Money matters: 'Smart analyst' chides 'cynical' elf

By MARY HOLM

Q: Your article (in last week's Money Matters) on my investment advisory newsletter included some comments that were incorrect or mischievously misleading.

* You said: "Without the remarkable success of just one recommendation your average return would be somewhat lower."

This implies that my 20-year track record is the result of just one big winner. Not so. The average gain is 91.3 per cent but, excluding the 34-fold gain on NZ Refining, it is still 68.3 per cent.

* You said: "You're in a high-risk game. More than a third of the recommendations on your web page resulted in losses."

Can anyone ever please you? The previous week you were complaining about newsletters that "don't tell you about the recommendations that bombed."

Damned if we disclose and damned if we don't. If investors diversify their portfolio over many shares then one-third losses and two-thirds gains (including some very big gains) is a winning strategy. My newsletter has a recommended portfolio of 20 to 30 shares.

* You said: "Your published returns don't seem to make allowances for brokerage or taxes on capital gains. Those two costs, plus your subscription fee, would cut people's gains a fair bit."

My newsletter has made 142 buy recommendations - but that is over 20 years, or about seven buys per year.

Thirty shares are still in the recommended portfolio, so there have been only 112 sales (five or six per year) - and 21 of these were taken over (realising an average gain of 108.6 per cent).

In nearly all of these cases I would have preferred to remain a shareholder in these successful companies.

Buying and selling five to seven shares a year from a diversified portfolio of 20 to 30 shares is not share trading, it is long-term investment. This low turnover of shares minimises brokerage and other transaction costs.

The annual subscription is a fixed fee of $150 regardless of the size of an investor's portfolio. It is my only source of revenue and pays for research, printing, postage and advertising costs.

To remain 100 per cent independent, my research business earns no commissions and does not accept advertising.


A: Incorrect? Mischievously misleading? I don't like the first one, but quite like the second. It makes me sound sort of elfish. Still, I have to plead not guilty.

In response to your first item, if going from 91 to 68 isn't somewhat lower, I don't know what is.

By the way, readers, those gains - big though they undoubtedly are - are over several years, not one.

On your second item, I wonder if it's you who can't be pleased.

Did you read right past last week's bit where I said, " ... your results look impressive on your web page. Perhaps you're another Warren Buffett"?

I then quoted Professor David Emanuel as suggesting you might be "a particularly smart and insightful analyst," and remembering you as a bright student.

More specifically, rather than damning you for telling about the bad as well as the good, I commented: "Good on you for doing as well as you have. And for disclosing all your results."

I stand by my statement that investing in individual shares is risky. Clearly, if you have one-third losses and two-thirds gains, you're going to do well.

But what if the balance tips the other way for a while? As I said last week, even Buffett has his bad years.

Also, just because you recommend a portfolio of 20 to 30 shares, that doesn't mean all your subscribers hold all those shares.

I know, because several of them have e-mailed me - some in response to your request that they do so. They seem to be a pretty happy bunch. Many of them, though, said they don't buy and sell everything you recommend, but rather use your advice as guidance.

On your third item, I'm sure you would agree that it is important to take into account transaction costs when looking at any investment.

The impact of brokerage and the $150 subscription will vary, depending on how large a portfolio is.

More worrying, though, is your implication - and the outright statement in some of the letters from your fans - that people following your recommendations are not trading shares often enough to have to pay tax on capital gains.

While regular share traders certainly have to pay the tax, they're not the only ones.

Anyone who buys "for the purpose of resale" or as part of a profit-making scheme is caught under New Zealand law.

The law says nothing about how long you hold shares, or what proportion of your portfolio is traded.

It seems to me that anyone even patchily following your advice, which includes buy-and-sell recommendations, would be hard-pressed to convince Inland Revenue he or she wasn't buying with plans to sell later.

In practice, many individual shareholders don't pay tax on their gains, because the IRD doesn't know about them.

But I would be surprised to hear that you or someone following your recommendations has been audited and got away with it.

Finally, I want to respond to a couple of sentences from one of your fans.

"I find many of your recommendations very conservative," he says.

