People in few houses shouldn't store eggs

By MARY HOLM

Q. I have been burned by shares and investment schemes etc, etc, so my bottom line is that I trust and can work with property.

But I am no fool either, and remember well the days of people having to pay 22 per cent mortgages, and properties doing the rollercoaster ride in prices.

Plus, I remember good people who were refused re-mortgaging when the tide went out in 1987. A friend lost his house (and equity) because his bank loan came to the end of its fixed term and, as he was self-employed, the bank simply said he was too risky to refinance. Bank loyalty isn't a guarantee.

So my home is modest and paid for (I can't eat it, so I don't kid myself that it needs to be anything other than a home), and my investment vehicles are my rentals, which are geared at financial break-even with room for rental growth.

That way, when the tide turns (and it will for sure, even if not in the next couple of years) then I can weather any mortgage storm.

Your correspondent last week displays a romantic view of how easy it is to get rich off property improvements, whereas many, many people have probably been rather lucky to have got their money back once the improvements were paid for. Or they have gone backwards.

So! Really this email is to say thank you for the exceptional depth shown in the response. I am very glad you did the arithmetic and, more importantly, tried to point out the obvious: the correspondent's time-frame is short, and he displays a disappointing lack of common sense in his approach.

And what is the bottom line that we always hear in elementary finance? Don't have all your eggs in one basket.

The correspondent will - sooner or later - make a mistake, because he is human and life is like that. Is he really willing to risk it all on one house? Where is the common sense in that?

A. I want to thank you, too. I made lots of points last week, but I overlooked a really important one, which you have made.

The writer of last week's letter really has blown it as far as diversification is concerned.

Having all your eggs in one house - now that's an intriguing image! - isn't as risky as having them all in one listed company. That's because shares are more volatile than property.

As you've pointed out, those of us who have been around for a while know that every type of investment has its good and bad times.

I hate to say this, but you, too, don't seem to be as well diversified as I would like. You have concentrated on property.

You're right to say that having several properties is much better than just one. But you wouldn't consider also going into a share fund, would you?

Q. Thank you for responding two weeks ago to my letter regarding single share investing.

I am sure it would have been of interest to your readers. If I could have "the right of reply" to address a few key facts it would be appreciated greatly.

* I note there were no figures in your response. However, and conveniently, at the bottom of your reply there was another article on how superannuation funds (your preferred multi-share option) have performed over the same period as Sky City.

Over three years the median return was 0.6 per cent, and for the past years, minus 5.1 per cent.

Sky City returned 133 per cent (including tax-paid dividends) and 25 per cent in the same period - not even in the same ball park - with three years of the "10-year" period gone.

* You comment that "things could go wrong and you could lose badly". They would have to go very wrong indeed.

However, the average investor is not so unsophisticated nowadays! I have a simple "stop loss" mechanism in place. If the share falls below a certain value then it is sold - with substantial profits still having been made.

Why would anyone sit and watch their investment value eroded to the point of making a loss? Try to get out of a bond (e.g. Tower's) so easily.

* Finally, you posit a frozen business environment where institutions could push up returns until they were "nothing special". This is not the real world (in Sky City's case anyway).

Sky City is continuing to broaden its base (new hotel, more gaming machines, Sky Cinema revamp) plus adding to revenue from Australia. Thus it is, under brilliant managership, creating a growing value base to justify further share purchase (it is a "buy" from various brokers).

Further to this, there is no reason institutional purchasing should necessarily drive a share price beyond value.

What can happen is that, because of the outstanding returns in dividend/bonus payments, a share can be "tightly held" - i.e, no sellers.

Sky City is contributing to this by embarking on a substantial share buyback over the next two years, which will add further shareholder value.

Hopefully you are still writing your first-rate column seven years from now. And also, hopefully, I will be around to either tip my hat or take a bow. We'll see!

A. If there's one message I've been trying to put across - not only to you but also to the bloke with the highly successful commercial property (November 2 column) and the one who has owned three houses (last week) - it's that conclusions based on one person's experience or one share's performance are worthless.

You could well be taking a bow seven years from now. You might also be too embarrassed to turn up. Neither would prove much. There are plenty of lucky people out there - and many unlucky ones.

In response to your three points:

* Of course Sky City's numbers are way better than average. That's why you wrote, isn't it? But it won't necessarily continue.

By the way, you don't choose to quote the five-year figures from the article below the column last week. Wouldn't that be fairer than one and three-year figures, given that we're talking long-term investment?

Admittedly, the five-year figures aren't great either. But the median return was 4.1 per cent, quite a lot better than the numbers you do quote.

Another thing: Superannuation funds are not my "preferred multi-share option". Low-cost index funds are.

* Stop losses can work well. But they sometimes lead to too much trading. Brokerage and other fees, and perhaps also tax on capital gains, can severely eat into profits.

Also, it's amazing how many people change their mind about stop losses when the share price falls.

"It's just a short-term dip," they say. "It's got to come back up. I'll hang in there in the meantime."

Your share has done well, so you haven't tested yourself on this. Yet!

Despite your confidence, things can go very wrong indeed. See next Q&A.

* Financial institutions that decide a share looks attractive don't push up the returns. They push up the share price, by boosting demand for the shares.

And - other things being equal - the higher the share price, the lower the return to new investors.

True, a company's value might be growing to match the share price growth.

But it's dangerous to conclude that Sky City or any other company that is broadening its base and growing its revenue is, necessarily, boosting its value. History is full of examples to the contrary.

Nor does a "buy" recommendation from various brokers mean much.

For my MBA, I did research on Chicago brokers' recommendations over a year. It turned out investors would have been better off investing in an index fund than following those recommendations. As for there being no sellers of a share, there will always be sellers if the price goes high enough.

Finally, share buybacks don't necessarily add to shareholder value. Research shows that sometimes they do; sometimes they don't.

The next section of this column is cheating a bit. The following is a Q&A published on September 23, 2000. I've edited it a bit for space reasons.

Q. I lost our life savings in the sharemarket crash. 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 guesstimate of what the Baycorp shares could be worth in the next few years.

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 per year of late, I think.

I know what I am doing is against all that advisers recommend. It wouldn't matter if we lost again, but I doubt this will happen.

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

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

It may be many decades before your Baycorp holdings top the million-dollar mark. There's no guarantee 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 continue at that dizzy pace. 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 past year.

A price that moves around that much is more likely to fall than shares of the slow and steady type.

There are many other people out there who put most or all of their money in one investment and lived to deeply regret it. They're not as inclined to write to columnists about it. They'd rather forget that it ever happened. But it did.

End of September 2000 material.

So how has Baycorp done since?

It's not a pretty picture, either before or after the company's merger with Australia's Data Advantage, late last year.

The Stock Exchange calculates that a Baycorp investor has lost 72 per cent - an annual loss of 43 per cent - since September 2000, taking into account dividends and what happened during the merger. Ouch!

Owning shares in just one company is dangerous.

* Got a question about money?

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Money Matters

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