Ten investment tips from a JSE legend

Simple investment truths handed down through the generations still have relevance, even in these ever-changing times. Stephen Silcock shares the lessons taught by his grandfather, Alistair Martin, a former chairman and president of the Johannesburg Stock Exchange. He picked up many lessons over 40 years under the tutelage of his grandfather, and till this day practices everything he learnt from the remarkable man. As he puts it, “This was far better than any university degree!”

A legend revealed...

Starting in British Army, Alistair made his way to South Africa to start a career in the equity markets. His speedy progression to the top could be attributed to the forward thinking contributions he made to committee deliberations right from the start. His years as head of the JSE coincided with one of the most tumultuous periods in the markets, including the buoyancy of the 1968 bubble, and inevitable crash in May 1969. This latter event was one that he had forecast, stating beforehand that, “it will be surprising if 1969, as well as providing a continuation of the present buoyancy, does not also produce the quite sickening thud of a major correction. The higher the peak, the steeper the fall.” He was not at all popular for voicing his view – but history proved him unnervingly accurate.

Ten timeless tips

One of the legacies that Alistair Martin left was a hand written piece of paper that included 10 tips that he felt he had learned in the investment arena. These timeless pieces of investment wisdom are still relevant.

1. The price paid for a share should have nothing to do with a subsequent decision to hold or sell – this is what behavioural finance writers have subsequently referred to as anchoring.
2. There are many reasons to sell a share, taking a profit is not one of them – if the share remains a good investment, do not try to second guess when it will fall.
3. The first loss is the best one – admit your mistake, learn from it and move on.
4. Where there’s a tip, there’s a tap – think about why the tipster is sharing his gem with you. Maybe he wants to offload?
5. Be aware of averaging downwards; be wary of buying more of a share unless it is on behalf of an initial buyer – to use the equivalent military maxim, never reinforce failure.
6. Run profits and cut losses – for example, one bad choice which is not eliminated quickly can negate a dozen good choices which improve moderately. 
7. Never forget the specific needs of a client – remember elements such as the client’s life stage, financial commitments and risk tolerance.
8. Never fall in love with a share or sector – we have seen many sectors enjoy their time in the sun (for example, IT shares in the 1990s), only underperform in later cycles.
9. Keep a reasonable balance in one’s portfolio: a heavy weighting in one or more shares or sectors increases risk.
10. And finally, apart from the taxation aspect there are good reasons for not fidgeting with investments generally. Many shares will reward holding for the long run. 

Via Investec

Top 10 investment tips

1. Diversify
The expression, "don't put all your eggs in one basket" is meaningful when it comes to money investing. Don't put all your money in one stock. Also, buy fixed income securities (i.e. bonds) and stocks. Don't pick only one type of investment.

2. Do Your Homework
Obtain and analyze as much information as possible before making your investment decisions. This will alert you of any problems a company may have, or what to expect from your investment. 

3. Set Goals & Limits
Determine the price (high target price or low stop-loss price) at which you're willing to sell. Analyze interest rates to decide what return you want. (According to the book The Intelligent Investor by Benjamin Graham)

4. Don't Gamble With Money You Can't Afford To Lose
The less you can afford a loss, the more conservative you should be in your choice of investments.

5. Don't Be Greedy
Don't expect your broker to recommend stocks that will double in value within a few months. If you do have a stock that goes up considerably -- i.e. 50% or more -- sell.

6. Invest For The Long-Term
Company stock prices will fluctuate, sometimes unfavourably, in the short-term. Invest for the long-term, but keep your current financial needs in mind. You never know when you might need some of that money.

7. Avoid Acting On Impulse
An impulse buy, whether at the mall or on the stock market, is still an impulse buy. Stick to your plan. Don't buy a stock on a hot rumor; you'll get burned 90% of the time.

8. Go For Value
Undervalued stocks will help create the most growth in your portfolio. Look for bonds of companies that are out of favor too. They should be selling at a deep discount.

9. Tax Planning Is Important
Consider income-splitting techniques. (Ask your investment advisor).

10. Get Professional Help
If you're starting out, hire the best professional help you can afford. Professional advice will likely pay for itself within a short period of time. Once you become used to the market, do the research yourself. Later on in the game, switch to an online broker

The 12 Most Important Rules Every Investor Must Know

'The more I see, the less I know for sure.' - John Lennon

When you're younger, your limited life experiences tend to cloud your judgement. At eighteen you know everything (at least if you're male).

The more you experience life, the more you realize how little you actually know. And that which you think you know, may not even be correct.

