Money Matters: Share of luck that risks running out

By MARY HOLM

Q. I lost our life savings in the sharemarket crash. I had shares in 36 firms before the crash. Lots of fun. The value got up to $276,000 on September 19, 1987.

I was left with, among others, 2000 Baycorp options. I have sold all the others except 200 Hellabys and put the proceeds into Baycorp. We now hold 23,000 of those shares.

As an exercise to try to impress our two children (early 40s), I did a guestimate of the Baycorp shares' value in the next few years. I want the children to consider the possibilities for the future if they happen to inherit them.

In December 1999, the shares were worth $174,444. With 50 per cent yearly growth, they will be worth $1.34 million by December 2004. With 100 per cent yearly growth, they will be worth $1.4 million by December 2002.

Baycorp has been going up at 100 per cent or more a year of late, I think.

I know what I am doing is against all that advisers recommend. But the risk of losing does not worry me a bit. I lost no sleep over the 1980s crash. It would not matter if we lost again, but I doubt this will happen.

When we get to $1 million worth of shares we may sell all gains over a million and have a bit of fun with the proceeds.

Could you please publish a list of all companies' capital gains over the past few years for comparison purposes?

The ones that consistently outperform in that area might provide a clue to future prospects.

A. Don't make any firm plans about what you or your children will do as millionaires.

I hate to spoil the fun, but it might be many decades before your Baycorp holdings top the $1 million mark. There is no guarantee that they ever will.

After your bad luck in 1987, you got extraordinarily lucky when you went so heavily into Baycorp.

In the past four years, Baycorp's share price has more than quadrupled. And, in the past year alone, it has almost doubled. That does not mean, though, that it will keep up that dizzy pace.

Baycorp's price today is what the big players in the market think it is worth. If they foresaw it growing by 100, 50 or even 20 per cent, they would all rush to buy more shares. That demand would push up the price to the point where huge future gains were no longer predicted.

It is quite possible, of course, that the big players are wrong. Clearly, in the past few years, they did not fully appreciate Baycorp's potential. That may continue and the shares may keep zooming upwards.

Remember, though, that a share price that rises fast is volatile. And that is true of Baycorp.

Stock Exchange figures show its price rose 100 per cent from September 1996 to 1997, but less than 3 per cent the following year, 15 per cent the year after, and 93 per cent in the last year. A price that moves around that much is more likely to fall than are slow, steady shares.

You are right that advisers would want you to diversify across more shares or share funds and perhaps other types of assets.

You might rubbish that. You have done much better with your one share than you did with 36 shares, before the crash. But you have taken a big risk in doing that. And you are one of the lucky few.

There are many others out there who put most or all their money in one investment and lived to regret it. They are not as inclined to write to columnists about it.

But why am I telling you all this? You say it would not matter if you lost again. You did not ask for my advice on what you are doing, so I should just let you be.

But I am afraid I have baulked at running a list of capital gains so you can invest in other shares that have been big winners. It is not a good way to pick future winners. In fact, I know of no reliable way to pick shares. And, for all the noise some people make, I am yet to be convinced that anybody else does.

Q. I would welcome your comments on the statement a few weeks back by Philip Macalister, editor of Good Returns, that "It is an indisputable fact that the best way to accumulate wealth is to invest in shares."

He further states: "Research tells us that shares provide a higher return over the medium to long term than any other asset classes such as cash, bonds and property."

As someone who invested $5000 in the NZSE40 in January 1999 and is waiting for the exit price to hopefully reach that figure again, I fail to follow his reasoning.

I realise 19 months is not medium to long term but I have not forgotten the price of Brierley and Robt Jones shares, among others, in the late 1980s.

You do not need to do much research to know that buyers of these shares during that time are regretting buying them over a long term.

I believe you should not invest in shares (other than managed funds) if you cannot afford to lose the lot. I would appreciate your thoughts on this.

A. Perhaps you should have skipped the NZSE40 and gone with Baycorp, like our previous reader!

No, no, I didn't mean it. While he's been lucky, and you haven't, your choice was a much less risky one - and the one I would go into the future with.

I agree with Philip Macalister that shares are your best long-term bet. I have seen heaps of research, done in different countries over different periods, and the conclusions are always the same.

Over very long periods, the out-performance of shares is particularly remarkable.

In New Zealand Armstrong Jones says $1 invested in shares in 1956 would be worth $207, including reinvested dividends, in 1999. But had you invested it in residential property it would be worth only $25. And in six-month bank deposits it would be worth $20.

Your experience so far has not convinced you of the superiority of share returns. But, as you say, 19 months is too short a period to judge. It's not uncommon for a share fund to lose value over such a time span.

That's why I recommend people don't put money in shares or a share fund for less than five years. And if they would be really upset if they lost money they should make it 10 years.

Even then, there is no guarantee against a loss. But it's pretty unlikely - especially if you reinvest dividends along the way - whereas a healthy gain is common.

I suggest you don't bail out when the exit price of your fund reaches your entry price. Hang in there. I would be surprised if, by 2010, you're not glad you did.

What about the Brierley and Robt Jones shares? They are individual companies. As I said to the previous reader, there is quite a big chance you will lose your money if you invest in just one or a few shares.

The research that Macalister and I quote is not on the performance of individual shares but on whole sharemarkets, as measured by indexes such as the NZSE40. Within those indexes are the Brierleys and Robt Joneses of this world.

But they are balanced by the Baycorps. Individual shares can become worthless but that never happens to all the shares in an index. Which leads me to agree with you. It is far less risky to invest in a managed fund of shares than in individual firms.

Q. It would be interesting to compare my savings with those of the rest of the population.

It's not the sort of thing that I can ask people.

Do you have a chart to show how much people have saved at each age?

For example, 50 per cent of 30-year-olds have net assets of $50,000-$100,000, 50 per cent of 40-year-olds have net assets of $90,000-$150,000, etc, or some sort of average?

A.I see what you mean. As cocktail party chit-chat goes, the question does rather rank with "Do you have nits?"

I checked with the Office of the Retirement Commissioner, to see if it has any data on savings by age.

It doesn't. It in turn, checked with Statistics New Zealand, which also doesn't.

But there is hope.

The Retirement Commissioner has contracted Statistics New Zealand to do a household savings survey, which should come up with the information you seek some time in 2002.

It will provide all sorts of data on people's savings, mortgages and other debt, on how tax policies affect saving and so on.

Meanwhile, perhaps you can get some guidance from a formula in a book called The Millionaire Next Door, by Thomas Stanley and William Danko.

The book is American and - as we are all too keenly aware at the moment - their dollar and our dollar are hardly of equal value.

But that doesn't matter.

We can feed New Zealand dollars into the formula, and get New Zealand dollars out the other side, and all will be well.

The two countries' tax systems do have differences.

But we're just talking ballpark figures here, as the Americans say.

So here's the formula: Multiply your age by your pre-tax annual household income from all sources. Divide by 10. This, minus any inherited wealth, is what your net worth "should" be.

Net worth is the value of your assets minus your debts, including mortgages.

If yours is twice the amount the formula suggests, you are a "prodigious accumulator of wealth," say Stanley and Danko.

If your net worth is only half what the formula suggests, I'm afraid you're an "under accumulator of wealth."

So there we have it - at least until 2002.

Q. Do you know of any women's investment clubs operating in Auckland? I would like to learn about investing in shares.

A. No, I don't. But someone else might. Anyone looking for new members?

*Mary Holm is a freelance journalist and author of Investing Made Simple.

If you have a question for her, send it to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@journalist.com

Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information.

Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.