NZ Herald 23 April 2022

ABroadly, I like the idea. It’s great for young people to get an understanding of shares. After all, shares are the easiest way for most people to build up substantial long-term savings.

I have some reservations, though. Here are some of the incorrect lessons people can “learn” in share clubs:

Untrue: By doing some research on a company, you can tell whether its shares are likely to perform well.

It’s certainly possible to look at a company’s financial statements, and experts’ analysis, and make a judgement about the company’s future profits. But — and this is important — just because a company performs well that doesn’t mean its shares will.

If a company’s prospects look good to the amateur investor, the professionals who run KiwiSaver funds and the like will have spotted that much earlier, and bought the shares. Those purchases will have pushed up the share price, making it less likely the price will rise much further.

I’ve quoted top US share investor Warren Buffett on this before, but let’s do it again. “What I just cannot get investors to understand is the difference between a good business and a good investment. When I bought Coke at $6 a share it was a great company and a great investment. It’s still a great company — but at $44 it is no longer a good investment.”

Untrue: It’s best to pick one or a few shares that you think will perform better than the market as a whole.

Lots of research shows amateurs are not good share pickers. Plenty of people say they are, but often their portfolio has risen only because the whole market has risen. A few convincingly beat the market for a while, but that can be sheer luck — although they won’t admit that! Very few continue to have good luck.

Actually, many professionals don’t consistently “beat the market” either. Only the first investors to realise a company’s potential do really well.

That’s why smart investors use funds that hold a wide range of shares, preferably around the world. The winning shares balance off the losers, and over time, the units in the fund rise. You can invest in such funds through Sharesies, but I expect your students might prefer individual companies.

Untrue: People often do well by trading shares frequently.

Again the research shows frequent trading doesn’t usually work well. It’s best to buy and hold.

Untrue: Shares are a good short- or medium-term investment.

They’re not. There’s too big a chance a share investment — whether in a single share or an index fund or other fund — will lose value over just a few years. Share investments should be for ten years or more.

Some years ago, I taught a financial literacy course to undergraduates at the University of Auckland.

To introduce the students to shares, each year I asked them at the start to pick one from a list of 25 New Zealand shares. I gave them a sharebroker’s information about each company, and asked them to explain their choice. Most said something along the lines of, “This company looks likely to do well.” I also randomly assigned each student a share.

At the end of the course, the most popular shares had usually performed worse than the least popular shares. Perhaps the popular shares had been “over-bought” in the real world. And as often as not a student’s random share had done better than their chosen one.

I also grouped the 25 shares into five portfolios, so the students could see how investing in several shares reduced their chances of doing really well, but also of doing really badly — a tradeoff most people are happy with.

Then we looked at the big portfolio of 25 shares. This, of course, had an average performance, which was better than most students’ chosen shares.

One problem was that the course lasted only 14 weeks — far too short a period, which sometimes coincided with a boom or bust. I went to some lengths to explain that to the students.

Your high school students will probably take part for at least a year and hopefully several years. Even so, that’s too short a period, and it would be good if you explain that.

Another difference is that my students didn’t use real money, but I assume yours will. But perhaps you could have each student buy their chosen share and you could assign them a random share and just keep track of its price. You could also have the students compare the performance of their shares with an appropriate share index, such as the NZX50.

Some students will of course do better than the index. They are in danger of thinking they have the knack to pick shares. Oh well, they’ve got years to learn that they almost certainly haven’t!

Good on you for taking this on.

AYou will probably disagree with some of what I’ve said in the above Q&A. That’s cool.

All I can say is I’ve read the research and watched what happens in the real world for a long time — including during the extraordinary rush of share investing in the 1980s, and then the ’87 crash and aftermath. Hugely popular share clubs disappeared almost overnight.

Still, people can learn lots through being in a share club, including what not to do!

It’s kind of you to offer your club info to others, and I’m happy to help. Interested people — perhaps including our teacher — can email me, with the subject “share club info”, and I will forward their emails to you.

On the Sharesies and Smartshares comparisons, two years is too short a time to draw any meaningful conclusions.

AYou’re right, of course, that the price of gold rises over time. And it sometimes zooms up for a while.

But last week’s correspondent was considering putting her inheritance into gold because she had been told it was the only safe place for it — presumably while she decides what to do with the money.

My point was that the price of gold falls often. It’s not suitable for money you are likely to withdraw in the next few years, as the price could easily be down.

On the 2000 years issue, a wise investor in a diversified portfolio — quite possibly including gold and silver — would do fine. You never get all investments becoming worthless at once, and some of the others will always do well over a long period. More on gold next week.

AGood idea. Data from the Reserve Bank’s inflation calculator shows us that $100 buys about one third as much food now as it did in 1985.

To put it another way, $100 of food then would cost $290 now. Food prices have risen slightly less than the consumer price index, which has tripled in that time.

Interestingly, transport prices have risen more slowly, and clothing has risen at not much more than half the pace of the CPI. Housing, of course, has risen much faster. The calculator shows that $100 of housing in 1985 would cost more than $1300 now.

The good news is about wages. While the CPI has tripled, wages have considerably more than quadupled.

We’ll also revisit this subject next week.

ASorry to lose you. You’ve written to me several times over the years, and at least two of your letters — and now a third one — have been published. You are an involved, valued reader.

And now you’re troubled by a couple of admittedly gloomy readers’ letters. But they are readers expressing worries, not facts. In my replies, I hoped to reassure everyone, with a bit of help from the Reserve Bank and info about bank credit ratings and so on.

I’m afraid I’m not going to stop running the letters from “Worried of Wiri”. Worries aren’t stopped by burying them, but by checking the facts. Please note this, ostrich!

In case you don’t read this, because you’ve already signed off, I’ve also sent my reply to you directly.