NZ Herald 27 October 2018

AI’ll do my best. When you buy shares, you are buying a portion of the company. In most cases, it’s just a tiny portion, but nevertheless you become one of the owners of the company.

You can make money two ways out of owning shares:

• If the company makes a profit, it will usually distribute at least part of that money to its shareholders — a.k.a. its owners — in the form of dividends. Sometimes, though, it will keep some or all of the profits to grow the company.
• When you sell your shares, hopefully you’ll get more for them than you originally paid. The price will reflect how well the company is expected to do. If its prospects look good, other people will be willing to pay more for your shares.

Both of these go wrong sometimes. The company may pay no dividends for years. If this is because it needs the money to grow, that may not matter, as it should mean you’ll get more when you sell the shares. But it might pay no dividends because it’s in financial trouble.

Also, you might end up selling the shares at a loss. That might be because the share market as a whole is in a downturn, which happens every now and then. Hopefully you’ll be able to wait and sell when things look better.

However, you also might sell at a loss because the company isn’t performing well. In extreme cases, the company can’t pay all its debt and goes into liquidation, so your shares become worthless.

But we’re getting way too negative here. Most shares gain value most of the time.

A good way to protect yourself against buying a few shares that don’t end up doing well — it’s pretty much impossible to tell in advance which ones they will be — is to invest in a share fund.

Your money is pooled with lots of other people’s money, and the fund managers buy many different shares. While some will do badly, that will usually be more than offset by others doing well.

You’ve got a couple of details spot on:

• It’s good to buy shares regularly over time. With the markets going up and down, your timing will sometimes be bad. But given that markets rise much more often than they fall, your timing will turn out to be good most of the time. Why not buy only when the timing is good? Because nobody knows when that is.
• You write about long-term investing. Over a single year there’s about a one in four chance that a share fund investment will fall. But over five years it’s about one in 15, and over ten years less than one in 50. Not only is it highly unlikely your investment will fall over ten years, but it’s highly likely it will gain lots — much more than, say, bank term deposits.

Hope I’ve convinced her!

AGet the Herald share price table and tape it over a dartboard. Then stand back and throw a dart. Buy the company the dart lands on — unless it’s in an industry in which you’re already heavily invested. Repeat…

It’s telling that you’re finding the advice on shares is for short-term growth. That suggests the advisers don’t understand as much as you — given your correct comment about investing for a decade or more. Short-term share investing is pretty risky.

There are, though, people who do lots of research in an attempt to work out which shares are good long-term investments. The trouble is, they’re in a really competitive game.

The first one to realise a certain company is likely to perform better than everyone expects will get in and buy shares. They are probably full-time researchers working for a firm that runs KiwiSaver and other share funds, so their purchase will probably be large.

And what happens when someone buys a lot of shares? It pushes up the price. Maybe the second big buyer will also get a reasonable price, but it doesn’t take long before the share price is pushed well up.

By the time you hear about a “good buy”, it no longer is. The company might go on to perform really well, but you will have bought the shares at a high price that reflects those expectations, so you’re unlikely to make out-of-the ordinary gains.

Many people disagree with this way of thinking, and they can always point to some share-buying advice they took that worked really well. But they tend to forget the advice that wasn’t so great, and also to ignore the fact that — as I said above — most shares go up most of the time. Many people in the last few years have said, “Look how well I (or my fund) has done!” without realizing a share investor would have to be pretty bad not to do well lately.

Much research backs the idea that ordinary investors can’t win by picking shares, and so they should just buy a diversified portfolio, as you are doing, or invest in a low-fee KiwiSaver or other share fund that does it for them.

Some fund managers and stockbrokers argue this doesn’t apply in New Zealand, where shares in smaller companies, in particular, aren’t researched enough for the prices to reflect their value. And because of that, we should listen to their recommendations or buy their share funds.

I’m yet to be persuaded that any one researcher is right often enough — which is why I stick to low-fee share funds where I’m not paying for any research.

AIt’s good that you went into this investment with your eyes open, but still it’s disappointing the way it turned out. The founder’s dramatic change of attitude is hardly surprising. But I don’t blame you for being annoyed at the process.

However, there’s hope for the future. Your call for better regulation is timely.

“MBIE (the Ministry of Business, Innovation and Employment) agrees that the current situation is unacceptable,” says a spokesperson. “Some providers of insolvency services fall well short of the standards of integrity and skill that the New Zealand public is entitled to expect.

“The Government has taken steps to greatly improve the situation. A Supplementary Order Paper to the Insolvency Practitioners Bill is currently before the House that progresses a licensing scheme for insolvency practitioners,” she says. The scheme will include “such things as entry criteria, ongoing competence requirements, and a fully effective complaints, investigation, discipline and appeals system.”

She adds, “The Economic Development, Science and Innovation Committee has heard submissions and is due to report back by mid-December 2018.”

What about keeping investors informed? “Liquidators are required to write six-monthly reports on failed companies and these reports are placed on the Companies Register,” says the spokesperson.

That part is probably reasonable. If they spent more money on direct communication, that would just eat further into the company’s assets. Nor do I think an accountant would necessarily cost less than a liquidator.

I also asked the Financial Markets Authority, which licenses crowdfunding providers, if those providers have any role here.

“The crowd funding service provider does not have a responsibility in this situation,” says an FMA spokesman. “They are licensed to assist in the capital raise but do not have ongoing responsibility to the companies or their investors.”

He adds, “Investors need to look out for the warnings on the crowdfunding site and on our own site about the risks of this type of investing.” But you already know that.

AThe tax credit stops when you turn 65 if you’ve been a KiwiSaver member for at least five years. If not, it stops at the five-year point.

You’re right about the pro-rated payment. If, for example, you turn 65 on December 31 — halfway through the July-to-June KiwiSaver year — you’ll be eligible for half the maximum $521 tax credit.

To receive your maximum, you need to contribute twice as much as your expected credit — which is 50 cents for every dollar you put in. You can deposit that money any time in the year, including after your birthday.

Don’t agonise over calculating your exact maximum. After all, if you put in a bit extra, you can take it straight back out again once you’re 65.