Seven golden rules of investing
By Nick Louth, MSN Money special correspondent
Last updated December 22 2004
These seven brief rules are really all you need to know to get a good leg up the investing ladder. Most of them work pretty well for ordinary savings too.
1. Start early, stay the course
Start investing young. If you do no more than put aside the cost of a bottle of Becks a day from the age of 18, and don’t raid it, you have already laid the foundations of a secure retirement.
Based on average stock market returns you will have £265,000 by the age of 65. If you wait until you’re 50 before starting, building the same pension pot will cost you the equivalent of a bottle of single malt scotch a day.
Click here for the full details of how youth helps investors
2. Low costs: the no-risk way to better returns
You want all your investment money to go to work for you, not the person who sold you your investment. So, for example, even though 2.5% a year in charges may not sound much, trimming that much off your investment pot year after year will have soaked up a two thirds of your total contributions after 25 years on a fund investment returning 7% a year.
For example, if you contributed £100 per month, that works out as £30,000 paid in over 25 years. At an average 7%, the fund would be worth £69,812 gross over the period, but after annual charges of 2.5% it would be worth a mere £50,027.
The same principle applies to trading commissions and account fees: keep them low and you get extra returns for nothing.
3. Don’t neglect the humble dividend
Reinvested dividends are the cornerstone of long-term stock market returns. They are the only part of share market returns which are never negative.
By contrast, share price returns are only about trying to outwit the market’s pricing mechanism. On average, by definition, we lose as often as we win. But dividends really add up, and their rate of increase is as important as their initial size.
See also ‘Get more from your dividends’
4. Don’t let small mistakes turn into big ones
This is a very important rule, especially for stock market investors.
The moment that an investment starts to go wrong, you should get out while the amount at stake is small. Profit warnings or even small unexplained falls in the prices of shares can soon do damage to your wealth.
Most importantly, never, never, add more money to a losing investment in an attempt to lower your break-even level.
See my article “How to deal with profit warnings”
See also “How to cut losses”
5. Never put all your eggs in one basket
This is essential advice, whatever kind of investments you have. Unexpected events can take place which hit particular shares, house prices, bond markets certain industries or countries, yet so long as we haven’t got everything riding on one type of investment, the outcome should be manageable.
But, for example, homeowners who have extensive buy-to-let market commitments, employees who have shares or options only in their own employer, or bank traders who invest their own savings in the field they trade, are running extra risks. This is especially so if they don’t have much in the way of cash savings should their bets fail.
Click here for more details on recognising and spreading your risk
6. If you don’t understand it, steer clear
This is true both of the complex investment products such as precipice bonds which were mis-sold, as much as it is of investors in technology shares which sounded impressive, but which rarely fulfilled their potential.
If you don’t understand what you have invested in, you will never know when to get out when the warning signs of failure are there for others to see.
7 Don’t fall for quick money promises
There is no risk-free way to become rich, and don’t believe anyone who says otherwise. The slow way to wealth, investing gradually and carefully in a wide variety of shares or in a low-cost tracker fund, is safe for those with a 10-20 year view.
If you fall for a scam or fraud, the chances are that your savings are going to go backwards. Opportunities that look too good to be true usually are, and the more impatient we are the more the chance there is of falling for them.
See ‘get started: why shares?’
Saturday, March 12, 2005
words of the sage of omaha
Ten rules from the world's greatest investor
By Nick Louth, MSN Money special correspondent
Last updated February 3 2005
Learn to be a better investor from the master – Warren Buffett.
The Sage of Omaha – also know as Warren Buffett - is regarded as the world’s greatest investor, having turned $100 invested in 1954 into $41 billion by the end of 2004.
He’s pretty good with words too, as these ten sayings of his show.
1. “All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.”
He makes it all sound so simple. Buffett is very choosy about which stocks he chooses to buy and when, and when he buys you can be sure he’s read right through the annual reports of not just it but the reports of each of its competitors.
