I have always found the share market fascinating because of its ability to create wealth. According to Fidelty, if you had put $10,000 in the Australian share market in June 1985, you would now have $219, 730 (a 10.8% per annum return).
I started investing in the share market as soon as I was legally able to open my own trading account (18). I started off with $5,000, money I had saved working at my part time fast food job. Here are the biggest 4 lessons I learnt:
1. Internal and External Analysis are Equally Important
Before investing my hard earned savings, I made sure to read investment books such as Robert Kiyosaki’s Guide to Investing. I also read all of the financial documents going several years back for the companies I was interested in. It took me around two months before I felt comfortable that I knew each individual company’s strengths and weaknesses well. My initial portfolio consisted of Woolworths (WOW), Westpac (WBC), Monadelphous Group (MND) and Fleetwood Corporation (FWD). On the surface, my portfolio looked solid; the companies I had invested in were making healthy profits and were growing their revenues consistently. In my first three months of holding these shares, my portfolio's value increased by 30%. I was ecstatic.
I however failed to take into consideration the industries in which these companies were operating in and the impact the economy had on them. Five months after investing, economic data came out that indicated the mining boom was over. What happened next, took me by surprise - Monadelphous and Fleetwood, both which happened to have exposure to the mining industry plunged over 40% each. In one fell swoop, I went from a healthy profit on my shares to a heavy loss.
The lesson here is simple; make sure to research ALL the factors that will impact the performance of the company's you invest in.
2. Emotional Attachment Clouds Judgment
After seeing my profits evaporate into thin air, I had a tough decision to make, buy, hold or sell. The economy had changed and it was very unlikely that MND and FWD shares were going to considerably improve over the short to medium term. In light of this, a smart investor would probably have sold the shares here but I decided to hold onto them. Why? Because they were my first investments, I refused to accept that I had made a poor choice in investing in these companies In other words, my ego got in the way.
My emotional attachment ultimately cost me dearly - In the next two months, both my MND and FWD shares decreased by approximately 10% each further exacerbating my losses.
3. Don’t Listen to the Hype
Warren Buffet, arguably the best investor of the 20th century is well known for his investing principles such as not investing in so called “hot” shares and only investing in companies he understands. By sticking to his principles, he has amassed one of the word’s greatest fortunes.
After seeing further decreases in the value of my MND and FWD shares, I finally decided to sell them at a loss. In order to regain the money I had lost, I abandoned my principles and began to look into “get rich quick” shares. These were shares that were being talked about on TV, shares that I had not done any research on. By listening to the hype on television, I made a series of bad investments that lost me even more money.
4. Figure out Your Risk Profile
After making all of these bad investment decisions, I became very risk averse. Every time I thought about the share market, I became frustrated/angry about how much money I had lost. Clearly the risk involved in the shares I was investing in was not something I could handle. I therefore decided to look at ways I could minsimise risk whilst still being involved in the share market. My research led to me to learn about what is known as Exchange Traded Funds (ETF’s). According to Investopedia an ETF is a share that tracks an index. ETF’s experience price changes throughout the day as they are bought and sold. The great thing about ETF’s is that you get a stake in many different shares not just one. So for example, I owned an ETF that tracked the American S&P 500 index, an ETF that tracked emerging markets such as Brazil, Russia and South Africa as well as an ETF with exposure to Europe and the Middle East.
In doing this, I minimised my risk as I was less exposed to price changes in individuals shares. I also gained exposure into global companies like Google, Shell and Apple. I however limited my investment returns. By tracking indexes, ETF’s are only able to return what the index as a whole returns. Regardless, investing in ETF’s was the best thing for me at the time because it suited my risk profile.
Fact: According to Market Watch, Warren Buffet plans to put his own wealth into ETF's when he passes away.
Looking back, investing in the share market at 18 was a great personal and professional development experience. I was able to make big mistakes that most people make later in life with much larger sums of money. Was it scary? Yes. Was it stressful? Yes. Did I lose money? Yes. Despite all of this, I would tell 18 year old me to do it again if I had the chance.