Timing alone is not enough

Q. You speak about success in shares coming from skill, hard work or luck. All great virtues I am sure, but you miss one key essential to all success in this life - timing.

An Australian media magnate with impeccable timing, just as everyone else was still buying up, cashed up all his many assets months before the October 87 share crash.

After selling his TV channel to Alan Bond for $1 billion, he said quietly he would buy it back for one quarter of his selling price; he did a couple of years later off the receiver.

Another example is a hard-working farmer I knew who went share farming in Perth's wheat belt, only to find his first crop came in the worst drought in history. He never recovered from that failed crop.

No amount of skill or hard work could save him. You may say he had bad luck, I say he had bad timing.

To succeed in business, you need a timing expert to tell you when to start up, when to downsize and when to expand. Buying shares is similar. Timing is everything.

A. Sure, it's possible in some areas to make useful predictions.

Your Aussie magnate presumably knew lots about the TV channel and about Bond, and so he could foresee Bond's demise.

For the farmer, though, it looks like bad luck to me - unless the long-range forecast was for a drought and such forecasts are pretty reliable in that part of the world.

As for the magnate's foresight on the share crash, whether he was clever or just lucky is anybody's guess.

In any share boom, there are always doomsayers advising investors to get out. For a while - sometimes for years - they are wrong and those who take their advice miss out on further big price rises.

Then, suddenly, a crash comes, and whoever happened to predict doom right before it gets lots of credit.

In the share market, timing is a mug's game. Nobody knows when a share or a market has reached a peak or a trough until well afterwards. And those who try to time the market often end up missing lots of the good stuff.

An investor in the United States share market between 1992 and 2002 would have made 10 per cent a year, before tax, if he stayed in the market the whole time.

But if he traded in and out, and happened to miss just the five best days - out of more than 2500 trading days - his return would have dropped to 7.5 per cent.

If he missed the 20 best days, it would have been only 3 per cent, and if he missed the 30 best days, a mere 0.8 per cent a year.

Missing all of those days would, of course, be incredibly unlucky. But even if he missed half, his return would be severely cut.

It's smarter to buy and hold shares over the long term than to try to time markets.

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Q. Your recent criticism of the NZ stock exchange's subsidiary NZX Funds Management, for promoting their new FONZ index share fund by quoting its 12-month returns, raises an important question as to why New Zealanders are so fond of buying mortgaged real estate rather than investing in a managed fund.

The answer lies in the dismal performance of the NZ managed funds industry. Economist Dr Gareth Morgan in a series of Herald articles concluded that fund managers do not add any value to their clients' investments after deducting their fat fees.

My own research supports this. I analysed the performance of 244 managed funds over the past five years with more than $12 billion of investors' funds.

The return on this colossal sum was a meagre 2.5 per cent per annum after tax.

If you had left your funds in a six-month bank deposit you would have earned 3.7 per cent per annum after tax, with little risk - unlike investors who put their savings into international equity managed funds only to see capital losses, exchange rates and management fees eat into their nest eggs.

It is little wonder, given the woeful performance of this country's highly paid fund managers, that Kiwis prefer to pay off their mortgages and splurge on electronic appliances and overseas trips rather than saving for the future.

A. True, the FONZ promoters were most remiss for publicising returns over such a short period. But you're not being entirely fair, either, looking at five-year returns.

I reckon potential investors in share funds should consider at least 10 years of data and, preferably, 20 or 30 years.

As it happens, the last five years have been extraordinarily tough for any fund holding international shares.

Over longer periods, they have done considerably better.

Having said that, I agree that many share fund managers charge too much and don't seem to add much, if any, value.

That's a major reason why I recommend index funds, such as FONZ - despite its misleading advertising. Index funds charge lower fees because they need much less management.

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Q. I have realised for a while that people who can 'make their own people' (to paraphrase Jerry Seinfeld) tend to feel superior to other people, but the number of letters suggesting they get tax breaks because of it is starting to annoy me.

Because a person has children they should pay less tax than childless folk?

Give me a break. If these people are blessed with the ability to procreate, AND to have incomes in a higher tax bracket, what on earth do they have to complain about?

Do they realise that childless people will have no option but to support themselves when they get old, and maybe that's why they work hard to try and earn enough?

A. You make some excellent points.

While parents might not always feel lucky to be parents, a little counting of blessings wouldn't hurt.