Share success is simple
Published in The Courier Mail, July 2007
By Erica Thompson
OWNING Australian shares has never looked so good, with the market delivering its best returns in 20 years.
In such buoyant conditions, what sort of shareholder makes the most money?
Being a short-term player, or trader, requires constant research and nerves of steel. The pay-off can be significant, but so can losses.
Being a long-term player, or investor, takes some initial research but then it's a waiting game hopefully peppered with regular dividend cheques.
"An investor assesses the value of the business and then tries to buy in at a price that is below that value and sticks with it for the longer term or for as long as the business is performing to expectations," says Fat Prophets analyst Greg Canavan. "Traders have more of a short-term focus. They might look at certain technical indicators (or charts) to find a (stock) to buy and are effectively looking to get in and get out quickly to make profits."
While this is the more risky strategy, Mr Canavan says it's been a good year for speculators.
"In bull markets risk-takers are always going to do better than the conservative investor, but over the longer term it's very easy to wipe out all your capital if the situation moves against you."
A commodities boom, a flood of superannuation money and plenty of takeover activity nonetheless makes short-term trading attractive.
But Wealth Within chief investment analyst Dale Gillham says trying to pick the next big thing or takeover target is high-risk trading.
"The people who make the most money out of the market keep it really simple and stick to the best stocks," he says. "Volatility means you can make lots of money if you get it right, but the day traders that make millions of dollars – we're talking maybe one in 10,000 if you're lucky."
Centric Wealth researcher James Foot says people should remember that returns consist of both capital growth and income in the form of dividends.
His analysis of Australian shares and dividends over the past 87 years found share prices have increased 247 times, while dividends have increased 246 times.
In the past 15 years, for example, the Commonwealth Bank has seen its fully franked dividend grow by 12.2 per cent a year, while the change in its share price has been 13 per cent a year. So while all the action appears to be in the daily ups and downs of the market, Mr Gillham says medium to long-term investors will often come out on top and for less risk.
But whatever strategy you choose, it's essential to do your homework.
"Anybody can buy a share, but you need to know how to manage it properly to achieve your profits," Mr Gillham says.
You also need to work out how much time you have to spend and how much risk you're willing to take. If you're close to retirement or need your money sooner rather than later, the share market may not be for you.
"The worst thing that can happen is someone puts all their dough in and they get blown out of the water in the first couple of months and they never come back to investing," says Mr Canavan.
"There's always certain methods to make more money in certain conditions but our view is you should stick to the fundamentals."