What he’s looking for above all is companies with an enduring competitive advantage. If they’ve got that, he’s more than happy to hold for decades.
2. “If the business does well, the stock eventually follows.”
Too many investors spend their time worrying about a share price because they think its gyrations tell them something is happening at the company, something they don’t know about.
Buffett’s confidence in the few businesses he chooses to invest in is such that he doesn’t really care about market prices, which is a reflection of what others think of them. It certainly helps that he either buys outright or gets offered a place on the board of a number of companies that he invests in.
3. “Draw a circle around the businesses you understand and then eliminate those that fail to qualify on the basis of value, good management and limited exposure to hard times.”
Understanding what you invest in is the core of the Buffett approach. He has never owned a technology stock because he claims not to understand them. He restricts his investments to companies he really understands.
This tends to lead him to fewer holdings than many other professional portfolio managers have, but they are companies he knows intimately.
4. “In a difficult business, no sooner is one problem solved then another surfaces – there is never just one cockroach in the kitchen.”
...so don’t buy an aerosol of insecticide; sell-up and move house! Buffett’s striking analogy is another reinforcement, if anyone needs it, that you sell shares on the first profit warning. Things are usually going to get worse before they get better.
5. “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamentals, it is the reputation of the business that remains intact.”
This isn’t always true, as Buffett would probably concede, but it is true very often. Don’t bet on corporate turnarounds being successful except where the businesses involved are actually pretty sound to begin with.
For every Reed-Elsevier or IBM, where the business was never really bad and the turnaround worked well, there are dozens like Jarvis or Invensys which are never going to return to their former glories.
6. “For some reason people take their cues from price actions rather than from values. Price is what you pay. Value is what you get.”
Warren Buffett must be one of the few investors who would be happy not to see share prices for his investments for weeks at a time.
He cares so little about the market’s valuation that he actually prefers to see prices falling for shares that he intends to continue buying to make them cheaper. Most of the rest of us feel nervous if we don’t get some validating price rises fairly soon after we’ve started buying a particular stock.
7. “I put heavy weight on certainty. It’s not risky to buy securities at a fraction of what they’re worth.”
Most of Buffett’s approach to investing came from Benjamin Graham, often known as “the father of securities analysis”. In the late 1940s Graham pioneered the concept of value investing, where shares are bought only when they are worth less than the sum of their assets.
Specifically, Graham said that shares which traded at 2/3rds of the value of quick assets (those which can be rapidly sold) could be safely bought. On a typical day there aren’t many companies you could buy at that kind of discount, but just occasionally there are times when vast numbers of firms are being given away at these prices. That leads on to the next rule...
See jargonbuster on net asset value
8. “Most people get interested in stocks when everyone else is. The time to get interested is when no-one else is. You can’t buy what is popular and do well.”
Buying shares when no-one is interested in them would have mean’t getting out your chequebook in the depths of the 1930s depression, in 1975 when UK inflation was soaring and there was secondary banking crisis, and in the first three months of 2003 when the war with Iraq was looming.
Not many casual investors even think about shares when the economy is in dire straits or when we are close to war, which is why many of them only get into shares just as everyone else does and the real value is evaporating.
See my article on contrarian investing
9. “In aggregate, people get nothing for their money from professional money managers.”
In the long term money managers fail to beat the markets against which they measure their performance. Very few buck this trend. It isn’t surprising, really, because funds of one form or another dominate the stock market. What is surprising isn’t that fund managers on average perform averagely, because that is true pretty much by definition. What is amazing is the fact that they get away with charging so much for it.
See my article 'Who needs fund managers?'
10. “You go to bed feeling very comfortable about two and a half billion males with hair growing while you sleep. No-one at Gillette has trouble sleeping.”
This isn’t so much a rule as a celebration of the kind of company that Buffett adores. Gillette has one of the most secure market niches of any company, with a brand that is trusted worldwide.
