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Share Investing 4th Australian Edition

by James Dunn

Share Investing For Dummies®, 4th Australian Edition Published by John Wiley & Sons Australia, Ltd Level 1, 155 Cremorne Street Richmond, Vic 3121

www.dummies.com Copyright © 2023 John Wiley & Sons Australia, Ltd The moral rights of the author have been asserted.

ISBN: 978-0-730-39653-6

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Contents at a Glance Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Part 1: Putting the Share in Sharemarket. . . . . . . . . . . . . . . . . . . . . . 7 So, You Want to Invest in Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 CHAPTER 2: Watching the market operate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 CHAPTER 1:

Part 2: Investing Strategies for Success. . . . . . . . . . . . . . . . . . . . . . . . 39 Developing an Investment Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 CHAPTER 4: Assessing Your Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 CHAPTER 5: Eggs and Baskets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 CHAPTER 3:

Part 3: Buying, Buying, Sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 Buying and Selling Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 CHAPTER 7: Knowing When to Buy and Sell Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 157 CHAPTER 8: Buying What You Know. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 CHAPTER 9: Buying Specialised Shares and Other Listed Products. . . . . . . . . . . . . . 217 CHAPTER 10: Choosing Shares Wisely. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 CHAPTER 11: Why Share Prices Change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251 CHAPTER 12: Working with Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 CHAPTER 13: Initial Public Offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 CHAPTER 6:

Part 4: Doing Your Homework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343 CHAPTER 14: Crunching the Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

345

CHAPTER 15: Following the Money Trail: Fundamental Analysis. . . . . . . . . . . . . . . . .

367 387 CHAPTER 17: Using Online Tools to Research Your Investments. . . . . . . . . . . . . . . . . 415 CHAPTER 18: Taxing Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 435 CHAPTER 16: Charting the Intricacies of Technical Analysis . . . . . . . . . . . . . . . . . . . . .

Part 5: Shares Are for Everyone. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 451 CHAPTER 19: Bankrolling Your Superannuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

453 CHAPTER 20: Investing in Overseas Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477 CHAPTER 21: The Exotic World of Derivatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495 CHAPTER 22: Leverage and Speculation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517

Part 6: The Part of Tens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 531 CHAPTER 23: Ten Great Investors and Their Strategies. . . . . . . . . . . . . . . . . . . . . . . . .

533 CHAPTER 24: Ten Great Books to Read Next. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547 CHAPTER 25: Ten Great Sharemarket Crashes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 555 CHAPTER 26: Ten Great Australian Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565 CHAPTER 27: Ten Things Not To Do, Ever. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 583

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 591 Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 611

Table of Contents INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 About This Book. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Foolish Assumptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Icons Used in This Book. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Where to Go from Here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

PART 1: PUTTING THE SHARE IN SHAREMARKET . . . . . . . . . . . . 7 CHAPTER 1:

So, You Want to Invest in Shares . . . . . . . . . . . . . . . . . . . . . . . 9 Investing Is All about Timing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Finding Out What a Share Is . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Sharing the profit, not the loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Understanding the market in sharemarket. . . . . . . . . . . . . . . . . . . . 15 Buying Shares to Get a Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Earning a profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Investing carefully to avoid a loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Making the Most of Share Investing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Capital growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Shareholder discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Divisibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Guarding Against Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

CHAPTER 2:

Watching the market operate. . . . . . . . . . . . . . . . . . . . . . . . . . 23 Floating: The Primary Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Understanding why companies float . . . . . . . . . . . . . . . . . . . . . . . . . 24 Raising money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Planning the Prospectus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Trading: The Secondary Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Finding the market action at ASX Trade. . . . . . . . . . . . . . . . . . . . . . . 28 Buying and selling for everyone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Working with a go-between. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Using the Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 The All Ordinaries index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 The S&P/ASX 200 index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 The Dow Jones. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 The Nasdaq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 The S&P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 The Footsie and the rest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 The mighty MSCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Stepping into the Futures Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Table of Contents

v

PART 2: INVESTING STRATEGIES FOR SUCCESS. . . . . . . . . . . . . . 39 CHAPTER 3:

