Diana Clement: The fundamentals of DIY investing

Does buying shares count as gambling? I’m sure many of the half-million Sharesies members, and especially the 60,000 members of its Facebook discussion group, would disagree vehemently.

Don’t get me wrong. I’ve even encouraged my
own children to join Sharesies and have a play around. Introducing young people to investing early is very valuable.

But I do worry about the people, and there are a lot of them, who panic about “losing” $100 on a share in one day. Or those who gloat about their gains over a week or two. This is gambling. What’s more, your gains or losses aren’t that until they’re cashed out.

I happened to be talking to Harbour Asset Management’s managing director Andrew Bascand the day of writing this article and he made the point that some sole share traders are successful. But they’re sitting there full-time, watching the markets.

Even they don’t have access to the research Bascand and his analysts can see on the five screens on their desks. They’re also at it five days a week, not evenings and weekends.

They study finance or business, they work in teams, and use computational power to their advantage.

They have tools to short the market and hedge their positions, says Bascand.

Unfortunately, the research that some new investors, in particular, have access to is social media commentary, which isn’t much different to the vaccine “research” that has sent many a New Zealander down the rabbit hole.

With every boom, a new crop of first-timers who think they can play the markets better than the experts or simply have a knack for picking winners. Ask the same person after 10 years and you’d be hard-pressed to find anyone who had actually beaten the markets if speaking truthfully.

The Financial Markets Authority (FMA) published research about the new breed of DIY online investor late last year. Most are embracing the positives, not falling for the pitfalls.

However, the FMA urges investors to follow the five Ds of DIY investing. They are: Do your due diligence and learn about your investments; drip-feed your money in over time because you’ll never pick the top and bottom of the cycle; diversify your portfolio across multiple companies, investment types and geographical markets; don’t freak out if markets go down; and if in doubt talk to a financial adviser.

You can be lucky with one company. But often it is just that … luck. Back in 2003, investors in Fletcher Building (FBU) probably thought it was one of the strongest companies in New Zealand. The share price rose by 202 per cent from March 21, 2003, to February 22, 2022, compared to the overall NZX that rose by 637 per cent, more than three times the return of FBU.

Buying a dud is one of the reasons people buy funds of, say, the NZX50 or S&P500. You’re spreading your risk across 50 or 500 shares, so the odd FBU isn’t going to ding your overall returns.

I would never begrudge anyone a flutter through Sharesies, Hatch or Stake. It’s ok to have a dream, providing it doesn’t stop you moving ahead. Likewise, there is nothing wrong with putting a few bucks in Rocket Lab, Apple or even FBU shares, providing it’s not your house deposit or retirement fund.

If you want to try out share investing, says Bascand, pick one stock such as Summerset (or, I would say, Tesla) and read absolutely every report that comes out about it and learn as it rises and falls in value.

Losing a small, or even relatively large sum of money while young can be an extremely valuable learning lesson. I, myself, was lucky to have just left university when the 1987 stock market crash hit. I’d worked in a stockbroker’s office as a student job and thought myself more than qualified to stock pick. I wasn’t. Boy was that a valuable experience.