Monday, 11 June 2018

Become A Dragon - Owning Shares


Why do some people own shares on the stockmarket? Maybe you are exploring investing for the first time and want to understand a little more about it. Many people are fed up with the low returns on cash savings and are looking at options for a better return with stocks & shares.


Capitalism

Whether we agree with the system or not, the fact remains that here in the UK we live in a developed capitalist economic system. It is predominantly a self regulated system with minimal intervention from the state. This is the opposite of a communist system which operates in the likes of Cuba and North Korea where the economy is largely run by the state which controls the means of production.

Under our system therefore, capital is valued more than labour and those who set up and own a business usually make much more money than the employees of that business. Capitalism has provided us with our smart phone from the likes of Apple or Samsung for example, Google which we all use to search the web (and more), advances in drugs and medicine which is helping us all to live longer, from Amazon we have the Kindle e-reader and more recently the voice-activated Echo speaker with Alexa, we now have the electric car and just around the corner is the driverless car and the promise of our online shop delivered by drones! A lot of people criticise the system but continue to buy into many of the latest must-have technology.

The stockmarket is basically a product of a capitalist system. It is a place where a business can be listed and basically enables the business owner to raise capital in return for a share of the future profits in the business. Therefore the owner does not need to risk his/her own savings or borrow money secured on his own house for example.

Many will be familiar with the popular TV programme 'Dragon's Den' where someone with a new business idea will 'pitch' this to the Dragons who hold all the cash and who may, if they like the business and see potential to make money, agree to invest their own money in return for quite a substantial share of the business.

Become A Dragon

Anyone with some capital, therefore, can become a 'dragon'. They may not wish to take a punt on a new start up but can buy shares in the many hundreds of established companies listed on the London Stock Exchange known as the FTSE. They then become a part owner of that company and they will share in the future success of the business as the share price rises and may also receive regular dividend payments.

I guess many new investors who 'dabble' with stocks & shares do not think of themselves as part owners of a company but more likely they are taking a punt on the share price rising and making a profit at some point when the shares are sold. They probably regard it as an online transaction carried out via their online broker and possibly not much different to an online purchase from their favourite retailer.


Here's a short extract from an interview with Warren Buffett, possibly the most successful investor of the past 60 years:
"Imagine you’re buying an ownership stake in the convenience store around the corner from your house. Automatically you’ll think about the competition, suppliers, prices, etc. You’ll have to think both about the specific location as well as its competitive position in the market.
Similarly, while buying stocks, you need to think about all these things – just as the people running the business do.
When you buy a stock, you’re not just buying a piece of paper or a ticker symbol. Buying the stock of a company is buying an ownership stake in a BUSINESS".

Think Big

It is therefore possible for anyone to become a part owner in some of the largest companies in the world such as Facebook ($550bn), Apple ($950bn) and Amazon ($800bn) which are listed on the US stockmarket NASDAQ.


With the introduction of the low-cost online brokers and access to the internet, it is fairly simple to open an account and buy into any of the large, well-established global businesses. Certainly it is far easier than starting your own company from scratch.

Buffett's again..." Owning a profitable, growing business is one of the few paths to wealth. It’s something anyone can do today with a meager amount of savings. You can start a business or buy one (Buffett often refers to farms or apartment buildings). Or you can take a simpler approach by buying a portion of a business through the stock market".
"Owning a decently profitable business over a long period of time will compound your net worth. And you can diversify into multiple businesses (via an index fund) to increase your chance of success. A savvy investor might try to buy shares of businesses for less than they’re worth".
Risk
The returns from owning a small share in a company or more commonly many companies held via collective investments will far exceed the return from holding cash in a deposit account. Over the past 50 years the average annual return from equities after inflation has been 5% each year compared to just 1.2% from cash (according to Barcap Equity Gilt study). That means a sum of £10,000 invested in 1968 would now be worth £90,000 whereas the same amount in a savings account now worth only £18,000.

Invest or save...you would think this would be a no-brainer yet only a small percentage of the population actively choose to invest on the markets. Many think it's far too risky...like gambling at the casino or say they just do not understand finance. They would probably go to great lengths to research their next phone deal, holiday or car purchase but will not think to put the same time and effort into understanding something which could enhance their wealth and lifestyle in a fundamental way.
Conclusion
One of the reasons for running this personal finance blog is to help those who want to understand this important subject get an understanding of the basics. Of course some people will sadly never grasp finance and I am not naive to believe investing is for everyone, many just do not have any spare cash to invest, for others to some extent it will depend on temperament and the ability to remain patient but I am sure there are many people who could do a decent job of it if they put in a little time and effort. 

I subscribe to the philosophy of legendary investor Ben Graham who said “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”

I was completely unaware of the stockmarket until I was in my 30s. It was never talked about in my immediate or extended family and was not covered at school. Most of what I now know has been acquired through a process of experimentation combined with an ongoing interest in learning from others with more experience. Some of the blogs I follow (see right) hold a great wealth of investing knowledge which I find invaluable.
I believe in keeping things fairly simple..have a basic strategy, hold low cost global index funds to capture the whole market, match your allocation mix to your timeframe and temperament, maintain a realistic expectation of future returns, hold through thick and thin and don't second-guess the market (as I often do!), automate as much as possible and make use of tax breaks and free money from employers/pensions...it's not really rocket science.
Over to you...why do you invest? Is it rewarding? Was it difficult to settle on a strategy? Leave a comment below and share your experience with others.