Twenty-six years in financial planning has taught me a lot. None of it came from textbooks. No amount of theory can replace experience.

Just when you think you know about markets, along comes a surprise.

Allow me to share with you what my experiences have taught me and what I think I know about the investmentbusiness...

Humility

Markets can make you truly humble. Those who treat the market with disrespect eventually pay a very heavy price. Markets are like the ocean - one day gently rolling waves, the next, wild seas with strong undertows. Anyone who does not respect the power of the ocean is a fool and the same goes for the markets.

Markets do have very long term trends. However over shorter time frames - five to ten years - they can be completely unpredictable. The All Ords for example is back to levels it first reached in late 2005. Eight years of zero growth - I bet few people factored that into the computer modeling used for a 2005 financial plan.

There are no new ways to go broke

Debt is the common denominator in all financial disasters. Those who live by the creed 'you have to bet big to get big' can be lucky, but they are in the minority. The majority ends up wrecked on the rocks of financial reality. Be prudent. I prefer the creed 'slow and steady wins the race'.

The best luck is bad luck

Success without bad luck is a disaster waiting to happen. Bad luck and misfortune teach you to appreciate the good times. Success without setbacks is conditioning you to have unrealistic expectations.

Patience

Patience truly is a virtue. In this fast paced world, instant gratification is embedded in our society. The thought of taking twenty years to pay off a home or forty years to build retirement capital is completely at odds with the 'want it now' attitude.

Markets (interest rates, shares and property) do not always deliver the returns we would like or expect. Sometimes they defy the averages and perform abysmally for very long periods. You cannot make markets go any faster, therefore patience is the key to holding your nerve.

Do not chase returns

This is a follow on from patience. If interest rates are low, the temptation is to leave the safety of the bank and chase an extra few percent. Invariably the cost for chasing the higher return comes with loss of capital - this loss is usually far greater than the few percent you earned.

Always take profits

You'll never go broke taking profits. So many people want to squeeze the last drop out of a winning investment. Leave some for the next person.

Besides greed, the other reason people don't take profits is, 'I'll pay too much tax!' This is dumb. Paying tax is a cost of successful investing. Live with it. Under Capital Gains Tax (provided you've held the investment for 12 months) the taxman will extract a maximum of 22.5% of your gain. You keep 77.5%. This is far better than seeing the market wipe out your paper gains.

Busts always follow booms

Since Tulip Mania became folklore we know booms always bust. Yet when the animal spirits capture society's emotions this logic is abandoned in the chase for the almighty dollar. Night follows day and booms always bust. When the heat is on in the market, get out and stay out. The market may get even hotter and you may experience sellers remorse - get over it. The hotter the market becomes the more violent the snap back to reality will be.

Transparency of investments

Only invest in something you understand. There are so many 'iceberg' investments out there. You think you see the risk, but most investors have no idea what lurks beneath the surface.

The rule of thumb is 'If you don't understand it, don't do it'.

Higher risk can mean greater loss

Have you heard the saying 'High Risk /High Return'? It's not entirely true. In some cases high risk pays off handsomely. However high risk can mean greater losses. Personally I prefer low risk/high return.

How is this possible? Buy low and sell high.

Far too many people buy high and sell low.

Do not invest for tax reasons

No one likes to pay more tax than they have to, but never invest solely for tax reasons. The taxman tells you upfront the percentage of your income and capital gain he will extract from you. The market does not give you any indication of the percentages it can take from you.

If you are a successful investor you must pay tax. There are certain structures you can use to minimise tax, but ultimately the investment must be sound.

If it sounds too good to be true...

Listen to your inner voice; if it's saying, 'This is too good to be true,' take the advice. You may genuinely miss out on the 'once in a lifetime opportunity' but from my experience you have more than likely dodged a bullet.

The magic of math

There is an old saying 'the market goes down by the elevator and up by the stairs'. If a market loses 50%, it has to recover 100% for you to break even.

The 50% loss can happen in a blink of an eye, whereas the recovery process can take years - look at the All Ords, still way below its 2007 peak.

Calculating your downside is far more critical than focusing on your potential gains. As an example one of my recent investments was in US dollars.

Buying in at $1.05 my guess was the downside was probably 5% (if the AUD rose to its previous high of $1.10). However the upside could be over 100% if the AUD falls heavily into the $0.50 range (perhaps GFC Mk2 could trigger this).

To lose 50% on this investment the AUD would have to appreciate to over $2 against the USD - highly unlikely.

Understanding the math assists in taking calculated risks.

Vern Gowdie
Contributing Editor, Pursuit of Happiness via http://www.dailyreckoning.com.au