It's good to share- 27th August 2003

Annette Sampson - Sydney Morning Herald

Australians are notoriously fickle when it comes to the sharemarket, either chasing over-valued stocks or jumping at shadows. Is it time to change our thinking on shares? Annette Sampson reports.
Shares are the good time girls of the financial dating game. Fun to flirt with, briefly satisfying, even the subject of a passing grand passion. But when it comes to commitment, Australians investors' minds still turn to property.

Property is where we store our wealth. It's the long-term investment that we aspire to and are willing to put in an effort to make it work. We understand there are cycles in the property market, but also understand that you'd be a mug to sell at the bottom of these cycles unless you absolutely had to.

Shares, on the other hand, are good when they're going up. But most investors don't want to have big money in the sharemarket when it's going through one of its inevitable down cycles, and we can't help feeling that shares are still inherently more risky.

Investment educator Peter Thornhill, the principal of Motivated Money, reckons we even have a different lexicon when we're talking about property versus shares. He says everyone talks about "investing" in property - even when they're speculating wildly at the height of a property boom. But when we talk about shares we talk of "taking a punt", or of having a bit of money that we can "afford to lose".

IPAC Securities' executive chairman, Arun Abey, says the entrenched phrase "making a killing on the sharemarket" is at the heart of the problem. "We see the sharemarket as an extension of the racetrack, not a legitimate long-term source of wealth," he says.

Is it that property is an intrinsically better investment than shares? Or do we just not "get" shares in the same way that we seem to understand the merits of investing in bricks and mortar?

Money asked some of the experts the real story behind the truisms we keep hearing about the relative merits of shares and property, and found the two types of investments are not that different at all. Most experts believe there is room for both in a properly structured long-term portfolio. We talk of the "long term" with property, but we're also prone to getting carried away by the excitement of a hot market - and making many of the mistakes that we make investing in a bull sharemarket.

But overall you can't help feeling that if investors applied more of their long-term "property" thinking to shares, our flirtation with the sharemarket could develop into something deeper and more financially rewarding.

Shares aren't 'real' assets like property. Abey says that for many people shares are pieces of paper that go up in value one day and down the next. We don't always "get" the fact that we're really buying pieces of productive (or unproductive, as the case may

be) businesses.

"What people miss is that both the property and share markets are the same thing," says Abey. "In both cases you invest by buying a piece of paper that gives you ownership of part of the economy.

"But when you buy a whole property, you take control of it. Because you have physical possession, it seems very tangible. If you buy shares in BHP [Billiton] the tangible evidence of what you own is actually much greater, but it's distant. Because you don't control it, it feels less tangible. That perception can be costly as it usually leads investors to be overweight in property and underweight in shares."

Robert Keavney, the chief executive of Centrestone Wealth Management, says this misconception also leads to people being scared to take risks with shares that they would happily take with property.

"Nobody really believes there's a real risk that corporate Australia will disappear," he says. "But people do have the strange feeling that the stockmarket could do just that. They don't understand the stockmarket is just a place where you can buy and sell pieces of Australia. If you won't invest in Westpac because you're worried the banks may go broke, then you should take all your money out of the banks as well. But people don't tend to make that connection."

The bottom line is that wealth is created in the modern capitalist world by participating in productive and growing economies. You can work to create wealth, and your wages are more likely to rise if the economy is growing. You can lend money to productive enterprises. Or you can buy a slice of the action by investing in "equity".

The professionals tend to use "equity" as another word for "shares", but it actually concerns a broader ownership. Abey says most of us don't realise that property is just a sub-class of "equity" investment, not a stand-alone beast at all.

"The demand for property is actually derived from the broader economy," he says. "If companies overall are not doing well and not employing people, the residential property market will go down the tube too.

"In theory, if someone landed from Mars and asked how the economy worked, they would think the return from operating companies must surely be at least equal to the return from property, because unless operating companies were making money there would be no demand for property," he says.

Shares are risky, property is not. Imagine for a moment, says Peter Thornhill, that shares weren't traded every day. The stock exchange was closed down and only allowed to open one day each year when everyone could buy and sell what they wanted. You'd immediately eliminate all those knee-jerk reactions to minor bits of news and gossip. Odds are that while prices might still vary a lot from year to year, the movements could be simply explained.

Also imagine that all the impediments to trading property were removed. You could buy and sell houses within minutes and each night your home would be auctioned and its current "value" flashed across the evening news. Now, which investment would seem safer?

"Every asset is affected by movements in the global economy, but the lead time is different," says Cavil Singh, the head of broking investment services with Godfrey Pembroke. "The effect on the sharemarket is immediate, but there is a lag before something affects property prices because property is not traded frequently."

This means the property investment cycle is often out of sync with the cycle in share prices. In different periods, each can be seen to be doing better than the other. It also means property prices are less volatile from day to day than share prices - though in the longer term, prices of both assets will reflect what's happening in the broader economy.