Though the company has had its troubles even during the years when Buffett was a director, it has come good in the end. Procter & Gamble last week offered to buy Gillette for $57 billion, making the combined group the world’s largest consumer goods company. The offered represents an 18% premium to the Gillette share price, and was described as a “dream deal” by Buffett.
By Nick Louth, MSN Money special correspondent
Last updated February 3 2005
Learn to be a better investor from the master – Warren Buffett.
The Sage of Omaha – also know as Warren Buffett - is regarded as the world’s greatest investor, having turned $100 invested in 1954 into $41 billion by the end of 2004.
He’s pretty good with words too, as these ten sayings of his show.
1. “All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.”
He makes it all sound so simple. Buffett is very choosy about which stocks he chooses to buy and when, and when he buys you can be sure he’s read right through the annual reports of not just it but the reports of each of its competitors.
What he’s looking for above all is companies with an enduring competitive advantage. If they’ve got that, he’s more than happy to hold for decades.
2. “If the business does well, the stock eventually follows.”
Too many investors spend their time worrying about a share price because they think its gyrations tell them something is happening at the company, something they don’t know about.
Buffett’s confidence in the few businesses he chooses to invest in is such that he doesn’t really care about market prices, which is a reflection of what others think of them. It certainly helps that he either buys outright or gets offered a place on the board of a number of companies that he invests in.
3. “Draw a circle around the businesses you understand and then eliminate those that fail to qualify on the basis of value, good management and limited exposure to hard times.”
Understanding what you invest in is the core of the Buffett approach. He has never owned a technology stock because he claims not to understand them. He restricts his investments to companies he really understands.
This tends to lead him to fewer holdings than many other professional portfolio managers have, but they are companies he knows intimately.
4. “In a difficult business, no sooner is one problem solved then another surfaces – there is never just one cockroach in the kitchen.”
...so don’t buy an aerosol of insecticide; sell-up and move house! Buffett’s striking analogy is another reinforcement, if anyone needs it, that you sell shares on the first profit warning. Things are usually going to get worse before they get better.
5. “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamentals, it is the reputation of the business that remains intact.”
This isn’t always true, as Buffett would probably concede, but it is true very often. Don’t bet on corporate turnarounds being successful except where the businesses involved are actually pretty sound to begin with.
For every Reed-Elsevier or IBM, where the business was never really bad and the turnaround worked well, there are dozens like Jarvis or Invensys which are never going to return to their former glories.
6. “For some reason people take their cues from price actions rather than from values. Price is what you pay. Value is what you get.”
Warren Buffett must be one of the few investors who would be happy not to see share prices for his investments for weeks at a time.
He cares so little about the market’s valuation that he actually prefers to see prices falling for shares that he intends to continue buying to make them cheaper. Most of the rest of us feel nervous if we don’t get some validating price rises fairly soon after we’ve started buying a particular stock.
7. “I put heavy weight on certainty. It’s not risky to buy securities at a fraction of what they’re worth.”
Most of Buffett’s approach to investing came from Benjamin Graham, often known as “the father of securities analysis”. In the late 1940s Graham pioneered the concept of value investing, where shares are bought only when they are worth less than the sum of their assets.
Specifically, Graham said that shares which traded at 2/3rds of the value of quick assets (those which can be rapidly sold) could be safely bought. On a typical day there aren’t many companies you could buy at that kind of discount, but just occasionally there are times when vast numbers of firms are being given away at these prices. That leads on to the next rule...
See jargonbuster on net asset value
8. “Most people get interested in stocks when everyone else is. The time to get interested is when no-one else is. You can’t buy what is popular and do well.”
Buying shares when no-one is interested in them would have mean’t getting out your chequebook in the depths of the 1930s depression, in 1975 when UK inflation was soaring and there was secondary banking crisis, and in the first three months of 2003 when the war with Iraq was looming.
