Tips for Success

The stockmarket is a place for everyone who wants to invest their money for good return. Some people do this through managed funds or exchange-traded funds. Others invest directly - and that is best done with some understanding of how the market works, key terms and basic rules for good investing. Investors can ask NZX Advisors for advice on any aspect.

This section outlines five generally-accepted rules for successful investing.

1.  Plan
Success is far more likely when it is planned for. You can't be totally assured of a certain level of return, but you can set targets and make the best moves towards achieving them. A plan based on your goals and circumstances will simplify decisions and help avoid the many pitfalls. It's one of the open secrets of successful investing.
Most investors have one of the following goals:

  • earn income
  • accumulate wealth for the future

Which is your goal? The answer will depend on a whole set of factors including your stage of life, time horizon for investing, personal and family situations, and attitude towards risk. Income may be the goal for retired people, leading to a selection of shares with returns mainly from dividend income. Accumulation will probably suit people planning for retirement or their children's education. A goal to "get rich quick" implies a willingness to take on more risk and trade shares more frequently using an aggressive strategy.

Your planning should define what kind of investor you are and set clear parameters for all decision making thereafter. The worst approach is to chop and change between goals and investment strategies. Stick to one good plan unless exceptional circumstances arise. An NZX Advisor can help you formulate a plan to suit your circumstances.

2. Buy value
Returns from share investing are inextricably linked to the success and profitability of companies. Successful investors select shares on this basis - they don't simply focus on prices and trading volumes on the stockmarket. They get to know the companies they are considering investing in and continually monitor their activities, future plans, financial results, directors and managers. They also consider the prospects for the industry the company operates in and the overall state of the economy.

Success is far more likely when you have your own well-informed views on the fortunes of companies. This is not just the preserve of experts with computer spreadsheets. You can pick out promising companies by reading annual reports, using professional research where you can, following market announcements, keeping abreast of the news and talking to an NZX Advisor. The best companies are those with a sound business, good financial health and good profit prospects.

When looking at profit, the questions to answer are:

  • how sustainable is the current level of profit?
  • if there is no profit yet, when will there be?
  • is the company expecting profit growth and where will this come from?
  • how much of current and expected profits are in cash and hence able to be paid out in dividends, or re-invested for further profit growth in the future?

Of course, analysis can become a complex business in itself. But there are some perennial indicators of value that most investors can access and use in decision making - price/earnings ratios, dividend yields and net tangible asset backing are the main ones. You need to work out which shares offer prospects best in line with your goals.

3. Diversify
There is risk involved in investing in any share, more so for some than others. The best way to manage those risks is to spread your money across a range of shares (and more broadly, to diversify across forms of investment).

The extent to which you spread money across shares and the particular companies selected will reflect your attitude towards risk. Higher returns come only with higher risk. The right balance will exist for you, depending on your goal and particular approach to the market.

Some companies represent lower risk, for example larger, established companies with steady cash flows and profits. These can be contrasted with, for example, start-up businesses in certain sectors that lack profits today but offer exciting growth in an uncertain future. If you have a "get rich" goal, your choices may be weighted toward high risk, high return shares.

4. Stay informed
Share investing should be seen as long-term investing. But that doesn't mean buying value to simply leave in the bottom drawer and forget about. Success requires you to stay tuned to what is happening on the stockmarket and in the businesses which you in part own - even if your investment goal seems to require minimal trading.

Staying informed means watching market and business developments, and doing some basic analysis on your companies from time to time. Anyone's plan should allow for selling to cash in on particularly opportune capital gains, or to cut losses if a company's fortunes start nose-diving for unforeseen reasons. If your plan is to trade in and out of growing companies to secure high returns, then collecting information will be a constant imperative.

5. Live with volatility
Patience is a definite virtue when it comes to share investing - and so are steady nerves. The only absolute certainty is that share prices will fluctuate. That can be hard to live with while you wait for good returns over the longer term.

Price volatility is one of the inherent risks of shares. The market value of your investment will rise and fall, sometimes constantly. You can be caught if, for some sudden reason, you need to sell out in the short term. And there's often a niggling worry that a particular fall in price will turn out to be the start of a long term collapse in value due to some negative news that you somehow overlooked.

The rule for success is: stick with companies you have carefully selected, until you see definite signals to sell from their business or financial figures. The best returns from shares - certainly if your goal is to "earn income" or "accumulate wealth" - are obtained almost invariably over the long term. You will lose out if you panic in response to volatility.

Price volatility reflects the diversity of views about a company's future fortunes. Different views - some frequently changing as new information gets into the market - are being factored into the share price all the time. Volatility is usually greatest in companies with future prospects for either strong profit growth or declining profits. If your investment approach is to trade frequently, then volatility may be welcome. Be well informed and stay alert.