Money: High-tech stocks will not always look so flash

By Mary Holm

Money Matters


Q: Your article of 28 August claims that "I would stay away from any investment boasting 50 per cent returns, or even 20 per cent. It has to be highly risky."

As the computer is only 51 years old and the capitalisation of the computer industry is now in the trillions of dollars, it would seem your claim is not correct.

Microsoft alone is now valued at half a trillion. For many years Microsoft's stock price has been growing at over 50 per cent a year. I doubt that you would call an investment in Microsoft a high risk.

If New Zealand investors are to have a "Bright Future," they must be prepared - indeed, encouraged - to invest in opportunities with higher than 20 per cent rewards.

I would rarely recommend a client invest in a technology stock that was expected to grow at less than 20 per cent a year.


A: You worry me. I just hope your clients aren't investing money they can't afford to lose.

The immense growth of the computer industry, and of Microsoft, supports rather than disproves my "claims" that if a return is 20 per cent, the investment is risky.

Risk in investment doesn't just mean the likelihood that a company will go belly-up. (Although plenty of high-tech ones have done just that. We don't hear much about them, unless they got big first.)

Risk also means uncertainty. A stock price that wobbles around a lot is riskier than one with a smoother path. The wobbly stock price might well end up higher. But there's a greater chance than with a blue chip stock that the price will be low when the investor wants to sell.

And high-tech stocks, Microsoft included, are among the wobblier.

Throughout recent history, an industry or two have always grown fast for a while.

Those lucky enough to invest in them at the start have done very nicely. At some point, though, the growth slows. And nobody can predict when that will happen. When it does, investors with high expectations get burned.

Somebody told me recently that if Microsoft continued to grow at its recent pace, in a few years it would qualify as a member of the G7 major economies.

That's not impossible. But given the enormous competition in the industry and anti-monopoly legislation, it seems unlikely.

And, if we assume 50 per cent returns for a few more years after that, we'll have Microsoft bigger than all the world's economies put together. Hmm.

Another point: You say that most of the technology stocks you recommend are expected to grow by 20 per cent or more.

Expected by whom? Certainly not the people who sell the shares to your clients, or they wouldn't be getting out.

If all the people who study shares believed a share price was going to grow by 20 per cent a year, everyone would rush to buy it. The high demand would push up the price immediately, to the point where the future gain was likely to be more like, perhaps, 8 or 10 per cent.

If the experts you listen to are predicting 20 per cent, others must be out there balancing that out - predicting much lower growth, or even a price fall.

If you haven't told your clients that the value of their high-tech investments is quite likely to drop sometimes, perhaps quite significantly, you could be charged with negligence. Just take a look at the recent performance of the Nasdaq index, made up largely of high-tech stocks, with Microsoft the biggest.

In less than three months, from July to October last year, that index plunged nearly 30 per cent. Yikes!

Recently, it has been back up at about double the trough of last October. But it has been a rough ride over those 11 months.

In just 16 days in February, the index fell 10 per cent. In 25 days in July-August, it fell 13 per cent. Those are sleep-disturbing drops over such short periods.

Keep in mind, too, that many of the shares in the Nasdaq are more volatile than the index itself. Some share prices have halved at times, or worse.

I agree with you to some extent that many New Zealanders should consider some higher risk/higher reward investments than they are in.

But encouraging anyone other than the wealthy and daring to go for rewards of more than 20 per cent, in a low-inflation environment in which 10 per cent is pretty darn good? Nope.

Q: I recently, for the first time, invested in the stock market - Contact shares at $3.20 - thinking our Government knows best and will not have us on.

I put $60,000 in this, which is half my retirement savings.

What's best to do? I have another 21 years before retirement with a total of $128,000, excluding $60,000 spent on Contact.

I have heard about fund manager Tower Tortis-International. Would that be at risk through its high US content and over-valued also?

I am an ordinary working person who now has severe arthritis, so must make every move count. I own my home mortgage-free, worth $200,000.


A: You - and many other new investors in shares - have learnt two sad lessons via Contact.

One is that the Government has no special knowledge about shares. The other is that putting lots of money into any single share, even one that isn't very high-tech, is unnecessarily risky.

Contact shares, issued at $3.10 in early May, rose to as much as $3.76 soon after that. Then the price plummeted, to as low as $2.90 in early August.

That's volatility with a capital V of the sort you're much less likely to see if you invest in a managed fund holding lots of shares. In a fund, price movements can offset one another.

In recent weeks, Contact's price has risen back to more than its issue price, which is comforting. But I still suggest you get out of Contact now.

You'll be tempted to wait and see if its price rises more. And, no doubt, some analysts are forecasting further increases.

But nobody really knows. I doubt if any analyst predicted a drop to $2.90 a few months ago.

