Case for picking winners

By MARY HOLM

Q: I must take issue with the way you so strongly advocate diversification. I realise for those with no real interest in learning about investment it does have its merits but greater returns could be achieved by developing specialist knowledge and investing accordingly.

If the choice was between putting the house on any old stock or diversifying, then the latter would obviously be wise. The returns might be rather ho-hum but the risk would be mitigated. But by cheering so strongly for diversification, you imply this is the only choice.

I recently read that US$1000 invested with specialist investor Warren Buffett in 1956 would have grown to US$16.4 million by 2002, whereas US$1000 in the Dow Jones 30/S&P 500 Index would be worth just over US$75,000. That's the difference between an average 23.5 per cent compounding annual return and the 9.8 per cent return of the indexed fund.

So with that said, do you know of any courses where one can learn about fundamentalist investing, along similar lines to that of Mr Buffett?

A: No I don't. And if I did, I wouldn't be recommending them.

There's no doubt that American Warren Buffett's company Berkshire Hathaway, which invests in shares in other companies, has performed extremely well. Buffett has made some bad moves, but they pale beside his successes.

Much has been written about how he chooses shares and you could always buy the books. The remarkable thing, though, is nobody seems to have successfully copied him. I have yet to hear of a Warren II.

So what's going on? Maybe it's just that, with thousands of Americans running investment companies and share funds, someone has to come out on top, perhaps largely through luck.

Or maybe Buffett really does know something nobody else knows and he's not telling. If that's the case, your best bet is to buy shares in Berkshire Hathaway.

I wouldn't though. He may not continue his dream run. It's easy to look back, as you have done, at how much better a winner has performed than the market as a whole. But nobody knows - in advance - who will be a future winner.

Don't forget that for every investor with an undiversified portfolio who beats the market, there must be another one, probably equally confident at the start, who underperforms - given that market performance is average.

While in most purchasing situations knowledge is, indeed, a plus, in share investing I don't believe the available knowledge is useful to the ordinary investor - unless it is insider knowledge and it's illegal to trade on that.

People who simply invest in index funds, which perform as well as the market covered by the index, will on average do about as well as those who spend hours deciding where to invest.

And most people would rather forego the opportunity to do much better than the market in exchange for knowing they won't do much worse.

PS: One thing Buffett advocates that I wholeheartedly agree with is the need to hold shares for years.

Q: With reference to a recent letter, Mr and Mrs A (who together earn $160,000) would only be likely to have children they can afford. Any they were encouraged to have (via tax breaks) would be properly raised and educated.

I'm sure there are many families on benefits who have more children to get the cash allowance - not necessarily spent on the children. Both parents being at home all day with nothing to do probably adds to the number.

These children are likely to be raised in the same lifestyle as their parents.

In time, with fewer educated workers and more non-workers added to the retired baby boomers, it could leave the country in an adverse position.

A: It wouldn't be easy to make more babies in the daytime with all those kids around!

Seriously, though, I doubt if many beneficiaries have more children to get the money. Adding the unemployment benefit and Family Support, a married couple with no kids gets $274 a week. With one child, they get $385 and with each subsequent child they get $64 more a week.

Have you ever tried feeding, clothing, housing and everything-else-ing a child on less than $10 a day?

As for raising the children in the "same lifestyle", I presume you mean a working lifestyle. The vast majority of people on benefits don't stay on them for long.

Of those getting any income-tested benefit - including unemployment, sickness and the DPB - 34 per cent have received their current benefit for less than a year and another 39 per cent for one to four years.

Only 11 per cent - or 1 per cent of all working aged people - have been continuously on their current benefit for 10 years or more.

Finally, I'm not too worried about your dire prediction, given that more people are getting higher education these days and the number of income-tested beneficiaries has dropped 18 per cent since 1999.

Q: Re your statement in a recent column that "it's more accurate to say those with taxable income of less than $38,000 are in the 21 per cent tax bracket, rather than 19.5 per cent".

Reviewing my term investments, they have withholding tax at 19.5 per cent and my accountant's recent tax return has done nothing to change that.

You are not in the habit of writing hogwash. So what's wrong with my octogenarian brain?

A: Your brain is fine. I should have been more precise.

While the general tax on income up to $38,000 is 19.5 per cent - and that applies to you and all other retirees - earners of wages or salaries get a "low earner" rebate that lowers the rate on their first $9500 to 15 per cent.

The way the rebate works, they then pay 21 per cent on earnings between $9500 and $38,000.

This brings the total tax for those earning exactly $38,000 to 19.5 per cent on all their income. And those earning more than that pay 19.5 per cent on their first $38,000.

Got that? Perhaps you can understand why I didn't want to explain it before!

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