Chair, Summer Investment Committee
When my daughter was about 18, she owned some shares in a company called The Helicopter Line. One afternoon we were standing out on the lawn and a helicopter flew over. We both looked up and, with a little smile my daughter said: “That’s my helicopter.”
She was right, of course - it was her helicopter. More correctly, a small piece of this flying machine was her helicopter (regrettably for the Hawes family finances she did not own the whole thing, let alone a fleet of them).
However, even at that relatively tender age, she knew that by owning shares in The Helicopter Line she owned a small fraction of that helicopter (and a fraction of the others in the fleet).
More importantly, she owned a share of the profits that this helicopter made. That helicopter that flew over was (hopefully) making money for my daughter and all the other shareholders in The Helicopter Line.
There are lots of people who are scared of owning shares –the price of shares jump around a lot for little apparent reason and they do not understand why.
To be successful with shares, many people think that they need to understand the sharemarket and why shares are so volatile. They think they need to understand every little up or down and be able to predict movements in advance.
They do not. In fact, the critical thing about success with shares is to understand the businesses that are listed on the market – to know what they own (or might own) and to know what will drive profits.
Unfortunately, just about every family has an uncle or an aunt, grandfather or a grandmother who was involved in the 1987 sharemarket crash and who still gives warnings to anyone who will listen about the dangers of shares. A lot of people lost a lot of money at that time and, for some, that has put them off shares forever.
But there is another way of thinking of shares. Shares are not some commodity that you need to fear, but are really the proportional, or fractional, ownership of a business. You need to think about whether that business is likely to be successful rather than worry about the ups and downs of the sharemarket.
Kiwis are pretty familiar with businesses – we go into business quite readily.
As soon as the redundancy cheque clears, or as quickly as we can say “I’ll be my own boss” we go off into business.
We’re familiar and comfortable with business. I do not think that we Kiwis are scared of business at all – I think that we are scared of the sharemarket
When you consider whether to buy the shares of a particular company, it is the business of that company that you need to think most about not just the state of the sharemarket. Specifically, good investors assess four important things:
When you think about it, these things are little different from the things that you would consider if you were buying a small business for yourself. The main difference is that instead of buying all the business you are buying a share in a business which other people will run for you.
The sharemarket, where you buy or sell these small parts of businesses, can be scary. However, the underlying businesses of which we might own a share are much more familiar. Remember that in spite of all of the volatility of shares, generally the underlying business remains and that you own a part of that business.
Sure, shares are volatile, they go up and they go down – sometimes a lot. The sharemarket often works on the basis of emotion (mostly fear and greed) and economic events can make people over-react.
For good active investors this over-reaction presents good opportunity as they try to exploit the pricing inefficiencies. Active investors can buy bargains when other investors are feeling depressed and sell high when other investors are feeling overly exuberant.
The sharemarket does give an opportunity to profit. To buy a small share of a really good business can be highly profitable as the profits, dividends and share value can all increase. Add to that the ability to buy cheap and sell expensive and you have a good formula for investment success.
Shares are a key part of every investor’s portfolio. Whether it is a helicopter company, an electricity generator or an operator of retirement villages you should embrace shares as the ownership of a business.
Of course, Summer KiwiSaver scheme members do not have to pick the businesses that they want to own. This is done for you by our investment managers who choose which companies to own on the basis of their future prospects and the prices that they have to pay. All of this is done according to a careful process and following thorough research.
Summer KiwiSaver scheme members will be subject to the ups and downs of the sharemarket, but they should take comfort in the fact that the businesses that they own are selected after a lot of analysis and thought.
You might like to discuss the views in this article with your Authorised Financial Adviser. Please call your Adviser directly or toll free on 0800 11 55 66.
Like to learn more about investment mix? Watch Martin's video on asset allocation.
If you are interested in other investor education insights from Martin visit the Media Investor Education page.
Martin Hawes is an Authorised Financial Adviser. This is not a recommendation to buy or sell any financial product and does not take your personal circumstances into account. All opinions reflect our judgement on the date of communication and may change without notice. Past performance is not a reliable guide to future performance. We recommend you take financial advice before making investment decisions. We have prepared this web page in good faith based on information obtained from other sources, but we do not guarantee the accuracy of that information. We do not make any representation or warranty (express or implied) that this web page is accurate, complete, or current and to the maximum extent permitted by law disclaim any liability for loss which may be incurred by any person relying on this web page.