Embracing Risk This May
Sell in May and go away?
Henry Jennings argues the case for embracing risk and how to control, quantify and embrace it.
Why bother? I know it's tough out there!
Recently we have seen some indications from our members at Marcus Today suggesting that it is all
too hard. Why bother investing in equities when you can get 5% on a deposit? No risk. It has its appeal, that is for sure. We continue to see dramatic reactions to company upgrades and downgrades, and at times, it feels more like a lottery. Or one where they lay out the grid perhaps and send a cow in to do its business! The odds seem stacked against you. Consider the plunge in BAP recently, 24% in a day. And then there is the siren call of 5% reaching out from the rocks, luring you in.
I am a stock picker. Always have been, and always will be. There is merit in ETFs for exposure that is too hard to get locally. Using
Other People’s Expertise (OPE) to get exposure to India for instance, or a big pharma theme is very worthwhile. But for me, buying an ETF on the ASX 200, for instance, is just vanilla, and although with time it works for you, it does create wealth, it can take a while. Same with that risk-free money rate. You are not going to get rich from having your money sitting in a deposit account. In fact, you will be going backwards, with tax and the inflation rate whittling away the interest income.
And, of course, there are bank fees. The banks continue to make $32bn plus from us here in Australia. That is over 1000 bucks from every man, woman, and child. That is a lot of money. And the
dividends are franked. It is a wonderful system, so much better for investors than putting money in the same bank.
Buy the shares instead. I know there is a capital risk, but what do you care if the share price goes up or down, just as long as they continue to pay the dividends? The capital is something for your kids to consider! Or your estate trustee.
Life is about risk.
It is about balancing the risks we take; with the rewards we can earn. Every time
we cross the road, we embrace risk.
We could just stay in bed, but then most people die in bed, so there seems to be an inherent risk there! We can
avoid risk altogether with safe and secure investments. Maybe you are in that phase of your life when that is all that matters. 5% return to fund your lifestyle. But we are Australians. We are a country that should thrive on risk.
Just coming here 200 years ago would have been the riskiest thing anyone could do. Most didn’t really have a choice! But imagine the risks prospectors took to follow the gold rush in the 1850s. Arriving here in the 70s from Vietnam on a sinking boat was a massive risk; driving a Tesla with autopilot on is going to be risky; I don’t even trust my car to bleep properly when I park! We are a nation of gamblers. Look at the pokies. We are the country that brought the world the cochlear implant. The flu vaccine and the blood plasma products for serious diseases were from our shores. The Esky, the black box, pacemakers, the supermarket duopoly, the goon bag! Polymer bank notes, Macquarie cut a hole in a coin to enable more coins to be created. Even at one stage, it was thought that an Australian had created Bitcoin. Our past, present, and future are wrapped up in risk.
Our lucky country is endowed with vast resources that take risks to harvest and mine. Every time a farmer looks at a dry patch of land and wonders if walnuts or macadamia nuts would go better there, they consider the risk-reward. Peg some ground, raise some money, risk.
Marcus Today contains stock market education, commentary and actionable ideas.
We are entering what some are now calling the new confession season.
This is the annual
Macquarie Equities Conference. 100 companies are presenting
(have presented now). 1000 domestic and international investors attending. Many use the conference as an opportunity to confess an earnings issue. Some may upgrade. Many, and I suspect most, will ‘reaffirm guidance’. There is a lot of that about. Playing the safe game.
But there will be volatility. Some of it will be extreme. Some of it will drive investors towards bank deposits as it is all too hard. Some will be driven to ETFs. There are no 24% moves in a day on those. But for the days when things move 24%, that can be up as well. That can be a positive experience.
As investors, it is inherent in us to
weigh up the risk/reward. It is inherent in us to
Do Your Own Research (DYOR). The industry glosses over this in the disclaimers. We all know it. The general advice only, consult your own financial adviser (who can afford one of those these days?), etc. And DYOR. But do we really?
Stock picking and choosing to embrace risk takes time. It takes work. When we talk about making money, the act of ‘making something’ requires an effort, not just reading what some analyst, wet behind the ears and pushing a corporate barrow, writes. If you are not prepared to take the time and work at it, then bank deposits or an index ETF are for you.
If you believe that you can harness the massive amount of information publicly available, and in your inbox every day, to build real wealth, then stock picking is for you. I do not have the numbers, but I know that anyone who invested $10,000 in CSL when it was first listed is somewhat better off than someone who put the money in the bank, or was happy to settle for 5% elsewhere. What about anyone who bought Apple, Novo Nordisk or Nvidia?
The stock market is the purest and most accessible way to create wealth.
Some brokers offer almost free brokerage. $1 trades. Sure, there is property. But who can afford that? And then there are the transaction fees. Stamp duty, real estate agent fees. Strata fees, fights and increased levies, management fees, etc. Shares are cheap and easy to trade. Easy to diversify. Buy a house, and what happens if that area gets a nuclear power station next door?! With shares, you can diversify quickly, easily and cheaply. You cannot do that with housing. And the rental income is hardly a great return. You need the
property market to continue to rise to make any money. So, you assume some risk. Maybe it’s a small one, but it’s still there.
For me,
it’s a no-brainer. Bank deposits are short-term until you decide where to invest. Investment is about risk. Life is about risk. You just have to control, quantify and embrace it. It is a crap shoot at times. That is why diversification is important. If you put all your nest eggs in one basket, it had better be a good basket. You had better have done your research on that basket. But if you do and are happy, go for it. Wealth is built by people taking risks, not by putting the money on deposit. 5% before tax and before 3.5% inflation is treading water. Investors need to strike out for the shore.
Next week will be interesting and set the tone for the next 6 months. Try and keep on top of things and think outside the box. What really is happening out there, who will do well, who will lose, and where to place your investment dollars?
Good luck. But if you did the work, you should not need it!
More about the author – Henry Jennings
Henry Jennings, Senior Market Analyst and Media Commentator at the
Marcus Today Stock Market Newsletter, has been involved in financial markets since the 80s in London before emigrating to Australia. For the last seven years, Henry has been writing strategy and insights daily, and is a frequent media commentator on all things finance on ABC TV and Radio, SBS and ausbiz.
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