They’re off in a race we’ve seen before

HOORAY! Pop the champagne corks, hand around the caviar and pile your winnings back on to the next big tip. No, I’m not referring to the Melbourne Cup racing carnival, I’m talking about the share market.

All of a sudden the stock exchange is starting to feel a lot like the racetrack.

Bookies and brokers, punters and players, inside running and inside info.

As Rekindling passed the Melbourne Cup finish line, the ASX 200 finally nosed past the 6000-point barrier.

It’s taken almost a decade to do it, but the psychological impact is big.

And, like all sectors of the gambling industry, this small win for shareholders has brought them all out of the woodwork, talking big again.

Now, apparently, the ASX has cleared the final hurdle and it’s full steam ahead. Blue sky potential.

But 30 years after the world’s biggest share market crash, I’m getting a feeling of deja vu.

The unjustifiable level of enthusiasm (think cyber currencies, for example, or earth-scorching resources companies or tax-dodging multinationals) can be seen in the surge of over-hopeful amateurs in the market.

Just to be clear – positive thinking, blind faith and riding the money at all costs is not an investment strategy, or a good betting strategy.

As with horse punters, share players need to look at the form before taking a plunge. Study the odds, check the breeding, know the track.

Before jumping online to buy shares or emailing your broker, do some analysis.

What is the current return? Not the potential return or the blue-sky return, but the current return?

Look at the latest financial report of the company you’re planning to buy shares in. It will tell you everything you need to know – almost.

Unfortunately, these reports are history, old news, yesterday’s headlines.

So you need to gauge the company’s potential, the future income, future costs and how much will be left over to make a profit.

Now, who’s running the show? Who’s on the board?

Chances are there will be duds – hangers-on, celebrity heads or people there because they own shares or they’re mates with someone. These people call all the shots and have the power to make all the wrong decisions.

Of course, the board will hire people to do the legwork. Let’s call them the trainers, but in most cases these executives – the trainers – need to be kept under a tight rein.

We’ve all seen, as consumers and investors, the disasters from egotistical chief executives who have run a good company into the ground all because the board allowed them to.

So check the breeding very carefully.

And then we have the condition of the market. The track. Does the company sell to consumers? How are consumers faring? Does it rely on the economic expansion of another country?

Whichever track your company has to run on, know its condition.

And, like all good gambling investment strategies, diversify. If you want to improve your odds, spread your bets.