Some Stock Market Myths That Aren’t Myths – A Warning

By Christiaan van Huyssteen (@cvh23)

From 702:

4 beliefs about shares that keep you from growing wealthy

Many people don’t invest in shares, because they believe one or more of the following misconceptions:

  1. Investing in the stock market is tricky
  2. Investing in shares is like gambling
  3. Investing in shares isn’t for those earning a low income
  4. Investing in shares can make you rich, but you need to know a lot and have the time for research

Investing in the stock market over longer terms is nothing like gambling

If you can put aside R300 per month then you can invest in the stock market!

If they’re honest, most employed South Africans will admit that they can afford to save R300 per month, which is all you need to start investing in an index tracker such as Satrix. We’ll discuss index trackers in an upcoming article. For now, just know that it’s a way to own shares in the very best South African companies. And you need only R300 per month.

You don’t need to know anything to invest in shares and you don’t have to do any work. I have a fund manager who makes all my investment decisions. I never check my stocks and spend, maybe, ten minutes a month on my portfolio.

A good portfolio should contain some equities naturally, BUT encouraging people who don’t understand some of the basics of investing to invest a day after the markets hit an all time high is a classic warning sign. When you get to a point where everyone from your hairdresser to your grandmother is giving you a ‘hot tip’, then you should be scared. Don’t invest if you don’t understand the risks, if you don’t respect markets, or if you don’t know what you are investing in. I don’t think it is entirely responsible of 702 to give this kind of advice at a time when the stock market has just hit an all time high.

Are these ‘misconceptions’ really misconceptions?

  1. ‘It is tricky to invest’

It is not technically tricky to invest. If you have money, you can make a phone call and invest money.

  1. ‘It’s not like gambling’

If you don’t have a fundamental sense of how the market works, if you don’t understand the macro-economic environment you are investing in and you don’t even understand what the company that you’re investing in does, it is just as bad as gambling, perhaps worse, because people don’t understand the risks. How many prospective investors understand what Naspers/Tencent (I’m not being critical of Naspers, they’re a great company) does? If you are investing out of greed because ‘everyone is doing it, and the market is going up’ you are in for a rough time.

Granted, you could have invested in virtually any big listed company over the past 5 years or so and have made a killing. But this is not normal, companies are starting to become overvalued and the world economy is not improving. All those trillions being printed by central banks have to go somewhere, and it seems they are going into stocks. These conditions are artificial, not normal.

  1. ‘Investing in shares isn’t for those earning a low income’

Investing in shares is for whoever has an appreciation of the risks involved, and understands that there is no guarantee of gains. The article encourages people to invest, even if it is as little as R300 a month, but it is not as simple as it seems. The transaction/management fees may amount to up to 1% to begin with. So, if you put in R300 a month for a year, you are already down 1%. And if you decide to buy specific shares outright, it may simply not be practical, buying a single Naspers share will take you seven months to do, if you are only setting aside R300 a month.

  1. ‘Investing in shares can make you rich, but you need to know a lot and have the time for research’

With regards to markets and companies, it would be wise to understand the following:

  • You need to understand what product/service the company you are investing in produces, and whether there will be a stable or growing demand for that product or service.
  • Understand simple multiples like the PE ratio and the share price to book value ratio, and compare the ratios of different companies.
  • Look at historical data and charts, and try spot the trends. And don’t assume ‘this time it’s different’.
  • Keep track of macro economic factors, like the gold price, oil price, currency and bond indexes. Also consider the effects of low interest rates and quantitative easing.

You also need to weigh up all the pro’s and con’s.

  • If a significant chunk of your investment value is lost (20%+), would you and your family still be financially secure?
  • How reputable is the investment company you are trusting your money with?
  • How liquid is your investment? If you invested in a small cap company, and there is a market shock, will you be able to dispose of your shares at a reasonable price?
  • Transaction fees and commissions are important to bear in mind, as mentioned under point 3.

On an unrelated note:

394 weeks nyse

JSE All Share (blue) vs DJIA:

Screen Shot 2015-04-28 at 6.50.45 PM

JSE All Share (blue) vs the Federal Reserve interest rate:

Screen Shot 2015-04-28 at 7.33.17 PM

JSE All Share (blue) vs the balance sheet of the Federal Reserve (indicates the $4.5t that has been printed (quantitative easing) to bail out the economy by purchasing assets (we don’t know what assets they purchase beyond worthless mortgages):

Screen Shot 2015-04-28 at 7.32.12 PM

Is this time different?

Follow us: @DiagonalViews

*DiagonalViews does not give investment advice.


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