Abey says many investors make the mistake of thinking the greater volatility of shares means they are also riskier. "But the greatest source of long-term return in the sharemarket is taking on that volatility," he says. "Your aim shouldn't be to avoid volatility but to ensure you can ride it out. And that means making sure you have a well-diversified portfolio of quality shares."

Thornhill says the enormous liquidity of the sharemarket exacerbates price movements as people who are nervous can bail out quickly - whether that is justified or not. He says this leads to an almost blind focus on the current value of your holdings and a lack of attention to the income stream being generated.

"The last two years have been a wonderful period for dividends even though share prices have been tanking," he says. "Australians tend to undervalue income. But ultimately it is the income stream that determines the value of an investment over the long term. No one would invest in a term deposit that paid no interest; nor will they invest in a company that remains unprofitable or a rental property that you couldn't rent."

Thornhill says it's also incongruous that investors who would think it risky to "punt" more than $5000 or $10,000 on a particular share but have no qualms borrowing $200,000 or more to buy an individual property.

Shares are difficult to understand and add value to, property is not. Brian Thomas, the head of retail funds with Credit Suisse Asset Management, says property often seems easy because we learn about it from friends and family who own their own homes.

When we do decide to experiment with shares, most of us start by doing the same thing we'd do with property - buying shares in a single company that looks promising. Unfortunately, while corporate Australia as a whole isn't likely to go broke, single companies can. Investors who don't understand diversification are most likely to get bitten.

It's true that share analysis involves making the effort to understand a company's business and prospects. But Singh points out that the level of research available on listed companies is much higher than the research available in the property market, where buyers often act on limited information from vendors and agents mixed with gut instinct.

OK, so you can't add value to your Woolworths shares by writing a cheque and telling management to renovate your local store.


But neither can you get added returns from your investment unit if new technology makes a particular business or industry more productive.

Abey says we are in the midst of three of the biggest technological booms in history - booms in biotechnology, material science, and information technology - which will inevitably benefit astute share investors.

Abey says shares can also give investors exposure to changes in the world economy. He believes we are at the beginning of a new economic epoch that will see the emergence of China as a major economic power, which will present real opportunities for investors.

To be a successful share investor, says Kerr Neilson, the managing director of Platinum Asset Management, you have to look forward, not back. Property investors do this instinctively. They tend to look for up-and-coming areas rather than investing in areas that have experienced big price growth.

But Neilson says share investors are less inclined to buy undervalued assets. "It's counter-intuitive for most people to buy things when other people are not buying."

Share investors, he says, should be trying to buy a slice of a country's economic growth or an industry that's in transformation. "You can't just say shares have been good for 20 years so you should get more of them."

One of the problems with both share and property investments, says Keavney, is that buyers are at their most enthusiastic after big price runs. "They get mesmerised by the idea that if something has done well in the past it must do well in the future," he says. "They get drawn in at the wrong time."

The graph at left (provided by AMP Henderson Global Investors) shows the movement in share and house prices in recent years (at the bottom), and investors' views on the best place to invest. Ironically, as prices became more expensive in each sector, investors were more inclined to want to jump on the bandwagon. Neilson says this hindsight also leads investors to believe that they can't lose money by "betting on the favourite".

"They buy a blue chip company and think they've got the best of the best and will make a profit," he says. "But they're working on the past and not linking that with what's happening today."

Thus many small investors have become disillusioned with the market after suffering losses on household names like Telstra and AMP.

The returns from property are better. Sydney and Melbourne dinner party conversations take this as an established fact. But the comparisons can be murky.

Abey says there's no argument about share prices as they are confirmed on the stock exchange each day. Broader market figures - such as the return from the All Ordinaries Index - are calculated after all costs except brokerage.

With property, however, you only know for sure what something is worth when it is sold. Most property owners have an approximate sum in their heads based on what other properties are selling for, but if they are wrong there's no hard evidence to tell them otherwise. Abey says broad market figures - such as the movement in median house prices - can also be rubbery because they don't take into account the costs of maintaining and owning property, or the massive amounts spent on renovations to improve their value.

Thomas says the fact that "hard" prices aren't readily available for property gives it an allure that shares don't have. We can kid ourselves our investment is worth more than it is and so we tend to think the returns from property are better than they may actually be.

When we invest in shares, we tend to be unrealistic in our expectations of how much return we should get for the extra "risk" we're taking.

Keavney says people who really understand the sharemarket don't believe for a minute that they can get returns of 30 per cent year in, year out. "The only people who do that are those with a fraction of the knowledge and experience of a top fund manager like Robert Maple-Brown," he says.

In the same way that amateur golfers attempt shots the experts would never do, he says, amateur investors take big risks in the hope of unlikely payoffs. He says the average return from the Australian stockmarket over the past 100 years has been about 8 per cent a year after inflation, not 20 or 30 per cent.

Over the longer term, says Singh, shares should give you a return of the country's economic growth rate plus a premium for the risk or volatility that you have taken.


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