy order for News.
As investors in WorldCom and HIH found out, there are some corporate wounds that time won't heal. Guppy points out that both companies were in a long downtrend before they fell off a cliff.
That's where timing comes in. Even though very few investors were privy to the problems at HIH before it collapsed, a look at the share price chart should have warned off new investors, and made existing shareholders consider selling and looking for better opportunities elsewhere.
ASIC's Dunn advises investors to know their time line before they buy. Some shares that are good value in the short term should be bought and sold quickly; others will deliver solid returns over the very long term. If you have a short- to medium-term financial goal, such as accumulating a home deposit, don't park your money in shares. Shares should form part of a longterm investment strategy, even if you buy and sell some stocks quickly.
Timing is important but so is price. Investors would be wise to take a page out of investment guru Warren Buffett's book and buy shares in quality companies at a fair price and be patient. If a fundamentally sound company is overpriced, wait for a price correction then pounce. Conversely, if a good company has been oversold, wait for proof that the price is on the mend then buy and enjoy the ride.
With a little foresight, investors can take advantage of the fact that opportunities emerge when the market undervalues certain stocks.
This story was found at: http://www.moneymanager.com.au/investing/guides/articles//shares04.html