We are a strong proponent that equities is the best asset class in creating wealth over time. Investing is putting precious saving to work and there are a number of ways buying shares.
The first path is trading shares for a quick gains. We are sometime guilty of this. The second path is our preferred way on how to invest in shares and that is the buy and hold approach.
Investing in shares over the long run is a proven way of growing wealth over time. While the long term trend in the equities indices has been up. We are not blind bulls that put our faith in the market just for its sake. The long term uptrend does however provide a strong tailwind if you pick the right companies.
Chart above shows the ASX 200 Index over the last 15 years. Note while the index is still below the highs reached before the GFC. It does not include the dividend over the same period which averages 4% per year.
Interesting common question investors ask: when is a good time to buy shares? Our answer is that it is more important to be in the market over the long run than timing the market and trading shares over a short timeframe.
There is always risks on the horizon that make investing in shares risky. Yesterday was the GFC, today is the risk of a prolonged China slowdown and tomorrow could be the volatility in the oil price.
The uncertainties are the reasons why we think equities tend to outperform the market. It is the most sensitive asset class to fluctuation in market sentiment. While the share market goes up and down everyday. The underlying company performance are no where volatile. Business with good management and are in attractive sectors (like Challenger shares) often sell off with the broader market.
It is times like this that we as value investors step in and pick up bargains.
Some prefers real estate over equities due to the attractive long term appreciation of house prices in Sydney and other areas in Australia. Important to note that past performance is not an indicator of future performance.
We view real estate as a leveraged asset class. When investors buy property, a large portion of the purchase price is financed by debt rather than equity. This means that while investor returns are leveraged to the upside when the value of the asset appreciates. But it only take a small fall in house prices to wipe out investor equity in their homes.
The run up in house prices coupled with leverage magnified real estate returns. This overstated the true return of the asset class.
How to Invest in Shares
If investors understand how to buy shares in the right companies and invest in shares for the long run. The portfolio will grow steadily overtime. There are tools investors can use as passive investing in shares. It is designed for those that do not have the skills or the time to manage a semi passive portfolio.
We take an active approach in trading shares and investing. Fundamental research is a key process in understanding how the business create value and positioned in the market verses peers. We actively allocate capital to companies which we think will outperform its peers and are mispriced by the market.
Best Shares to Buy
On an more granular level, we see shares as a true partial ownership of business rather paper traded back and forth. We see ourselves as long term owners and appreciate businesses that have a strong moat, good management and truly add value for its customers.
There is no secrets in long term investment. Buy low and sell high. The best shares are those that are misunderstood by the market.
Companies misunderstood by the market are usually priced at a discount to its true value. We focus our research first to identify these opportunities from the hay stack then goto work in understand all we can above them so we are comfortable with what we own.
Index funds and Exchange Traded Funds are perfect instruments for passive investors that do not have the skills or time to learn how to buy shares. These funds provide a passive market exposure which means the returns will match the overall performance of the market. Investors in these funds do not pick winners or losers. Rather the goal to track the whole equity market and capture the market returns.
How to Buy Shares
Traditionally, buying shares involved calling a broker to place an order over phone. Today investors can sign up with a online broker and buy shares online. The most well known online brokers in Australia are usually attached to a big 4 bank. Etrade is owned by ANZ and Commsec by Commonwealth Bank.
We take a step further and focus our stock selection beyond Australian equities to shares listed on oversea stock exchanges like London and New York. The world is our oyster and we can find the best listed companies in the world and once completed research, buy shares online rather than calling a US or UK broker.
Additionally, more advanced investors can use leverage through margin loans. Margin lending means shares are used security for loans in which investors use the process in expanding the portfolio. It is similar to borrowing to buy real estate but the risk is that while returns are enhanced, equity will also be eroded if the price of shares decline.
Long Term Investing
There are no shortcuts in investing. It takes time and handwork to develop the analysis skills and experience to be a successful investor. While beginner can read and learn all they can on trading shares and fundamental analysis. Only through experience over time that true investment skill can be developed.
No doubt mistake will be made along the way. But if you start out small, the cost of these mistakes will be small. Overtime as investor transition from beginners to intermediate level. Then you will realize learning how to successfully investing in shares is a never ending process. It is a continual learning process that pays for it self.