I match my suggestions to the inquirer's circumstances. This man has a mortgage-free house that "represents only about one-third of our net worth."

He's certainly in a position to take more risks than most. If he enjoys a bit of a gamble on a well-researched investment, I would say, "Why not?"

He also says that my cynicism, in writing about your newsletter, "was not justified." What cynicism?

I was certainly cynical the week before, when discussing another newsletter that boasted about a recommended share that rose from about $US4 to $US10. It now trades at around 45USc.

But I thought I made it clear last week that your newsletter seems to be different, and better.

What more do you all want? A free ad? Sorry.

Q: I agree with your views, in last week's Money Matters, regarding the limitations of many accountants when it comes to providing advice dealing with matters outside mainstream accounting.

I've also met a few who have yet to master their own discipline, and wouldn't be described as (to quote from your article) "whizzes at debits, credits and taxes."

But I've also met some financial planners who couldn't count the money in my 7-year-old daughter's (very small) piggy bank.

In my opinion, your comment, "Accounting is no more like finance than maths is like chemistry," is flippant.

We could probably argue about definitions. But I believe that accounting has a lot more in common with finance than mathematics does with chemistry.

I'd like to know what your credentials are. I note that you are a freelance journalist and author of Investing Made Simple, but think your readers need to know whether your comments and advice are authoritative, given that the actions of some will be influenced by what they read in your column.

Please advise of relevant experience and tertiary qualifications. Thanks.

I understand that your column aims to entertain as well as inform, and I do read it regularly, along (I'm sure) with many others.

I'm sure you appreciate that many unsophisticated readers might act on what they read without input from others (including accountants - God forbid). So it's important that your comments are balanced and as accurate as possible (please keep clear of tax-related issues).

Disclosure of interest: I am a chartered accountant but, unlike some of the more serious individuals who will probably contact you, I was not offended in the least by your article - well, maybe a teensy-weensy bit.


A: There, there. I'm sure you're one of the good accountants I wrote about.

And, okay, I'll concede that perhaps accounting is more like finance than I suggested.

It's just that, when I studied both subjects, I really enjoyed finance but didn't like accounting much at all. So, in my mind, they're quite different.

Which leads to my qualifications. I did an MBA degree at the University of Chicago, majoring in finance, and got A or B passes for all courses.

On that programme, I took several finance courses from Nobel Prize winner Merton Miller. He, among others, taught me that it's rare indeed for someone to continue over long periods to be as good at recommending shares as today's first letter writer says he is.

I also did a BA in economic history at Victoria University, and an MA in journalism at the University of Michigan.

But I've learned just as much over the years through my work.

I've written about investments, personal finance, taxes and so on for a couple of decades, working for the Chicago Tribune, Australian Financial Review, New Zealand Listener, the 1997 Todd taskforce on retirement income, and others.

And I've been business editor of the late Auckland Sun and Auckland Star.

Despite your advice, I don't steer clear of tax-related issues, or any others that I don't know much about. I consult experts and then quote them, so you know where the advice came from.

Whenever someone says that what I have written is inaccurate, I check it out. If he or she is right, I always run the correction in the next column.

I also try to run letters that offer a different opinion or another perspective on what I've written.

Just quietly, I agree with you that there are also many dismal financial planners out there. But I'm not going to say that. My enemy list is getting too long these days!

Q: Just a little niggle from a recent column and a query from your correspondent. People are not made redundant, jobs are.

I have been in the position of job redundancy and it is not always nice.

But it can be a new start and an opening to things we may not have thought of otherwise.

Imagine what the world may be like in 20 years. The internet we use now will probably be prehistoric, and so will many occupations.

Everyone is important in society. Never, never, never accept that you are redundant just because a job may be. Everyone can still contribute. It's all in the mind.


A: You sound like Winston Churchill. Apparently he once made a seven-word speech at a school break-up.

"Never give up," he said. "Never, never give up." Then he sat down.

Then again, W.C. Fields said: "If at first you don't succeed, try, try again then give up. There's no use being a damn fool about it."

I'm a bit inclined to take Field's side.

In your case, though, all those "nevers" seem to be justified. You make an excellent point.

* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions for her 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. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.