Not many casual investors even think about shares when the economy is in dire straits or when we are close to war, which is why many of them only get into shares just as everyone else does and the real value is evaporating.
See my article on contrarian investing
9. “In aggregate, people get nothing for their money from professional money managers.”
In the long term money managers fail to beat the markets against which they measure their performance. Very few buck this trend. It isn’t surprising, really, because funds of one form or another dominate the stock market. What is surprising isn’t that fund managers on average perform averagely, because that is true pretty much by definition. What is amazing is the fact that they get away with charging so much for it.
See my article 'Who needs fund managers?'
10. “You go to bed feeling very comfortable about two and a half billion males with hair growing while you sleep. No-one at Gillette has trouble sleeping.”
This isn’t so much a rule as a celebration of the kind of company that Buffett adores. Gillette has one of the most secure market niches of any company, with a brand that is trusted worldwide.
Though the company has had its troubles even during the years when Buffett was a director, it has come good in the end. Procter & Gamble last week offered to buy Gillette for $57 billion, making the combined group the world’s largest consumer goods company. The offered represents an 18% premium to the Gillette share price, and was described as a “dream deal” by Buffett.
dollar falling
How the dollar's value is threatening your shares
By Nick Louth, MSN Money special correspondent
Last updated March 4 2005
The dollar is falling, and is unlikely to stop for quite a while. Whatever your investments, this is going to affect you. Here are some quick answers to seven key questions on this issue
Travelling across the Pacific Ocean, enormous freighters arrive in US ports, stuffed with Chinese clothing, and electrical goods, South Korean flat-screen TVs and Japanese electronics. Many of these vessels return home empty to pick up another load and bring it back.
The US economy is living beyond its means, with both government and consumers spending like there is no tomorrow, and running up bills with those economies that supply it. In 2004 alone that trade deficit was $672 billion, a 30% rise from 2003. When those exporting nations decide to cash in their dollars, the greenback will inevitably fall.
Why does the dollar have to fall when it represents the world’s strongest economy?
Though the US economy has been growing strongly, at more than 5.5% a year, about twice the rate of the UK, that growth has been led by domestic consumption. That in turn has been partly fuelled by US budget deficits, with the government spending far more than it receives in taxes.
Though President George W. Bush has recently proposed a tighter than usual budget for 2006, it will be too late to stop spending exceeds taxes by a record $427 billion in 2005. Although that may seem modest at 3.9% of annual GDP of $10.9 trillion (ie. $10,900 billion), it is the stack of debt being built year after year up that is frightening.
Who owns all these debts?
US debt owed to foreigners has trebled to $3.5 trillion in the past 20 years. Japan is owed $715 billion, China $191 billion, Britain $152 billion and South Korea $70 billion.
Britain’s high placing on the creditor list owes much to the fact that British banks hold a vast amount of US debt on behalf of investors from other countries. That same reason explains Caribbean banking centres huge $76 billion holding.
When will the dollar plunge?
That is the hardest part to predict. Currency re-alignments are like the tectonic plates of economics. They can strain for years, building up pressure without much happening, driven by the pressure of economic imbalances. The bigger the imbalances, and the weaker the corrective action taken, the greater the chance of a devastating dollar collapse which could throw the world into a slump.
Already this month, South Korea has said that it will spread its future foreign exchange holdings away from the dollar which account for a third of its $200 billion reserves. The announcement was enough to set the dollar on a temporary slide.
How far will it fall?
A falling currency should be a self-correcting mechanism for trade imbalances by encouraging exports and making imports more expensive. However, Asian countries such as China and Hong Kong, where the US trade deficit is particularly large, have pegged their own currencies to the US unit, rather than letting them float as the pound does. The dollar doesn’t fall against them, but drags down their currencies too against floating currencies like the pound, euro and Japanese yen.
