Warwick Lucas - Keen on the JSE?

This Article was written by Warwick Lucas and published on Fin24.co.za - A balanced view on Investing on the JSE!

IT'S well over 10 years that I've spent wrestling the market, and I have the scars to prove it! I have found it rewarding and intellectually stimulating. It is a journey of discovery, not a smash and grab, and as such, it is place where gamblers may be entertained for a while but never rewarded.

Right now we are after all in a bull market, and despite the rumblings and grumblings of old hands about high levels of return being unsustainable going forward, the siren song of profit for little effort, is unfortunately a popular one! The question I seek to address here is that of determining one's own suitability or otherwise for embarking on this journey.

What are shares? Contrary to popular opinion, they certainly are not mysterious or exclusive playthings for the rich. With the application of time, common sense and discipline, you can be a successful investor too.

A share is basically part ownership in a company, and stock exchanges developed in order to simplify the process of trading in these part ownerships.

Stock markets though do vary in sentiment from very rational to positively insane. Possibly the most notorious was the South Sea Bubble of the 1700s when no less than the Chancellor of the Exchequer was locked up in the Tower of London for fraud.

That market included a company whose prospectus stated "it was for carrying on an enterprise of great advantage, which nobody was to know what it was".

Needless to say 1000 deposits of £2 each walked in the night. Other unspeakable ventures may rear their ugly heads, but generally, the number of outstanding businesses that reward patient shareholders massively outweighs them. Despite being somewhat stifling at times, corporate governance has come a long way since those days.

Step1: Your own personal financial hurdles

# Are your debts paid off?

I am continually staggered at the number of people with credit cards, auto finance and home loans who look to the stock market to solve their financial problems. Avoiding paying interest is the same as earning it - tax-free - why go for a risky 14% when you can earn 11-12% risk-free? Aspirant stockbrokers writing their JSE exams would never pass if they advised otherwise. Watch the market by all means, but don't succumb to temptation to participate. The rule is simple: "Gear today, gone tomorrow."

# Your other financial ducks need to be lined up - do you have basic life assurance, RA's and Unit Trusts in place?

While your stock market portfolio may well grow large in time, it is vital to have core investments in place first, the whole investment game is a marathon, not a sprint.

# Ensure you have adequate cash or draw down facilities in place for emergencies.

# Can the initial outlay be spared?

Individual stock purchases are riskier than other types of investment than you'd have been used to. Prices of shares are driven by a perception of the sustainability of their dividends, and that can make them quite volatile. From time to time companies go bust, and that is a queue in which shareholders come last.

# If you HAVE to make money right now, you're not a good candidate for the market, you'd do better selling hot dogs. I can count on one hand the number of people I know who have made money with their back to a wall. The market is a mercurial creature, and doesn't just "behave". If it's a guarantee you want you should be shopping for a fridge.

Step2: Why look at the stock market at all?

# Equities have consistently proven to be the highest performing investment asset class available.

# Direct equity investment is best used to complement rather than compete with an existing Unit Trust portfolio, by someone who is looking to take an active interest in his or her own financial affairs. Certainly direct participation gives you a better feel for the forces affecting your investments.

# Your own share portfolio should be far more flexible than a Unit Trust Fund, many of which run into hundreds of millions of rands. That is your starting point for attempting to outperform your other investments. Unlike a product, shares are (on the whole) bought by clients, not sold by brokers. It also is very cost effective in that it eliminates a tier of costs often associated with packaged products.

# You can also seek out-performance by applying your specific expertise, no-one says you have to cover the whole market. For example, a retired bank manager could specialise in banking stocks. Similarly, your investment universe can also be wider than that of investment professionals, because smaller caps can be considered.

# Will you be able to sleep at night? Well if you're going to start, I would start small, and if I couldn't sleep, I'd sell until I could. You should be able to ENJOY investing on the market, because if you can't there are many simpler ways of investing your money. Despite the scars, I haven't stopped learning. There is no pressure to commit everything right away.

Next time I'll cover basic process and mental attitude.

Warwick Lucas is an industrials and quants analyst at Imara SPReid