There's a lot to be said for investing in a company where others do the research
A couple of weeks back I gave a talk about dumb things people do with their money. Afterwards I was approached by someone whose son had lost money in a finance company despite doing "all the right research".
I don't know what research he did. But I suspect he didn't have a clue what to research. If he had done "all the right research" he may have concluded that it was best to invest in a public company, not a private one.
The advantage of public companies is that they must continuously disclose to the NZX anything that may have a material influence on the share price, says Geoff Brown, markets development manager at NZX. The other key factor in public companies' favour is the independent research being conducted by brokers, which tends not to leave many stones unturned.
Of course individual investors may not understand all of the information being disclosed, says Brown, which has been a problem in New Zealand.
If this is you, says FundSource business manager TJ Singh, then you might want to employ a financial planner - although finding the right one requires research in its own right.
But professional investors generally do understand the disclosures and as a result will buy more or offload shares on the market affecting the price. This can at least alert private investors to the fact that there are changes afoot that they need to know about.
Some investors' "research" of finance companies was comparing rates listed in the newspaper.
At best it was reading the investment statement or prospectuses - which were woefully inadequate. Some directors of finance companies have been accused of misleading investors in their prospectuses.
That's not to say that directors of a publicly listed company can't do the same thing. It is, however, more difficult with brokers poring over their books.
Shares aren't the only option for DIY investors. They can access fixed-interest investments through solid companies, providing they do their research. The options include bank-based savings accounts and term deposits, and debt securities (bonds) listed on the NZDX. The important thing is that the parent is a quality listed company, says Alan Best, a director of the New Zealand Shareholders Association.
"If I wouldn't buy shares in a company, I have to ask seriously whether I would lend that company money on debenture," says Best.
It should be said that a blanket "don't put your money in private companies" would write off many of the fund managers and KiwiSaver providers. The difference with these is that your money isn't going into the company's pot. An independent trustee holds legal title, audits the accounts, distributes income and releases money to the manager for investment. But no system is foolproof.
Whether the investment is in a public or private company, the four main things investors should be looking for when researching a stock market investment, says Brown, are:
* History of the business
* Current description of the business
* Drivers to performance
* The risks.
"If I was sitting at home on a rainy Sunday and I have $5000 that I wanted to invest, those are the things I would look at," says Brown. "They will stand you in pretty good stead."
For Best, the basic questions to ask in your research of an investment are:
* Do you trust the directors? Are they lawyers and accountants with a track record, or are they politicians or other public figures employed for their well-known names?
* Do you understand the company's business? In the case of finance companies many were borrowing short, but lending on long projects such as property development where the income was capitalised until the building finished. Shorter-term lending such as car loans and hire purchase might have been safer from an investor's perspective because the risk was spread more widely. And with equities, Best would rather invest in a company such as Cavalier, where the directors really know the business and have a good track record, rather than a hugely complex company such as Richina, that few could understand.
* Is the investment priced well? Where finance companies were lending on property developments, the answer was that the interest rate didn't match the risk. With equities, Best would also ask himself whether the business/industry had a future. For example, he cites quarries. People will always need quarry rock from sources nearby to where the product is needed. "It is a natural monopoly."
Best also considers the cyclical nature of the market and may not buy if the returns are likely to fall as the market turns.
Plenty of historical information about companies and share prices is available online through the NZX and broker websites. If you're a new investor it can also be worth following online discussions such as those on Sharechat.co.nz. Some of it will be just gossip. Yet plenty of well qualified and experienced investors comment on such websites.
Another good port of call is ShareInfo.co.nz, which also offers a subscription to IRG Research. Broker research on equities is more rigorous than it was 20 years ago, says Brown.
When it comes to DIY research of managed funds, there are difficulties. Managed fund research-house information from companies such as FundSource and Morningstar isn't available usually to the general public in the way that private investors can get access to some broker research.
That means DIY investors must rely on quantitative data rather than the qualitative information from research reports. Having said that, there are interpretative articles about managed funds on websites such as FundSource.co.nz, Raboplus.co.nz, and Goodreturns.co.nz.
The trouble with quantitative information is that it's historical and doesn't tell you where the investment is going, points out Jeff Matthews, senior financial adviser at Spicers Wealth Management. "If you are Dan Carter you go to where you think the ball is going to go, not where it has already been," he says. Even worse, for all you know half of a star investment team could have jumped ship to another company.
If you're determined to take the DIY approach to managed fund investing rather than pay for advice, then it's important to find out as much as you can about the fund manager, says Singh. "What kind of track record do they have, what level of risk have they taken to produce the result, and what consistency of performance (has there been)? That past history gives you some level of comfort."
It's important to know the manager's style as well, adds Singh. For example, is the manager value focused, he says. "Most of this you can get from the prospectus."
One good measure of listed debt securities, finance companies and equities is their credit rating - provided by Standard & Poors and Moody's. Like everything these ratings aren't foolproof, but they give you a good indication of the company's likelihood of survival. If the rating is below BBB then the chances of default are high.
"If it had been explained to (finance company investors) that a company with a BB credit rating had a one in 10 chance of defaulting, you wouldn't have put your money with Hanover or anybody else," says Matthews.
When it comes to property investment, researching a residential property investment requires that you know the area and the street and have checked out the neighbours (buying next to a gang headquarters isn't a good idea), that you understand local prices, that you check out the potential rent yourself, rather than relying on a real estate agent estimate, and if the property and any alterations are legal.
Finally, all the right research in the world doesn't guard 100 per cent against losing money. The credit crunch showed just that.
