Why stocks are not like racehorses
There is always the Warren Buffett way: only invest in companies you understand
ONE always has to question the motives of pundits who provide tips on the financial markets. The chief query would be their stake in the proffered information. The loonier fringes of the internet are packed with conspiracy allegations against asset managers frontrunning their secret prior purchases with puffs of hot air about the merits of their investment — with a view to driving up the price of the asset, which would quickly be off-loaded once a suitable profit had been scalped.
We trust those dark arts do not apply to South Africa’s extremely well-regulated banking sector. Asset managers, we are assured, will disclose their holdings before recommending that others buy, hold or sell. Investors go into that universe of diverse opinions with their eyes open.
Potential trouble looms when tipsters (often those with inside knowledge) spray ideas about. Few cases of organised schemes calculated to pump and dump shares have been prosecuted, but you can be sure the practice continues. Part-time investors like us are gullible and easy prey for cynical manipulation.
Last week in Bull’s Eye I had to explain to reader Rob “Potch” Schoeman why my opinions are merely a bit of fun. Before you may legally give financial advice, you have to pass stringent examinations and undertake to stick to a formal code of ethics. It doesn’t apply in my case, so I can hack and burn through the investment world with impunity. I am just a random, openly unqualified commentator.
Reader hilly1963 posted a nice comment this week on bdlive.co.za about this vexed matter of tips: “Giving a ‘hot tip’ is like telling somebody the sky is blue. I imagine the product of a hot tip should be financial gain, but one would have to fill in the qualifiers: how much money you want, how fast you want it, what colour it must be, should it be environmentally sustainable, and do you want to invest in weapons of mass destruction?
“Stock trading is not like the race track, which is probably where Rob Potch should be heading to.”
There is always the Warren Buffett way: only invest in companies you understand, and preferably ones you have had some experience with. He likes Coca-Cola and Procter & Gamble, for instance, because he knows both the products and the strategy.
With the usual fat disclaimer, that’s why 13 years ago I would have invested (and would still be invested, probably buying more) in two companies: Mr Price and City Lodge Hotels. In both cases I spent time with the managers, which helps, but, more importantly, my feeble brain got a pretty good grip on what they do (and do well).
And gold stocks? Ugh, don’t even ask. Comment on this: write to letters@businesstimes.co.za or SMS us at 33971 www.timeslive.co.za