Cents recall lack of sense

PUBLISHED : Sunday, 08 May, 2011, 12:00am
UPDATED : Sunday, 08 May, 2011, 12:00am


Pinned to a notice board above my desk is a cheque for the princely sum of 10 Australian cents. The cheque has been sitting there for some 16 years and serves as a reminder of investment folly.

Generally, these pages are filled by smart people writing about how clever they have been in making investment decisions; others provide advice on how readers should behave in the world of investment. It is uncommon to find a writer admitting to dismal failure, yet failure teaches investment lessons with far greater vigour than any amount of bragging about success.

Let me then tell you about this wretched 10 cent cheque. It is all that remains of an investment in what was a London-listed Australian mineral resources company that came to market when companies of this kind were very much in vogue. The rush to get into its initial public offering was remarkable given the relatively small size of the issue. The 'lucky' winners of the IPO lottery, including myself, were allocated modest blocks of shares. Sure enough, the price surged and we could all pat our backs, congratulating ourselves on our considerable financial genius.

In my case the satisfaction was possibly even greater because I had just left the employment of an investment magazine whose editor frowned on his journalists dabbling in the share market, fearing that it would create conflicts of interests. So, like many of my colleagues, I was a frustrated investor, writing about stocks but unable to touch them.

When liberation came in the form of another job, I could not wait to leap into the market and feverishly searched around for shares to buy despite rather limited resources. This Australian counter seemed to be just the ticket. I had heard about it coming to the market from people I talked to on a regular basis as a reporter and there was much tweaking of noses suggesting it was a good bet.

Naturally I did not bother to read the prospectus and I instantly discounted all negative comment in the confident knowledge that I had the inside track on this investment while those expressing scepticism were somehow out of the loop.

My confidence was vindicated as the price soared. At this point, a sensible investor should have taken their profits but I was intoxicated by the lure of even greater gains. You can guess what happened next: the share price dipped and dipped again. By then I was more concerned by the prospect of loss than gain and was reluctant to confirm my loss by selling and getting back much less than I had invested. There could be no surer admission of failure.

The company was then sold, and sold again, its business steadily stripped down with more or less nothing left until the inevitable final liquidation occurred, which left shareholders last in line for any of the crumbs still left on the table.

Fortunately, this had been a pretty small investment but it cured me of excessive enthusiasm for 'hot' IPOs and made me realise that if you really want to go in for these things, be prepared to get out as quickly as possible.

Unfortunately, these lessons did not constitute a comprehensive study in good sense because over almost four decades of investing, I seem to personally embody that lamentable maxim applied to the Bourbon kings, who had 'learned nothing and forgotten nothing'.

Mostly I learned nothing by listening to so-called financial advisers, who, without exception, have led me into all the worst investments I have made. They are called advisers but in reality are nothing more than glorified salesmen who only 'advise' clients to buy investments that are earners for themselves - this usually means mutual funds and, even worse, life assurance policies and similar long-term investment products that carry great upfront rewards for the salesmen, whose earnings come from the hapless punters who put their money into these vessels.

So I've held a clutch of very poorly performing mutual funds, probably not significantly worse performing than the average in the market, but then the average performance of these funds is consistently mediocre at best.

Some of these investments have been foisted on me by employers' pension funds requiring an employee contribution. So at least I have the excuse of no choice in these matters, but I still can't get over the absurdity of landing in free-market Hong Kong and being confronted by a government introducing the shameless Mandatory Provident Fund, which compels employees to contribute to a small raft of utterly useless funds.

When there was a choice, I have to admit to being beguiled by promises of 'guaranteed growth', 'aggressive performance' and 'high yield'. Let me translate the real meaning of these phrases: the first generally means investments in fixed-interest counters that yield peanuts. The second means the fund manager will take greater risks with your money but, as they behave like herd animals, they are generally mesmerised by benchmarks that lead them to underperform the markets they are in. As for 'high yield', this is usually an outright lie.

It has taken a while to realise all this and in the process I've lost a good deal of money, forgone opportunities and been forced to contemplate my own stupidity. Only now, late in the day, have I learned the best funds are exchange traded funds (ETFs), which do no more than track the markets, have minimal costs and consistently outperform managed funds.

I would like to say this is the end of my confession but, lamentably, it is not. I have invested in instruments that seemed too good to be true. One offered a far higher rate of return than anything else available in the sterling deposit market.

Sure enough, what seemed too good to be true was not true and the deposit taker collapsed, leading to a drawn-out liquidation returning some but, of course, not all of the original investment. The lesson here is blindingly obvious, but greed overrode good sense and I was tempted to believe the unbelievable.

There is another level of folly that applies to those of us who are keen equity investors, but in this instance no fancy fund manager can be held to blame. This is the folly of greed and it kicks in mostly when investing in shares that keep increasing in value until, inevitably, the pendulum swings the other way. Instead of being satisfied with a modest profit, I have often hung on too long in hope of greater gains. And instead of buying at a fair valuation, I have often waited in vain for a plunge, which does indeed occur but not necessarily when I am in a position to buy.

All of this falls into the category of 'being too clever by half'. Let's face it, who is really so clever as to be able to consistently beat the market? No doubt some readers will claim to have done this, but most of us mere mortals are not that clever. Moreover, you don't need to be that clever to merely match the overall returns in major stock markets, which, over time, have consistently outpaced returns on all other types of investment. So nowadays I am more than happy to follow the self-effacing confession of the financial genius Nathan Rothschild, who said: 'I never buy at the bottom and I always sell too soon.'

Rothschild's fortune stands as testament to his ability as an investor content to secure admirable investments, albeit not at their cheapest, and to sell them on the back of a reasonable profit. It has taken a while to learn this lesson but once learnt, it should be clung to with considerable tenacity.

There is only so much self-flagellation to be performed in print, so let me conclude by saying that after so long as an investor, I am beginning to learn from my mistakes - it's been an expensive process.