No get-rich-quick game

2011-02-19 10:34

Having worked in stock broking I have mixed views on individuals trading on the JSE.

On one hand we had individuals who built up quality share portfolios over time and made a significant amount of money. We also had traders who made money more often than they lost it.

However, we also had many, many ­individuals who lost money. The number-one culprit was emotions.

Private client investors get caught up in the emotions of the market. When they see headlines that the JSE is breaking new highs or the market is up 30% in just six months, that is when they want to invest. Invariably that’s exactly when you do not want to invest – when the market is getting expensive.

Then when the share market crashes, they forget that this is a long-term ­investment and tend to sell at the bottom. So they have bought the shares at the peak of the market and sold at the lowest price, which loses them money.

People also see the stock market as a get-rich-quick scheme. They bet on tips they hear at dinner parties without thoroughly researching the company they are investing in.

“For some people share investing has a bling value. People feel if they talk about their shares it gives them status. This can be a fatal attraction,” warns Noelle Conway, head of marketing, sales and service for FNB share ­investing
People who trade on the JSE usually talk about the shares they have made money on, not the shares that have cost them. This creates the perception that there is easy money to be made.

It isn’t easy. It takes steady emotions, research and a plan.

The best way to invest or trade is to have a strategy and to stick to it. ­Building up a long-term share portfolio is one way to do this.

A good starting point is to invest in some of South Africa’s top 20 ­companies. These are successful companies that have good track records and you will be familiar with most of them as they are household names.

There is also a lot of research on these companies available so you can read up on them and see which you believe is offering the best value at the moment.

As you are starting off it is best to buy shares in different sectors (industries) so that you have a diversified portfolio.

Some of the large companies that unit trust fund managers are currently holding include Anglo American, ­Sasol, MTN and SABMiller, Naspers and FirstRand.

Large- to medium-sized companies are established businesses but they are still growing and can offer more growth potential over time.

These can include the next 20 largest companies like Shoprite, Vodacom, Pick n Pay, Bowler Metcalf and ­Tiger Brands. It would also include ­medium-sized companies such as Mr Price.

As you save additional funds you could add to your portfolio every few months by purchasing shares outside of the top 20 companies.

Again do your homework and even use your own gut feel. My mother bought shares in Shoprite because she found that the one closest to her was busy all the time.

The shares have done well, but now they are considered expensive – so you need to do your research to find out if the good news is already priced into the share.

As you become more familiar with the stock market you will want to ­include one or two smaller companies in your portfolio. These tend to be the most risky because they can still suffer growing pains, however this is where the real money can also be made.

In 2002 if you had invested R5 000 in Capitec on the day it listed in at R1.80 a share that investment would be worth nearly R460 000 today. It is these kind of success stories that attract people to the stock market.

But you would have gone through a bumpy ride which would have seen your investment halve a month after you had bought it. Only investors who had bought because they understood it and believed in management would have held onto those shares.

By the same token there are many small companies that listed on the JSE in the late 1990s which no longer exist and which lost investors a lot of money.

Again you have to make sure you understand the business and that you are not just buying it because of a hot tip.

There is always room for a small company in your portfolio but the rule of thumb is that is that it should not make up more than 10% to 15% of your total investment.

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