Meantime, the price of whatever you switch into might rise. When you decide to make a move in the sharemarket, you might as well make it right away.

What should you go into? With 21 years until retirement, and a mortgage-free house, it's reasonable to put savings into share funds if you have a bit of courage.

As you've already seen, share prices do sometimes fall. But if you hang in there, it's highly likely that you'll do better over a couple of decades than in any other type of investment.

Which share fund? Well, Tower Tortis-International is one good choice. It invests in the biggest listed companies around the world. And, because it's an index fund, its fees and taxes are lower than in most other funds.

You worry that about half Tortis-International's investments are American. Certainly US share prices have risen dramatically through the 90s, and some commentators fear that market is over-valued.

But investing in shares in a wide range of US industries is much less risky than if you concentrate on just one industry as today's first letter writer seems to do.

The US economy is pretty healthy. And the growing demand for shares from American Baby Boomers who are entering their post-kids, pre-retirement years when savings are high, seems likely to keep the US market reasonably buoyant.

Don't forget, too, that half your Tortis money would be in several other economies. However, you won't want to put all your money in a single fund. You could also consider index funds of New Zealand shares; funds that specialise in certain regions of the world or emerging markets; perhaps one that invests in lots of properties.

A good sharebroker or financial planner will tell you about some options. Good luck!

Q: In a recent column (August 7-8) you listed the rest-home subsidy rules.

My wife has been in care for more than 10 years. I have a house and a car and have about $16,000 in the bank. I get the subsidy and am grateful that I do! I get a small pension from the old Ministry of Works of $186.88 every 28 days.

A few months ago I received a reassessment form, which I filled in declaring the pension. I received a letter stating I had to pay half of the pension towards her care. Is this correct?


A: I'm afraid it probably is.

As I said in that earlier column, a married couple with one partner in care can't get a rest-home subsidy until they've used up all their realisable (easily sold) assets except $45,000, the family home, car and personal belongings.

But there are also rules about income. If you get income from a superannuation or pension scheme, you have to contribute half of that income towards the care of your spouse, says Pat Thomas of Work and Income New Zealand.

That puts you in a similar position to a couple with no pension but $45,000 in savings. If they earned 4 per cent after tax on those savings, they would get $1800 a year.

Your $16,000, earning the same return, would bring in $640. Add half your pension and your total is $1858.

Still, we're hardly talking luxury incomes here.

I think it's fair a single person or a couple in long-term care should use up most of their assets before getting a subsidy. But I'm not sure the Government has got it right for couples with one in care.

Q: Would capital gains tax be due if shares were bought and sold and all the proceeds reinvested?

Would a safer way to do it be to buy the shares, pick up the dividend, sell the shares at a higher price and reinvest? That way could it be seen as investing for dividends rather than capital gain?

This article is what I have based my question on. [The reader enclosed a page from The New Zealand Sharemarket Letter, May 1999, which says: "If the purpose of an investment is to generate either dividends or interest, but the investment is subsequently sold, it may not be subject to capital gains tax.

"For example, an investor takes our advice and buys a company's shares, but then sells them the next day for a profit. The investor may not have to pay capital gains if their intention was to keep the shares but the market price on offer changed their mind.

"The best way to demonstrate that the intention was investment, not speculation, is to reinvest all the funds generated from the sale of the shares into another investment ...

"Effectively, an individual can buy and sell shares as much as they like without incurring capital gains, just so long as the proceeds are not all used for consumption."


A: I certainly wouldn't count on this advice. When Inland Revenue is deciding whether a gain on a share sale is taxable, it looks first at your purpose when you bought the shares.

The department also looks at how often you trade.

"If a person buys and sells on a regular basis, they could be in the business of share trading," says an Inland Revenue spokesman.

Too many decisions to sell the day after buying, even if you swear you had no intention of doing so, might not stand you in good stead.

What you do with the proceeds of a sale is a secondary issue, says Inland Revenue. "That would be something we would consider. It helps give a picture."

But, the department adds, "to say that 'as long as you don't use the proceeds on consumption you won't be caught' is not correct."

I should add that the IRD doesn't necessarily have the last word. The matter can be disputed, and cases sometimes wind up in court.

But nobody has ever convinced a judge that their gain wasn't taxable solely because they reinvested.

By the way, in the last paragraph quoted from the newsletter, I'm sure they meant to say "without incurring capital gains tax."

* Send your question to Money Matters, Business Herald, PO Box 32, Auckland; fax: (09) 480-2054; or e-mail: maryh@journalist.com. Letters should not exceed 200 words. Please provide a name and a (preferably daytime) phone number in case we need more information. We cannot answer all questions or correspond directly with readers.