KEY POINTS:
As reputable investment advisers will tell you, the higher the returns from an investment, the higher the risk.
Most advisers will suggest a diverse portfolio made up of a few different assets with a sensible range of risk and return.
Money in the bank, while safe, is not going to make you much richer any time soon. Finance company debentures pay a little more than that, but in many cases the best returning and also riskiest investments in a conventional investment portfolio will be equities.
The New Zealand sharemarket's overall 20 per cent gain last year was a good result by historic standards but some individual companies have done much better. Rakon, issued at $1.60 almost a year ago, is trading at $4.75 - a gain of close to 300 per cent.
For the investor in a hurry who can stomach the prospect of losing large amounts quickly, there are other ways to invest that can provide returns of several hundred per cent over a shorter period - and don't involve a visit to the casino or TAB.
But given the risk involved, you probably wouldn't want to punt your life savings or the family home on any of these.
- Adam Bennett
Uranium
There's big money to be made in heavy metal. And for those after stock which has the potential to rise tenfold in quick time, gold is good but uranium is even better.
The all-important ingredient for nuclear bombs has soared from US$7 a pound at the start of this decade to more than US$100 this month.
Uranium miner Summit Resources - which trades on the NZX as well as the ASX - was worth just 19c a share at the start of 2005 but hit a record high of $7 this month. The shares took off when the price of uranium started to soar and a drilling programme at Mt Isa in Queensland confirmed its uranium deposits were world-class.
The company has since become a takeover target for the larger Paladin Resources.
Those looking for the next big thing in uranium mining will find plenty of minnows on the ASX but one which at least one New Zealand broker keeps a regular eye on is Glengarry Resources.
The Perth company trades at just A18c a share but it has a number of exploration properties in well-mineralised but relatively unexplored provinces of Australia including strategic land holdings adjacent to two world-class deposits - Kidston (gold) and Cannington (silver-lead-zinc).
And just this week the company announced it has been granted two exploration licences "considered highly prospective for uranium" in the northwest of Western Australia.
The licences cover the northern part of Glengarry's, 1700sq km Citadel Project 100km north of Telfer in the Paterson Province. The Paterson Province hosts the world-class Kintyre uranium deposit (36 Kt U308) currently being assessed by Rio Tinto.
BUT ... High prices may make exploration a more attractive investment but until mining begins, stocks like Glengarry remain highly speculative investments.
Uranium could hit US$1000 a pound and it won't change the odds of finding the stuff. - Liam Dann
Units in Mangere
Property has not been a cheap or speculative punt this decade, as values skyrocket and the country's 1.4 million homeowners become wealthier.
But the silver-tongued experts reckon they still have tricks up their sleeves. Asked to pick areas and types of property which appeared to be sure winners, Kieran Trass, property market analyst of the website SuburbWatch, picked twin-unit residential properties in Mangere as the single best venture for today's punters.
Avoid standalone houses like the plague, he reckons. The rent won't come anywhere near covering the mortgage. But income from twin units or a house divided into two flats will cushion against this and help buyers to cope with today's steep interest rates.
Here is the Trass formula: buy the Mangere two-unit property for $405,000, contributing $40,000 of capital and borrowing $365,000 fixed at 8.25 per cent for five years as an interest-only mortgage. The two places will generate around $560 weekly rental income. Claim deductions on tax paid on wages or salaries and the investor will only need an extra $23 a week to cover the interest and collect any capital gains on the places, Trass calculates. Magic!
BUT ... What if property prices don't keep rising and when you sell, you get less than expected? What if interest rates continue to spiral and your costs head uphill? Tenants could leave or you could be faced with unexpected house repair or maintenance expenses. The economy could take a dive, unemployment could rocket and tenants become scarce. Plus under this scenario, you have no plan to actively build equity by paying off that whopping mortgage. - Anne Gibson
The movies
Early small investments in successful film projects can reap enormous rewards, says a film finance consultant.
Richard Fletcher, of Liberty Films, says a successful film delivers a big return from initial sales of the project to main distributors, continuing at a slower rate when the film rights are sold to other territories and growing number platforms. Investors in the Australian movie Crocodile Dundee made millions, while publicly listed SkyCity and its executive team are also understood to have come out smiling after investing in local hit Sione's Wedding.
In Wellington, BLM is launching a scheme that would see local investors cover the early development costs of a project and then exit early with a profit.
There are also "vanity" investments where people get their pay-off by being associated with the glamour of the film business or where corporates have used them to boost their profile.
BUT ... be aware that this is a notoriously cut-throat world built on personal relationships and elaborate financial structures that can easily wrest control away from early investors.
The rule of thumb is that only one in 10 makes a profit. Hollywood experts hedge by investing in several projects or "slates" of films in the hope that one is a hit. Private investors don't have that luxury. Internationally, the film industry thrives on private investors who are captured by the glamour. - John Drinnan
Share derivatives
One way to make a huge return quickly is to successfully pick a company whose stock is about to move dramatically, maybe because of an unexpected takeover offer or regulation changes, and then gain leveraged exposure to them. That can be done by way of derivatives, including options where available, or contracts for difference (CFDs).
Both offer investors ways to supercharge the potential gains (and losses) to be wrung from shares.
Options come in two basic flavours, "puts" and "calls".
Call options are the right to buy shares at a particular price by a particular date while put options are the right to sell shares at a particular price. Call options enable investors to multiply the returns from share price gains.
