Investment for dummies

Apologies for any infringement of copyright first of all, as I am sure the above must be a title of a book, or many.

I attended a very pleasant breakfast presentation given by EMH Prescient, the fund managers.  This was informative and featured many formidable looking graphs, a bit much to take in on one sitting.  However I was mainly preoccupied with the thought - why does the ordinary person never seem to make any money on the stock exchange, 'funds' or other 'investments'? 

There is the old joke that whenever there is a big investment conference, the fund managers arrive in their Mercedes and Bentleys, and the clients arrive in their Toyotas.  In question time I referred to my wife's experience as a generic example of an unhappy 'investment' experience  Some ten years ago she had an amount of £60000 (currently about N$ 1 million) to invest.  She had an experienced financial consultant, and bought a few speculative stocks but mostly international blue chips, in hard currency.  The investment was monitored fairly often, but the net result at the end of ten years was that the £60000 had turned into £45000, in fact she would have been far better of keeping her funds under the bed.  At least she didn't lose all her money.  How can this be?

To try to understand this, I met up again with Melanie Allen, the MD of EMH Prescient, to ask the question -what goes wrong with investors and investments, at least when 'amateurs' make them?  Melanie replied that several points must be borne in mind.  Firstly, the investment regulatory environment has been tightened up considerably from a few years ago.  Then, for instance, anyone, a retired teacher or policeman could rent a one roomed office and put a plate on the door saying Financial Consultant.  Now, this is less easy and will soon be legally impossible.

Second, it is impossible for an ordinary person to know all the factors, which can range from technical to financial to political, to the global economy and to subjective public perception, which affect a company's stock price.  Yes, some shares do increase by 10% overnight, but the amateur investor is not going to get that 10% - it is swallowed up by the professionals.  You do need to take the advice of consultants, or spread the risk over a portfolio containing a wide spread of interests.

Third, there is the tendency to think that fields are 'greener' the further away they are.  In other words, they like to invest in international stocks quoted in foreign currencies.  Not only are the factors affecting the stocks price of global corporations even more impenetrable, you run the further risk of being burned by exchange rate fluctuations.  Fourth, investors should be patient and stay with with investment for the medium or long term.  If you have put funds away for a five year period, do not panic over their performance after the first year etc.

Then there is the suspicion that the average person will never show a profit from your investment, because any profits will be eaten up by consultant and fund manager fees.  The answer is that you get what you pay for.  It is cheaper to buy your groceries wholesale, but many people find it a soulless experience trudging around a remote warehouse buying goods in inconvenient packing and quantities.  It is much nicer to go to your local friendly retail supermarket. Of course, rich people can have housekeepers who will choose what is needed and do the shopping for them.  If you wish to go through a 'pyramid' of financial advisers and investment consultants, each of these of course will take their commission.  But you can go straight to a wholesaler such as EMH, select one of their managed funds, and leave it to them.

Demand regular statements on your investment.  Query mysterious fees, like when you take your car for a routine service but the bill contains unexpected extras, or of course a restaurant bill which adds an amount for a tip but which says at the bottom that 'service is not included'.

The baseline goal is to protect your little bit of money from inflation.  Putting your cash under the bed will not help with this - neither will putting it in a bank or post office or bank savings account (how can it - the bank and even the post office must make money out of your savings, so that the interest they give you must be less that your savings' net worth).  But inflation is relative and may differ for every person: if you are into photography and buy a lot of camera equipment, the inflation rate of this is important to you - if you never take pictures this is irrelevant.

Having said all of this, I recall an experiment which was conducted recently in the UK (there have probably been many) where ten expert financial advisers were retained to design a stock portfolio for Mr. Average Investor, over a period of two years.  Then a portfolio was chosen purely at random, maybe with a roulette wheel.  After two years, the random portfolio had performed better than the average of all the expertly chosen stocks.  So there you are.  Personally, I have still some money saved with the Post Office.