So although the dollar fall does nothing to help US deficits with dollar-linked economies, it helps those same economies become more competitive against the rest of the world. The effect is to slow correction in trade flows, and make a sharp dollar fall, or even a crisis more likely.
How long will it last?
That is an even harder question. Once the dollar starts sliding again, it could fall for months or even years before stopping. It may well move beyond the point at which it is ‘correctly’ priced for future balance. This is not unusual. Like a supertanker, the billions of dollars of selling cannot be easily turned around.
Can anything be done to stop it?
The Federal Reserve, the US central bank, has been gradually raising interest rates since June 2004, but they are still extremely low by historic standards. US bonds yield around 4.5%, and the official Fed Funds rate is only 2.5%.
For Alan Greenspan, chairman of the Fed, this is a delicate balancing act. He needs to keep rates rising so that US bonds are attractive to foreign investors, but each rise devalues trillions of dollars worth of existing bonds which pay lower rates. Moreover, increasing rates raises the government’s own bill for debt interest charges, and if pursued with too much vigour may slow down the economy on whose strength all attempts at debt repayment hinge.
Cutting the budget deficit directly is the main way of addressing the problem, as the Fed chairman himself said earlier this month. Though he acknowledged that it wouldn’t be easy, he added: "But that does not mean that we shouldn't begin focusing on the goal of getting the deficit down, especially, as quickly as we can, before we begin to run into the really serious problems in maybe 2012, 2014. We don't have a lot of time to do it."
I only own my house and a few BT shares. Why should I care about the dollar?
The falling dollar tends to drag the pound down a little against other currencies, particularly the euro. While that will make exports more competitive (except to the US), it pushes up the price of imports. An open economy such as Britain’s is hard to insulate against rising interest rates across the Atlantic because of the competition for international interest-bearing deposits.
In short, if US rates go higher, our rates will tend to rise too. That could affect your mortgage interest rate, and to some degree could lessen the attractiveness of high dividend shares like BT.
What can I do about it?
* Don’t buy US assets such as real estate.
* Steer clear of US shares unless they are in export-based industries and can be expected to become more competitive.
* Consider borrowing in dollars. As the currency falls, these debts will become smaller. The interest charges are already lower than you would pay in the UK
* Holiday and shop in the US and take advantage of falling prices in sterling terms. Be sure to pay for your items by credit card. By the time the bill comes through you may have saved a few cents in every dollar.
* Don’t buy shares in big dollar earning UK stocks, such as pharmaceuticals.
* Expect UK interest rates to rise, so keep your overall indebtedness low.
* Expect the price of dollar-denominated commodities such as oil to keep rising.
By Nick Louth, MSN Money special correspondent
Last updated March 4 2005
The dollar is falling, and is unlikely to stop for quite a while. Whatever your investments, this is going to affect you. Here are some quick answers to seven key questions on this issue
Travelling across the Pacific Ocean, enormous freighters arrive in US ports, stuffed with Chinese clothing, and electrical goods, South Korean flat-screen TVs and Japanese electronics. Many of these vessels return home empty to pick up another load and bring it back.
The US economy is living beyond its means, with both government and consumers spending like there is no tomorrow, and running up bills with those economies that supply it. In 2004 alone that trade deficit was $672 billion, a 30% rise from 2003. When those exporting nations decide to cash in their dollars, the greenback will inevitably fall.
Why does the dollar have to fall when it represents the world’s strongest economy?
Though the US economy has been growing strongly, at more than 5.5% a year, about twice the rate of the UK, that growth has been led by domestic consumption. That in turn has been partly fuelled by US budget deficits, with the government spending far more than it receives in taxes.
Though President George W. Bush has recently proposed a tighter than usual budget for 2006, it will be too late to stop spending exceeds taxes by a record $427 billion in 2005. Although that may seem modest at 3.9% of annual GDP of $10.9 trillion (ie. $10,900 billion), it is the stack of debt being built year after year up that is frightening.
Who owns all these debts?