Developing an Investment Strategy . . . . . . . . . . . . . . . . . . 41 Getting Rich Slowly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Giving yourself time in the market. . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Compounding magic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Starting with Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Spreading the risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Setting your goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Setting your time frame . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Setting your risk tolerance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Setting your financial needs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Buying and Holding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Timing your strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Trading on your portfolio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Timing for the long run. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

CHAPTER 4:

Assessing Your Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Gambling or Investing?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 The bad news: Risk is inescapable . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 The good news: Risk is manageable. . . . . . . . . . . . . . . . . . . . . . . . . . 63 Spreading the news: Risk increases your return. . . . . . . . . . . . . . . . 65 Assessing Your Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Market risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Financial risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Commodity risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Liquidity risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Business risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Product risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Legislative risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Technical risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Engineering risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Project risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Valuation risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Political risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Expansion risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Currency risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Specific risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Sector risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Fraud risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Agency risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Non-financial risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Information risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

vi

Share Investing For Dummies

Avoiding the Turkeys. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Using technical analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Watching cash flow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Charting dividend changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Gauging who’s selling — or buying. . . . . . . . . . . . . . . . . . . . . . . . . . . 97 CHAPTER 5:

Eggs and Baskets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Spreading the Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Building a Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Buying growth stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Finding value stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 Knowing How Many Stocks to Buy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 Picking your sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 Choosing core stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 Evaluating second-liners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Gambling on specs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 Diversifying through Managed Funds . . . . . . . . . . . . . . . . . . . . . . . . . . 129 Investing outside Australia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 Considering Alternative Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . 135

PART 3: BUYING, BUYING, SOLD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 CHAPTER 6:

Buying and Selling Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 Finding the Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 Setting the pace — how the ASX trades. . . . . . . . . . . . . . . . . . . . . . 141 Getting order depth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Getting trade history. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Paying your way. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Making a Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 Placing an order. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 Utilising market depth information . . . . . . . . . . . . . . . . . . . . . . . . . 146 Finetuning your order. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 Closing an order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 Working the Trading Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 Estimating the costs for trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 Making the final settlement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 Transferring off-market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 Playing CHESS Isn’t a Game. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

CHAPTER 7:

Knowing When to Buy and Sell Shares. . . . . . . . . . . . . . 157 Getting Ready for the Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 Loving your shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 Buying smart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 Selling smart. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

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Going into Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 Using fundamental analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 Working with technical analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 Investing or Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 Buying as an investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 Selling as an investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 Buying as a trader. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 Selling as a trader . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 Relying on Your Broker. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 Looking and Listening. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 Analysing takeovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 Taking note of profit warnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 Watching index changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 Capitalising on turnaround situations . . . . . . . . . . . . . . . . . . . . . . . 180 Being a contrarian investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 Watching for insider activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 Taxing Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 Minimising capital gains tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 Selling to take a tax loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 CHAPTER 8:

Buying What You Know. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 Acquiring Ordinary Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 Buying blue chips. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .184 Looking at industrial and resources companies. . . . . . . . . . . . . . . 187 Deciding What to Buy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 Buying what you know . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 Retreating behind defensive stocks . . . . . . . . . . . . . . . . . . . . . . . . . 212 Cycling your way to recovery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 Scooping the small-caps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 Punting on speculative stocks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215

CHAPTER 9:

Buying Specialised Shares and Other Listed Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 Looking at Listed Investment Companies (LICs). . . . . . . . . . . . . . . . . . 218 Engaging with Exchange-Traded Funds (ETFs) . . . . . . . . . . . . . . . . . . . 221 Active ETFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 Themed ETFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226 Protection ETFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 Visiting the Hybrid Part of the ASX Zoo . . . . . . . . . . . . . . . . . . . . . . . . . 230 Considering exchange-traded bonds. . . . . . . . . . . . . . . . . . . . . . . . 231 Moving with the mFunds market . . . . . . . . . . . . . . . . . . . . . . . . . . . 232

