Investing for the Uninvolved — Part 3
There are a number of threads worth exploring when discussing building your wealth. If you build your knowledge you can make more informed decisions, based on your assessment of the companies in which you are investing.
First of all, you have to accept the fact that:
‘You don’t know what is going to happen next’
A forecast is an informed guess, based on various assumptions. But what if these assumptions prove to be wrong, or other factors influence the outcome?
For example, the BT Group, amongst its business interests, manages internet and fixed phone infrastructure in the UK. Its Internet business can grow. However, someone suggested the internet business, Open Reach, might be sold off as a separate company; the traders react and buy the shares until they discover it is not going to happen. They then (over) sell the shares, but the company fundamentals haven’t really changed that significantly over that time. What do you do?
Before getting to that point, you should try to fill in the gaps and appreciate how we got here, how to make comparisons and then the story behind the companies.
How we got there?
This is really the history of money, trading goods and services, then the development of companies and eventually stock markets, where people invested or traded in shares of companies.
How to make comparisons?
There’s the mathematics — just simple arithmetic which allows you to appreciate sizes and ratios that matter. Then there are the various ranking factors, such as the Greenblatt ratio which tell you something.
And when you bring time into consideration you can look at price graphs, trends and indicators, but maybe more on that later.
The stories behind the companies?
If you know the industry, sector and subsector that a company belongs to, general changes in those areas affect the fortunes of the company. So does how it is placed to trade; where it is based, who it buys from and who it sells to.
As you explore these three main areas of interest, it provides a context to your investing.
For example, a company like Ferrexpo PLC is involved in the industry of supplying ‘basic materials’.It is in the sector of ‘industrial metals and mining’. Its subsector is iron and steel. Where does it obtain those basic materials? How does it manage its mines and treat its staff? Who is it selling to and how is the market for its goods changing? And how does it compare to its competitors?
You get the idea. So you have a snapshot of what the company is about. Does it look attractive? And then you have the forecasts of earnings and the companies growth prospects. Can you see the share price growing in time? Does it pay dividends which you can take as an income or re-invest?
But there’s more . . .
In the global market, if a country decides to change its trading rules, the effect ripples through the associated companies and their stock markets; the share prices may soar or plummet as traders react/overreact to the news. But under all that news, the analysis of the fundamentals of the company, the ratios of cash flow, dividends compared to earnings and company debts gives you an indication of how solid the company is. So you decide . . . should you buy, sell or add to your holding?
New money goes into a public limited company on its Initial Public Opening as I call the IPO, where new money is pumped into the business and this is recognised by the issuing of shares to those investors. If you were one of the big investors, and an investing institution running a multi-million-pound fund, if you shifted significant amounts of money in or out of the company, the regulatory news service would report this and people would take note.
However, the rest of us are small-time investors. As an investor, you can regard yourself as a sleeping partner in a business, who owns part of the company by investing directly in shares. You are operating at the ‘micro-level’, buying the shares of a company directly, along with many other small-sized investors.
You could operate at the macro level. You could choose to invest indirectly by buying into an investment trust, closed-end fund or real estate investment trust which is one of the ‘big guys’ throwing significant money at a number of companies.
So if you buy shares in one of those trusts or funds you are buying a share of an investment portfolio managed by someone else. That’s like saying you are using their managers’ expertise to choose investments for you in a broadly defined area, which is their focus and interest.
You should also appreciate that investing (as opposed to trading) is a long-term activity. So you could ask yourself why you want to invest in this company (or investment trust, etc.) and also would you be happy holding it for 5+ years or more?
You should build up a collection of a number of different companies, ideally working in different areas of business, of geography, of customers, etc. This diversifies your asset allocation. If one area of the market is affected by current events, it usually should not affect the whole of your portfolio.
I would suggest you have to work within your comfort zone. This will change as you become more knowledgeable about your choices of investment.