Clem Sunter

Who wants to be a millionaire?

2010-04-08 07:56

The first decade of this century has been a pretty bleak decade for a lot of investors. The stock markets in developed economies like the US and UK have been flat or even down. Meanwhile, stock markets in developing countries like China and South Africa have outshone their rich cousins; but one has to take into account higher inflation rates and currency depreciation.

The second decade has not started out much better, and many investors are betting on a long drawn-out recovery with some shocks on the way. Equally, if you look at current price/earnings ratios for companies around the world, their shares are by historical standards fully priced as a result of the market rebound. So it’s difficult to know where to put your money.

I still subscribe to the principle that 1/3 of your wealth should be in equities, 1/3 in property and 1/3 in bonds/cash. I know the cash element does not attract much interest, but it is a hedge against the uncertainty of equity markets. Moreover, property these days is quite difficult to sell and is therefore less liquid than the other two categories.

Nevertheless, having studied the performance of stock markets over the last 100 years, I humbly submit the following recommendations for would-be investors:

1. Be prepared to leave your money in the stock market for at least 10 years. If you do, you are very unlikely to lose money, particularly if you re-invest the dividends. Any lesser period, you are at risk and one year is a lottery.

2. Invest in low price/earnings multiple stocks. Over 10 years, statistics show that you will do better than in high multiple stocks for any period you choose. It is the reason why the credo of one of the most respected asset management companies in South Africa is to look for exceptional value because the market underrates the track record and prospects of a particular company.

3. If you do not wish to be invested directly in equities, choose a fund manager with a proven track record over 10 years or more.

4. Be diversified in currencies.  Nowadays you can lose as much money in selecting the wrong currencies as you can in selecting the wrong shares. An old saying is that a man and his money should be on separate continents!

5. Don’t be tempted to trade in the market unless you are going to make it a full-time profession. A recent survey indicated that, over a period of 10 years or more, shrewd investing in stocks beats shrewd daily trading comfortably. The more important fact is that daily trading can lose you serious money. Long-term Capital Management was a US hedge fund which boasted two Nobel Prize-winning economists and still had to be bailed out on account of enormous trading losses.

None of these recommendations will make you an instant millionaire. Indeed, stock markets on average have yielded a return of around 10% per annum (including reinvestment of dividends) over the last 100 years. Thus, it would have taken you 72 and a half years to convert $1000 into one million dollars.

So what’s the message? If you want to become a millionaire honestly, you have to work for it. The investment game is purely there to defend the wealth that you have accumulated. Don’t be suckered into thinking otherwise.

Send your comments to Clem

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