US debt owed to foreigners has trebled to $3.5 trillion in the past 20 years. Japan is owed $715 billion, China $191 billion, Britain $152 billion and South Korea $70 billion.
Britain’s high placing on the creditor list owes much to the fact that British banks hold a vast amount of US debt on behalf of investors from other countries. That same reason explains Caribbean banking centres huge $76 billion holding.
When will the dollar plunge?
That is the hardest part to predict. Currency re-alignments are like the tectonic plates of economics. They can strain for years, building up pressure without much happening, driven by the pressure of economic imbalances. The bigger the imbalances, and the weaker the corrective action taken, the greater the chance of a devastating dollar collapse which could throw the world into a slump.
Already this month, South Korea has said that it will spread its future foreign exchange holdings away from the dollar which account for a third of its $200 billion reserves. The announcement was enough to set the dollar on a temporary slide.
How far will it fall?
A falling currency should be a self-correcting mechanism for trade imbalances by encouraging exports and making imports more expensive. However, Asian countries such as China and Hong Kong, where the US trade deficit is particularly large, have pegged their own currencies to the US unit, rather than letting them float as the pound does. The dollar doesn’t fall against them, but drags down their currencies too against floating currencies like the pound, euro and Japanese yen.
So although the dollar fall does nothing to help US deficits with dollar-linked economies, it helps those same economies become more competitive against the rest of the world. The effect is to slow correction in trade flows, and make a sharp dollar fall, or even a crisis more likely.
How long will it last?
That is an even harder question. Once the dollar starts sliding again, it could fall for months or even years before stopping. It may well move beyond the point at which it is ‘correctly’ priced for future balance. This is not unusual. Like a supertanker, the billions of dollars of selling cannot be easily turned around.
Can anything be done to stop it?
The Federal Reserve, the US central bank, has been gradually raising interest rates since June 2004, but they are still extremely low by historic standards. US bonds yield around 4.5%, and the official Fed Funds rate is only 2.5%.
For Alan Greenspan, chairman of the Fed, this is a delicate balancing act. He needs to keep rates rising so that US bonds are attractive to foreign investors, but each rise devalues trillions of dollars worth of existing bonds which pay lower rates. Moreover, increasing rates raises the government’s own bill for debt interest charges, and if pursued with too much vigour may slow down the economy on whose strength all attempts at debt repayment hinge.
Cutting the budget deficit directly is the main way of addressing the problem, as the Fed chairman himself said earlier this month. Though he acknowledged that it wouldn’t be easy, he added: "But that does not mean that we shouldn't begin focusing on the goal of getting the deficit down, especially, as quickly as we can, before we begin to run into the really serious problems in maybe 2012, 2014. We don't have a lot of time to do it."
I only own my house and a few BT shares. Why should I care about the dollar?
The falling dollar tends to drag the pound down a little against other currencies, particularly the euro. While that will make exports more competitive (except to the US), it pushes up the price of imports. An open economy such as Britain’s is hard to insulate against rising interest rates across the Atlantic because of the competition for international interest-bearing deposits.
In short, if US rates go higher, our rates will tend to rise too. That could affect your mortgage interest rate, and to some degree could lessen the attractiveness of high dividend shares like BT.
What can I do about it?
* Don’t buy US assets such as real estate.
* Steer clear of US shares unless they are in export-based industries and can be expected to become more competitive.
* Consider borrowing in dollars. As the currency falls, these debts will become smaller. The interest charges are already lower than you would pay in the UK
* Holiday and shop in the US and take advantage of falling prices in sterling terms. Be sure to pay for your items by credit card. By the time the bill comes through you may have saved a few cents in every dollar.
* Don’t buy shares in big dollar earning UK stocks, such as pharmaceuticals.
* Expect UK interest rates to rise, so keep your overall indebtedness low.
* Expect the price of dollar-denominated commodities such as oil to keep rising.
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