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CHAPTER 10:

Choosing Shares Wisely . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 Selecting a Strategy That Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 Sticking with your strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 Throwing darts as a strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 Giving your strategy time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 Playing it smart and safe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 Choosing small over big. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 Developing Your Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 Taking a mechanical approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 Investing in a style to suit you. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 Buying profits or buying blue sky . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 Knowing When to Buy Resources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246

CHAPTER 11:

Why Share Prices Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251 Influences on the Price of a Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252 Pricing and liquidity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254 Earnings, earnings, earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256 The pull of the P/E. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 P/E expansion and contraction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 The tyranny of expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 Watching out for announcements . . . . . . . . . . . . . . . . . . . . . . . . . . 261 Profits, expectations and ‘confession season’. . . . . . . . . . . . . . . . . 262 Judging quality of earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 The Economy as a Predictor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 Reacting to News. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 Boosting power of takeover bids . . . . . . . . . . . . . . . . . . . . . . . . . . . 272 Relying on rumours and tips. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276 Insider trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 Rejecting Murky Offers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 Manipulating the price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 Marking the close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 Wash trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 Ramping. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 Clocking Emotions and Biorhythms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 Pacing the Seasons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282

CHAPTER 12:

Working with Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 What a Broker Does . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286 Stockbroking for Everyone. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287 Buying full-service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288 Going online — or on the phone. . . . . . . . . . . . . . . . . . . . . . . . . . . . 289

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Choosing the Best Broker for You. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 Fighting for full-service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296 Doing the research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296 Paying for service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297 Interviewing for a Broker. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297 Making the most of full-service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 Forging a new relationship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 Using broker sponsorship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301 Locating the ideal broker. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301 CHAPTER 13:

Initial Public Offerings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 The Float Slipway. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304 Staying afloat. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306 That sinking feeling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307 Understanding the Prospectus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312 Anatomy of a (Successful) Prospectus. . . . . . . . . . . . . . . . . . . . . . . . . . 316 Getting an overview of the company . . . . . . . . . . . . . . . . . . . . . . . . 317 Reading the chair’s letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318 Getting the investment highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . 320 Digesting the financial information . . . . . . . . . . . . . . . . . . . . . . . . . 321 Dealing with risk factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322 Checking out the key people. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324 The nuts and bolts of the offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324 Reviewing the independent experts’ reports . . . . . . . . . . . . . . . . . 326 Searching for additional information. . . . . . . . . . . . . . . . . . . . . . . . 327 Getting to the application form. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327 Pricing a Float. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327 Running the numbers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329 Building the book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330 The importance of timing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330 Getting into the Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331 The undemocratic world of allocations . . . . . . . . . . . . . . . . . . . . . . 331 Using subbies and firms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333 Stagging a float . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335 Placements and Rights Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339

PART 4: DOING YOUR HOMEWORK. . . . . . . . . . . . . . . . . . . . . . . . . . 343 CHAPTER 14:

Crunching the Numbers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345 Getting the Price Right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345 Working Out Liquidity Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347 Current ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347 Quick ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348

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Understanding Debt Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348 Debt-to-equity ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348 Shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349 Interest cover. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349 Debt to cash flow ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350 Using Profitability Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351 Return on equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351 Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 Linking the Margins. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353 Drawing on Performance Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353 Price/earnings (P/E) ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354 Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356 EBITDA multiple. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356 Pricing growth by PEG. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357 Earnings yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358 Dividend yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358 Dividend cover. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359 Payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360 Free cash flow yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360 Revenue multiples. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361 Net tangible asset value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361 Price to NTA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363 Crunching More Numbers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363 EBIT and EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363 Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 Dilution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 Capital adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 CHAPTER 15:

