Shares, be warned

Please first read Where to start then take five minutes to consider the following:

1.  Small companies – we say don’t go near them unless you are an experienced investor. They take a lot of work and you are on your own because they are usually poorly researched. Stock Exchanges are a nursery for small companies, some do well, but many fail. Small companies are often under-capitalised and badly managed. A founder or promoter with a great product or service often dominates. But they don't necessarily know how to manage a company.

 

2.  New floats – we say don’t go near them. Consider new companies only when the initial gloss of the listing wears off and they otherwise meet the criteria that follow in this Shares section.

 

3.  International companies (outside of Australia) – we say don’t go near them, unless you get professional advice, are already an experienced investor or investing in a relevant managed fund. Remember that these companies involve increased complexity, not the least because currency fluctuations can affect returns quite markedly.

 

4.  Foreign companies listed locally – we say don’t go near them unless they are substantial and reputable organisations in their country of origin and preferably have an Australian office.
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6.  Unlisted public companies – we say don’t go near them. Information is harder to come by and more expensive to access. Seldom is there ever a market in the shares if you want out.

 

7.  Timber and agricultural schemes– we say don’t go near them. There is a long history of overstated prospects, inadequate disclosure and scheme failure.

 

8.  Corporate governance (the system and processes by which a company is managed) - we say treat all the “boiler plate” governance pronouncements on websites and in annual reports with scepticism. Don’t be taken in by the grand assurances. Focus on otherwise assessing the experience and competence of company management.

 

9.  Company management – there are a number of directors and managers of companies who have little, if any, regard for the interests of shareholders. These people are often associated with failed and poorly performing companies. We can’t name them for obvious reasons. Avoid their companies. (Check out company management on our website by searching for the company and then clicking on executives/directors names to see Google results.)
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11.  Share Trading – we say leave it alone. Surveys show that the vast majority of traders lose money.

 

12.  Borrowing to buy shares - we say better not to unless you get professional advice or are already an experienced investor. Likewise for derivatives generally.

 

Further warnings – ASIC's MONEYSMART provides further warnings about investing.

Words of caution from the world’s number one investor:

1.  Warren Buffett’s first investment rule is to “define your circle of competence”. If you know nothing about selecting shares (and most people don’t), pay to get advice from a full-service stock broker or other professional adviser.
3.  Warren Buffett also says the best thing an average investor can do is buy an index fund that mirrors the market. So if you are not an experienced investor, consider investing at least part of your portfolio into index funds and the rest in individual companies or other managed funds. And select the companies from among the top 500 listed on ASX.

Further Reading: Spanner in the works (Annette Sampson, SMH - Sep 2012)