10 comments:

  1. Dear DIY Investor.

    A good article.

    I invest because I was thrown into it. I was fortunate to inherit money but was census of losing it as a number of childhood heros of mine squandered their fortunes, turning to bankruptcy. I was determined not to do that.

The difficult challenge is to settle on a strategy. Value investing can work very well, so can Divided Growth Investing for me the absolute clincher was the the book ‘ How to pick Quality Shares “ by Phil Oakley.
It is tremendous at guiding one through the analysis process, highlighting all the good qualities of a company and also the warning signs.
    The quality of the author isn the chapter on “ Pension Fund Deficits”. Considering the subject of Pensions must be the most boring topic in the world, Phil makes even this interesting.

This book has changed my outlook and I would be so bold to say that wether you are a Dividend, Growth or Value Investor you will fail if the company you choose is of poor quality.

    Kind Regards

    Louis

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    1. Thanks Louis and good to hear from you. I agree that settling on a good strategy can take time to work out - I am still working on it - but it sounds like you have found a method which works selecting 'quality' shares.

      I tried this as a part of my strategy for several years but in the end I realised I was not really suited to handling the additional volatility so have moved on to the relatively calmer waters of Lifestrategy.

      As a matter of interest, I was wondering what degree of additional return you may have received on your shares over and above the average index?

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    2. Dear diy

      Thank you for your reply.

      Algy Hall an Investors Chronicle contributor runs several screens and one of his most successful is his safe yield screen.
      I am considering retrieving his original portfolios and comparing them with the performances of companies that most likely resemble Phil Oakley criteria.

      I have the relevant data of the companies on sharepad and I will send a copy of the results.

      Regards

      Louis

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  2. I'm convinced that index investing is the best long-term approach and I do use it in my pension portfolio....but I am also building up an experimental portfolio of direct share and bond holdings (outside my pension) specifically for income, and investing in p2p. These last two approaches are much more fun. I keep them to a certain percentage of my assets with which I am comfortable. Overall, equities account for a very conservative 20% of total assets.

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    1. RJ,

      Yes, over the long term, low cost global index is a good core strategy and I have so far converted around 50% of my portfolio in recent years. I guess it will be interesting to see whether you will get a better return from your experiment..time will tell but I like the idea of a fun/tinker percentage which means you can adopt a 'hands off' approach with the core holdings.

      Good luck with it and post updates to let us know how the experiment is working out.

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    2. My yield on the self-managed portfolio (60:40 equity/bond split) is about 4.5% on the current value (4.8% on the book value). Currently in profit by about 6.8% over the book value but this could evaporate at any time. While it's comforting to have that cushion, I tell myself that you haven't made a gain or loss until you sell the security. What matters is the income since I don't intend to sell. Forgot to mention I hold some ITs. I seem to have gone in the opposite direction to yourself (only outside my pension), although I recognize that what you are doing is the sensible approach.

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  3. Really enjoyed this post DIY Investor. Buying/investing in stocks is kinda what capitalism is all about. I think from the data/analysis the amount that Joe average invests in stocks has fallen over time. If indexing helps to correct that trend then that is another bonus!

    P. S. I learnt about investing whilst at university but only partly through my studies. The main way I learnt was first through Monevator and then also from RIT, John Kingham and yourself!

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    1. Thanks YFG. Yes I seem to recall seeing an article which said investing was far more popular with small investors in the 1960s and 70s. However, many individuals will now hold equities via their workplace pension...currently around 10 million, so the picture is complex. Maybe something to explore in a future article?

      I am not sure who could deliver the teaching but I think this whole subject should be taught at primary school from age 7. The sooner children learn about personal finance, starting a business and generally how the system operates the better imho.

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    2. I was in my teens when I was first made aware of shares/stockmarket, with the 'Tell Sid (British Gas)' adverts on tv. As a student, I profited from Thatcherism by using my student loan to buy electric company shares but as I didn't know how to replicate that success, I didn't really invest again until when I turned 40, after I had cleared my debts.

      By then, I knew that investing wasn't all about buying individual shares at a low price and selling high but I went for expensive funds as I didn't know what index trackers were. It was reading Monevator, RIT and then Tim Hale's Smarter Investing book which made me switch to index trackers. I started buying individual shares for long term yield but then your posts about investment trusts started me looking into and building an IT portfolio for income. I've still got individual shares but may slowly divest of some of them in time when I'm simplifying my portfolio.

      There aren't a lot of females talking about investing in this community - I can't say that I know a lot about it myself but I'm comfortable with it and the risk involved, plus I'm not averse to having a bit of fun along the way, eg Monkey Stocks and Dogs of the FTSE!

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    3. Yes, I guess quite a lot of people would have been tempted into owning shares in the privatisation of state owned organisations in the late 1980s and early 90s. The first shares I owned came from the demutualisation of Abbey National in 1989.

      Like you weenie, I have picked up so much from reading the sites you mention. The impetus for starting this blog came after I was invited to write a couple of articles for RIT in early 2013. I changed my strategy towards index funds after reading various articles on Monevator, especially the ones by Lars Kroijer.

      I think it is good to have an ever expanding community of people who share a common interest and who are at different stages of life. I hope more women will get involved in the future...maybe your blog will be an inspiration for some to take more interest.

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