Basics of buying shares: lesson 1

How do I begin????? This is a question that gets asked a lot and should be music to the ears of a parent of a young child. I will tell you how I began building my share portfolio and you can use it and improve on it.

The most important thing is to remember that it is like taking up any new challenge. It takes time and commitment! You will feel clumsy at first but the learning curve is steep and pretty soon you will have the basics figured out. Here are the steps:

• Select 20 shares you want to watch. You DO NOT buy them yet!
• Research the chosen shares. (will take weeks if not months)
• Open an account with an Online Stockbroker.
• Run a dummy portfolio for a month.
• Start buying the shares you are sure offer good value.

Things to remember

• Some of your shares will go down before they go up.
• Never get emotional about gains or losses.
• Invest in shares that you want to be a part owner of for the longer term, do not speculate.
• Do not buy and sell often, do not try and time the market. When you believe that a solid company can be bought at a good price, buy it and never sell it. (for now)
• Do not borrow money to invest in shares. This is a long term commitment and you should NEVER be forced to sell.
• Building your own share portfolio keeps you updated with world finance in general. It becomes a hobby that will not only be something you can carry on doing till the day you die, but also something that can become your main source of income and something you can do anywhere in the world with almost no capital outlay!

Think back on something that you wanted to take up 20 years ago but never did. If you did, how good at it would you have been by now?! I always wanted to play guitar and took it up twice but never persevered. If I did I would have been able to play by now and would have been able to do something that would have added a lot of value to my life. 

...........a lot of "would haves"!!!!!

I will take you through the process over the coming weeks and months but to get the show on the road the following homework:

• Download the Equity fund fact sheets of the top 5 unit trust fund managers (called "mutual funds" in the USA) from their web pages and create a spreadsheet of their top 10 share holdings that they have to list on the fact sheet. In SA the fund managers that I rate are Allan Gray, Foord, Coronation, PSG and Prudential.
• Make sure it is the Equity Fund and not the balanced, income, bond, flex etc. (Prudential calls the one I like the Dividend Maximiser Fund).
• Also ensure it is the local equity fund. If you live in SA then go to the "LOCAL EQUITY" section.

This is the first step, go for it!!

Thinking about passive income

When I was in 5th grade I had my first introduction to the stock market. One of my talented friends entered a competition where he had to write a song for the provincial Rugby team and won. He got some money and then did something nobody understood, he bought shares!

During his articles at an accounting firm he met a wealthy businessman and they started a property development company with a market cap of R11,5 billion Rand as I write this.

Why do I share this flashback with you? Because when he won the money, every single one of his friends (aged 10) could only think of the pocket knife he promised to buy every one of us. The way we think about life determines how we participate in it.

There are 4 main ways to participate in the income generating part of life and they are:

• Go work for somebody else (employee)
• Start your own business (employer)
• Buy an established business (owner)
• Buy a share in a business (investor)

Without making things to complex I want to put forward that the last one is the best one. The following reasons can be given:

• I do not have to work according to the rules of my boss.
• I do not have to worry about getting fired.
• I do not have to worry about the problems of my employees.
• I do not have to be at work 24/7 to ensure that nobody destroys my business.
• All my money is not tied up in one venture.
• I make money as I sleep.
• I can do my work from anywhere in the world.
• I do not have to worry about the politics of the country my business is in.
• I do not have to go through a lengthy process of selling my business or looking for another job.

The list goes on and on and on........

The beauty of buying a share in a business (buying a share on the stock market), is that you make friends with two very powerful forces:

• Passive income (dividends)
• Power of compounding growth

On top of that you can choose the best managers in the world in businesses that have proven themselves over decades!

I bought my first share when I was about 16 years old. It was a stock tip from a friend and it was a Gold Mining company called Jules. I made what seemed like a mountain of money on that share but for some reason the investment bug didn't bite. It was only when my love affair with working 12 hour days for somebody else faded that I "discovered" investing again.

What I am getting at is that anybody can start investing. You do not need to make it your job but it will provide you with the ability to generate the best returns with the money that you do generate from doing whatever you love doing and at the end of the day it can start taking care of you.

There are two very important things to remember when it comes to investing:

• The younger you start the better. The biggest secret to investing is to understand what you are investing in. It takes a long time to understand a company. To know what a good price is to buy it at and when it should be sold. You have to read all the news and listen to all the comments about it. You have to watch it for a long time before you commit to it.
• Only buy a share in a company if it is a company that you would like to be a part owner of for a long time. Sometimes it takes a long time for value to unlock. Speculating is fun but nothing else.

When I was growing up the mantra was "get educated so you can at least fall back on something, even if you don't like it". Unfortunately this is the truth, and for the majority of people the way it will be. The lucky ones are the ones that have a passion for something and can make a living from doing it. 

I say that if you can develop an interest in investing, you will never have to worry about living too long. Your passive income and the knowledge of investing in the right shares will provide you with financial independence or at least provide a healthy supplement to your normal income.

Beware!!!! Once you leave home and start buying those nice lifestyle assets, you might just never get out of the debt trap and having spare cash to invest becomes impossible! You have to get going with your pocket money while you still live at home! Like Warren Buffett said, very early on he realized that for every Dollar he spent, he could have made ten if he invested it!

TIP: get your children to read his books or read it to them. It is easy and very entertaining.

What to do with new money?

It was a spectacular 2013 and I need not say more on that. The year before, 2012 was even better so I cannot see SA equities delivering the same results in 2014 although some counters (Resources) had a dismal 2013 and could bounce if China starts growing again. The USA had a 27% (in $) return, also following a good 2012 and with the Rand depreciating 23% in 2013 SA investors smiled all the way to the bank.

Bonds will remain under pressure with interest rates going up rather than down so to answer the question of where to invest additional funds in 2014, I will say 50% in International Equities and 50% in SA equities for longer term.

Reason: Even if we get a very low 2014 for equities, I prefer not to time the market and regarding the international side, Developed markets still offer better value for money than SA and even though the Rand should strengthen against the $, there are no guarantees.

If my gut feeling is right, any Equity investment made by a SA investor will not perform much better than cash in 2014 but I have been wrong too many times to trust my own short term predictions and would rather just follow sound investment principals and get the money into the right place for the longer term growth prospects.

Some very unpredictable things can happen in 2014:

• The reaction to election results in South Africa
• The striking miners in South Africa
• The US tapering and debt ceiling handling
• China growth?
• Europe back into recession?

The good thing is that the US seems to be recovering well. That should at least stabilise many of the potential surprises.