"If the investor has got the view that a share price is going to go up, then they can pay a small premium to get a large return if the price moves in the direction they think it will" says Goldman Sachs JBWere derivatives manager Greg Boland.
For example, last week Australian chemical company Orica rejected a takeover bid which saw its stock soar from A$27.89 on Tuesday to A$33.50 on Wednesday.
"You could have bought a May A$28 call on Tuesday for A87c [the market price for that specific call] and sold it on Wednesday for A$5.35.
"Your return on the stock is more or less 19.5 per cent, but your return on the option is 614 per cent. That's the difference between buying the stock and buying the option."
Meanwhile put options, which are often used to protect investors' portfolios against price falls, can be used to profit from price plunges.
Last year, the day before the Government announced the new regulatory
framework for Telecom, the company's stock was trading at $5.70.
"You could have bought a $5.50 put option for 20c. The next day the share price was $4.80 so your option was worth at least 80c, and that was in a day."
BUT ... Of course there is a potential downside for the buyer of the call option. If the share price falls they can lose all their money as can the buyer of a put option if the share price rises. However, with options the most the investor can lose is the initial outlay. - Adam Bennett
Contracts for difference
The potential returns from share price movements can be even greater using contracts for difference, or CFDs.
A CFD is a contract between a buyer and seller, stipulating that the seller will pay to the buyer the difference between the current value of a stock and its value at the time the contract was taken out. If the difference is negative, the buyer pays the seller.
Using CFDs, for a deposit, typically 10 per cent, investors can purchase full exposure to a stock, including dividends.
Neale Jackson of OM Financial, one of two companies in New Zealand offering the products, says the effect of movements in the stock is magnified by the leverage amount.
"If you've put $100,000 in, you've effectively got $1 million worth of the stock. If a $10 share moves to $11 you will have doubled your money."
BUT ... "If it goes to $9 you've basically wiped yourself out."
Investors can put stop loss orders in place, to exit their position should the stock move beyond a certain point in an unfavourable direction. Otherwise the company providing the service can make a so-called "margin call".
"To keep your trade open we would need to see some indication from you that you had deep enough pockets to withstand that kind of loss," says Jackson.
However, if your pockets aren't deep enough, you may be forced to sell your investments at the worst possible time. - Adam Bennett
The dollar
With the New Zealand dollar trading at 23-year highs, it has to fall at some point, and that offers investors skilful or lucky enough to pick the timing, speed and amount of that fall the chance to turn a tidy profit.
There are a number of ways this could be done, including buying overseas assets such as shares, or shares in New Zealand companies with large overseas exposure such as manufacturers like Fisher & Paykel Healthcare Appliances or holders of overseas assets such as Guinness Peat Group.
The most direct way to benefit from the kiwi's fall is of course through the foreign exchange market and, like shares, foreign exchange can be traded on margin, to give an investor much more bang for their buck.
OM Financial also offers foreign exchange trading on margin.
The minimum transaction value available is $100,000 and investors must maintain a margin of 3 per cent - meaning investors would have to put up $3000.
The margin - in this case $3000 - is returned when the position is closed.
At yesterday's exchange rate $100,000 would buy you US$74,640. Should the exchange rate fall to say 70c you could buy back your $100,000 for US$70,000 leaving a US$4640 profit on top of your original investment of $3000.
BUT ... Should the exchange rate go up then you are left with a loss. The potential speed of currency movements and the degree of leverage means those losses can mount quickly. If that happens the company providing the service will make a margin call asking you to top up your account. If you can't, you're out and your money's gone. - Adam Bennett
Biotech stocks
Can lightning strike the same stock twice?
A biotech boom left plenty of investors nursing big losses in the first part of this decade when reality hit home. The rise and fall of New Zealand science company Genesis Research and Development was one of the great hard luck stories of the era. News of a promising treatment for skin disease psoriasis sent its shares soaring to more than $7 each by mid-2000 - they closed yesterday at just 27c.
What investors failed to understand then was how difficult it is getting a drug to market. To be a winner drugs must pass three rigorous trial phases run by the US Food & Drug Administration. Genesis' psoriasis cure never made it past phase II and the shares plummeted.
Over three years later, it is still quietly doing its thing and still rates as one of the best-listed science companies on the New Zealand market.
But why would investors go there again?
Well, the returns for picking the right biotech stock can be spectacular.
One of the the hottest in the world right now is US-based Acorda Therapeutics. Its shares were trading at US$2.20 until last September. But news of a successful phase III trial for a drug that improves walking ability for multiple sclerosis sufferers has sent it soaring to about US$25.
From a drug development point of view Genesis is virtually back at square one. It has consolidated its product development down to just three drugs and a biofuels division. The risks are high but it is now a cheap company. Its total market cap is just $6.8 million - not much more than the amount of cash it still has in the bank.
And while Genesis no longer has any products in FDA trials, it has some interesting prospects in pre-clinical trials. They include Zyrogen, which could offer a cures for osteoporosis, MED-1, a possible ingredient for a tuberculosis vaccine, and RNAi therapeutics, which could treat cancer.
The company also owns technology for more efficiently making biofuels and has a project growing a woody shrub called falix near Taupo.
BUT ... While Genesis may be one of the best on the local scene, it is tiny by global standards. Bigger biotechs playing the odds on making a breakthrough might have 30 or even 300 potential drugs in the pipeline. With just three, Genesis will have to get very lucky to hit the big time. - Liam Dann
