Joining the dots 4th April 2000

Annette Sampson - Sydney Morning Herald

The rush to cash in on the dot.com share boom is changing not just how we invest, but our very way of life, writes Annette Sampson.


ONLY a couple of years ago the success stories in business magazines featured young entrepreneurs who had worked for five or 10 years to build small businesses worth a couple of million dollars, recalls Arun Abey, executive chairman of the financial services company IPAC Securities. "Today these people would be regarded as losers," he says, adding: "Everyone is talking about the guys who make $50 million in six months."

If greed was good in the 1980s, there's a feeling that it is now almost obligatory.

In the past four years, sharemarket profits have become the holy grail for legions of ordinary Australians, many of whom had barely looked at the financial press before taking their first step into what John Howard calls our shareholder democracy

A booming sharemarket, high-profile floats like AMP and Telstra, the availability of "one click and its done" online trading, and a political environment where the need to be financially self-sufficient has been hammered home, have combined to make Australia the top share-owning nation in the world in terms of the proportion which owns shares directly. More than 40 per cent of adult Australians - 5.7 million people - now own shares; 7.6 million own shares themselves or indirectly through managed funds.Thanks to the likes of Telstra and AMP, a fifth of the adult population - 2.9 million people - have become first-time shareholders since 1997.

Australia's love affair with shares is at three key levels. Among older Australians, years of low interest rates have turned more retirees away from term deposits and other bank-style products to shares.

"You're also seeing a lot of people taking redundancy," says Richard Kimber, head of the discount broker HSBC InvestDirect. "In the past they might have bought a milk bar but now they're taking the money and trading from home."

The baby boomers have also embraced the sharemarket as they reach their peak earning capacity with little or no savings for their retirement. A general manager with MLC Investments, Peter Thornhill, says many baby boomers who have accumulated wealth in their homes are now borrowing against it to prepare for retirement. "They're becoming aware [that] to live a reasonable lifestyle in retirement they will have to have a lot of money," he says. "And believe me, these people have lifestyle coming out of their ears."

But the big growth area is the under 35s. "Younger people don't expect a benevolent employer will look after them," says Thornhill. While home ownership is still important to them, rising house prices combined with an uncertain employment environment have prompted younger investors to look to alternative forms of saving. "They're willing to take risks, they're quick adopters of new technology, and if they want to invest just $2,000 or $5,000 they find a discount broker is happy to do it for them," says Ian Struthers, the managing director of the discount stockbroking firm TD Waterhouse. Struthers says up to 800,000 Australians have signed up with discount brokers - many trading online. For many online investors, he says, trading is entertainment as much as an opportunity to make money.

The leader in the market is Commonwealth Securities, a division of the Commonwealth Bank, with about 480,000 clients. "In many cases, it's the first-time shareholders who have come in through the major privatisations and are now looking to diversify their holdings," says managing director Paul Rickards. "Most are looking at the sharemarket for their longer-term savings."

Mix it all together, and what you have is a huge cultural shift in how Australians see their finances. Those whose parents saw buying their home, followed by an investment property, as the route to financial security are now looking at a broader portfolio - often centred on shares.

But while the investment community applauds the shift from an "unhealthy" obsession with property, there are rumblings of concern. Some say the early throes of this love affair may have been too passionate and blind to market realities.Will the passion end in tears when the market falls - as markets inevitably do?

Part of the problem is that everybody knows of someone who has made big money on shares. "Dinner parties have become a big occupational hazard," says HSBC's Kimber."And you can't get into a cab without hearing about the driver's share investments."

Private share trader Michael Liu says he initially became interested in shares after hearing stories from investors about how much they had made on privatisations such as the sale of the first tranche of Telstra shares.

That prompted him to educate himself. Unlike many new investors, Liu spent several months and a significant sum of money on education before investing. But, he says, the more you learn, the more risks you start taking. "I've changed from wanting a return that beats what you get from the banks to having higher expectations. You start off wanting 10 per cent, then 15, then 50 and so on and the next thing you know you're taking risks."

Liu says he minimises the risks by holding some of his money in gold and researching his decisions. He and his wife, Heather Gatenby, spend as long as 12 or 13 hours a day researching potential shareholdings and monitoring their portfolio. While they trade at the speculative end of the market, they have also avoided borrowing for their share investments.

Gatenby says she sometimes hears stories at the Internet sharemarket chatrooms of people who have taken a "hot tip", borrowed to buy it and ended up losing their house. These investors, she says, come online to knock whoever provided the tip, "but you should only speculate with money you can afford to speculate with".

Kimber says: "We certainly see people who shouldn't be betting as big as they are. There's a psyche that there is easy money ... and if you don't get in now, you're crazy."

At the other end of the spectrum, financial counsellor Narelle Brown says she hears stories of ordinary Australians buying shares on their credit cards. "A lot of people are getting into shares they know nothing about, simply because the price is right - like nine cents - or they've got a hot tip.There's a huge interest in buying shares, and in borrowing to buy, and some of these people are going to come a cropper."

Financial experts stress it is the people on the sharper edge of the market, rather than the majority of investors, who are treading close to the wire. But in the current "new economy" boom - where any company with a .com in its name is automatically judged to be a prime investment - it is easy to get sucked in by the euphoria.

"It's a nightmare selling the concept of blue-chip investments at the moment," says MLC's Thornhill. Even though these companies are growing their dividends at great pace, he says, they are coming up against speculative companies that could triple in value in a matter of weeks. "The worst part is that investors in these companies have actually begun to believe they are clever and have found a licence to print money," he says.

But he finds some solace in the fact that for the bulk of investors, these shares are "fun".

"A lot of them are only putting in small amounts on top of their existing portfolios ... but some are up to their necks in it."

Another area of concern is the huge growth in margin lending, which allows investors to borrow to buy shares using the shares as security. Reserve Bank figures show Australians had borrowed almost $5.5 billion through this form of lending as at December - with the loans outstanding up by almost $2 billion over the previous year.

However John Meagher, the marketing manager of margin lender Leveraged Equities, says his firm's clients have borrowed an average of only 50 to 55 per cent of the value of their shareholdings against maximum lending limits of 65 to 70 per cent. He says the industry average would be 45 to 50 per cent.

Commonwealth Securities' Paul Rickards says most of his firm's clients borrow just 45 to 46 per cent of their investment, so the market could fall about 30 per cent before they would have to cough up for a margin call. "I don't think it's any more risky than borrowing for an investment property if you know what you are doing and are comfortable with the risks."

Another growth area has been the use of home equity loans to fund share purchases. However, the nature of these loans - which let borrowers withdraw money against the value of their home with no questions asked - makes it impossible to determine how much home equity money is being used to purchase shares."I suspect a lot more people are using home equity loans because margin lending is still fairly embryonic, whereas people have borrowed against their homes for years," says Meagher.

Kimber says his firm is seeing a lot of clients using home equity loans "but most of them are being relatively conservative".

IPAC's Abey is more circumspect about the new shareholder culture than most - especially given its genesis in a rising sharemarket. "Yes, 50 per cent of Australians own shares, but the vast majority own just a couple of shares," he says. "It's a good step in the right direction but it's far from complete."

Talk to me again, he says, after one of those "grinding corrections" where share values can go backwards for a number of years. "That's when people will really understand the sharemarket.''


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