Hard lessons, happy returns- A REVIEW OF MY BOOK BY BARRY DUNSTAN- 20th December 2002
Barry Dunstan - Australian Financial Review
There are some important lessons for smart investors to learn at the end of a pretty nasty investment year. The lessons are, basically, to understand what investment is all about.
Some people think investment has changed for the worse because the easy capital gains of the late 1990s are gone, but they are wrong. That wasn't investment; it was speculation.
Some people still think investment is about discovering and following the latest fads. They're wrong, too, but the lessons may take time to be learned and will probably be painful.
Some people think because there is so much information available for aspiring investors, they simply need a PC and an internet connection to become hot-shot investors.
They're especially wrong, because information isn't knowledge and knowledge isn't wisdom. Mostly, investment wisdom comes only from experience.
So, for aspiring smart investors, this is a season to be thoughtful; a time to seek wisdom and return to investment basics rather than speculative froth.
As if to confirm this, a couple of investment books have emerged recently which emphasise how investors can learn and prosper from the experience of other people.
First, there's Wealth of Experience, by Robin Bowerman and Jeremy Duffield. Bowerman is managing editor of Personal Investor and Asset magazines (published by John Fairfax) and Duffield is managing director of Vanguard Investments Australia.
Their book stems from a survey by Vanguard and input from the share experiences of a group of Australian Investors' Association investors. Its basis, the authors say, is a sign in a Melbourne shop: "You should learn from the mistakes of others because you can't live long enough to make them all yourself."
The book answers three basic questions: What was the best investment decision you ever made? What was the worst mistake? What advice would you give to a beginner?
It isn't another book which purports to impart the secrets of millionaire share traders or how to become rich through real estate speculation.
The authors say they don't believe the get-rich-quick idea happens in the real world and it doesn't do any good to encourage people to chase false dreams. Rather, the book emphasises down-to-earth things such as saving first in order to have something to invest - and starting early.
For those investors keen on property as an alternative to shares, the book contains a sobering reminder from work by Macquarie Funds Management, showing that by mid-2002 residential real estate is selling on a much higher price/earnings multiple than ordinary shares.
The second book, just released, is Motivated Money by well-known investment commentator Peter Thornhill. He wrote the book to satisfy a growing demand for investment knowledge, but also to change people's perceptions about wealth creation.
Thornhill, like the other authors, warns readers this isn't about how to make money and get rich quick; there are hundreds of books offering that. Rather, he says, his book is for those people who have a clear vision or dream they want to achieve.
He emphasises that people need a benchmark to measure how well they have invested. He recommends the S&P/ASX All Industrials accumulation share index since Thornhill is definitely a shares man rather than a residential property advocate.
The selection of an accumulation index is vital because, Thornhill says, it is the growth of ordinary dividends and the power of re-investing this income flow which produces the best results.
The results speak for themselves over a period from the end of 1979 to the end of last year. The All Industrials share price index increased 11.5 times (almost twice as much as the All Ordinaries), whereas the accumulation index (assuming dividends are reinvested) increased 33.5 times.
Many so-called experts forgot this basic wisdom at the height of the stockmarket bubble, when some of them solemnly advised investors that dividends would become obsolete. Now, all the analysis of likely future returns begins by building on the current dividend yield on offer.
"We need to go beyond seeing shares as purely growth assets," Thornhill says. "This one-dimensional view of assets remains the biggest trap for potential investors." Those buying shares just for the capital gain, he says, may be missing out on more than half the value which shares offer.
Wealth of Experience is published by Wrightbooks. Motivated Money is self-published by Peter Thornhill phone (02) 9498 5053, www.motivatedmoney.com.