MONEY MATTERS

MONEY MATTERS MONDAY 5TH APRIL 2010
By Robert Frogley

Investors Must Avoid Short Term Thinking

Most people are attracted by the idea of quick profits. Wouldn’t we all love to buy a share for $1 today and sell it for $20 in a couple of months? Profit without effort sounds better than working for a living. What’s the latest hot tip?

In reality picking things that will sky-rocket tomorrow is way too difficult. Some stocks may do that but they are one in a thousand. Trying to pick them is no better than a lottery, or betting on a horse. Serious investors should forget such ideas.

Instead they should favour investments with a much higher probability of success even though the returns won’t be nearly as spectacular. Investors can be successful if they focus on growing a portfolio over the long term. They must work on building wealth, not speculating.

People who look for quick profits, should understand spectacular returns are as rare as a needle in a haystack. People grossly underestimate how competitive the field of finance is.

Because everyone wants quick, easy money the number and skills of people who devote themselves to trying to find it are extraordinarily high. They are way ahead of the average person. However average investors can win by focusing on the long term.

They should aim to build wealth steadily rather than get rich quick. The greatest problem long term investors have is trying to filter out all the short term comment and influences that are only of interest to speculators and the press.

In fact most of the comment on the economy, financial markets and investments is short term focused. The capital city press wants sensational news such as recent share market losses, or stories that predict big losses tomorrow.

They love to report interest rates and home loan payments going up, or the gold price collapsing, or Greece going broke, or predictions of another big share market crash, or petrol prices going to $2 a litre because we are running out of oil.

The press has to attract readers and viewers, but they aren’t the only problem. Stock brokers make money when people buy or sell. They go broke if people sit on what they already have and do nothing. So broker comment is designed to offer quick profits and get investors doing something.

Then there are the droves of speculators. These are the futures and options traders and the hedge fund operators. They are all trying to make quick profits by buying something with a small deposit and seeing a small price move multiplied by the gearing generate instant large profits.

They are all short term focused. Buy today, sell tomorrow. They love the fear and the greed in the short term. Issues like Greece’s debts are ideal for them. They punt on how bad it will be and how financial markets will react over the next few days or weeks. They love the high risk trading.

However over the longer term we can invest with reasonable safety. The issues that make good headlines and concern the short term speculators have zero interest for long term investors such as those trying to grow their portfolio and superannuation for their retirement many years away.

Long term investors must filter out what is not important to the medium and long term, and that’s most of the messages we hear. We want to know where the economy is going over the next five years, not the next five weeks. That’s what we are really interested in, but it’s rarely reported.

The share market has earned 12.5 per cent per annum compound over the 30 years to 31st December 2009, even though it’s way below its previous peak. Commercial property has done nearly as well. That’s what we must remind ourselves.

Fortunately the prospects for continued economic recovery and progress over the next five years are very good and wealth builders should do very well.