Following the Money Trail: Fundamental Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367 The Fundamentals of Fundamental Analysis . . . . . . . . . . . . . . . . . . . . 368 Reading the Income Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369 Profit (or loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369 Finding Balance Sheet Bliss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371 Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373 Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373 Shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374 Examining the Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . 374 Generating company cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375 Calculating net cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376 Factoring in quarterly cash flow reports . . . . . . . . . . . . . . . . . . . . . 377

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Looking at a Case Study: XYZ Limited. . . . . . . . . . . . . . . . . . . . . . . . . . . 378 XYZ’s fundamental details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378 XYZ’s ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381 CHAPTER 16:

Charting the Intricacies of Technical Analysis. . . . . 387 Understanding Technical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388 Creating the Chart. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389 Drawing a line chart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389 Stepping up to a bar chart. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390 Getting the point-and-figure chart . . . . . . . . . . . . . . . . . . . . . . . . . . 391 Lighting the candlestick chart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393 Charting with arithmetic and logarithms. . . . . . . . . . . . . . . . . . . . . 394 Watching Market Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396 Moving average. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 Support and resistance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 Interpreting the Chart. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402 Finding channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402 Locating gaps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404 Identifying consolidation patterns . . . . . . . . . . . . . . . . . . . . . . . . . . 405 Identifying reversal patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409 Leaving the Charts Behind. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413

CHAPTER 17:

Using Online Tools to Research Your Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415 Making the Most of the Web. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416 Finding Investment Websites. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418 Getting information for free . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418 Paying for content. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422 Turning to your broker. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428 The App Revolution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429 Perusing the Podcast Pack. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431

CHAPTER 18:

Taxing Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 435 Benefiting from Dividend Imputation . . . . . . . . . . . . . . . . . . . . . . . . . . 435 Franking credits made easy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436 Franking credit refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440 Obeying the 45-day rule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441 Watching Your Capital Gains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441 Calculating your liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441 Reducing the tax office’s take . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442 Taxing Tactics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443 Tax-loss selling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443 Using a delisted dog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444

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Biting on a buyback. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445 Borrowing a tax deduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446 Keeping tax breaks in perspective . . . . . . . . . . . . . . . . . . . . . . . . . . 447 Trading as a business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 Keeping a record. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450

PART 5: SHARES ARE FOR EVERYONE. . . . . . . . . . . . . . . . . . . . . . . . 451 CHAPTER 19:

Bankrolling Your Superannuation. . . . . . . . . . . . . . . . . . . 453 Dissecting Superannuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453 Funding your future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456 A super concept. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456 The adequacy dilemma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458 The gaps in super . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460 Two carrots but no stick. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461 Apportioning the super pool. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462 Accumulating funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463 Managing the nation’s super. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464 Tantalising Tax Breaks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466 The Not-So-Super Part of Super: Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 468 Taking Control: Self-Managed Super . . . . . . . . . . . . . . . . . . . . . . . . . . . 470 Diversifying SMSF assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471 Complying with the law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473

CHAPTER 20:

Investing in Overseas Shares. . . . . . . . . . . . . . . . . . . . . . . . . 477 Going Offshore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477 Investing in the mega-stocks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480 Getting a bite of the FAANGs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481 The passport to performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 482 ETFs: Revolutionising offshore investing . . . . . . . . . . . . . . . . . . . . . 484 Where to Invest? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486 Deciding the Best Way to Invest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 488 Going directly to the source. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489 Dealing with currency risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492

CHAPTER 21:

The Exotic World of Derivatives. . . . . . . . . . . . . . . . . . . . . . 495 Understanding Options and Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . 496 Exercising your options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496 Recognising the highs and lows of options. . . . . . . . . . . . . . . . . . . 499 Working through options transactions . . . . . . . . . . . . . . . . . . . . . . 500 Trading in the World of Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507 Investing in trading warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507 Tracking the index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 508 The mighty MINI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 509

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Graduating to Investment Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 512 Instalment warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512 Gearing into the dividend. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 514 Self-funding instalments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 515 CHAPTER 22:

Leverage and Speculation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517 Leveraging through Margin Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . 517 Borrowing to buy shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518 Borrowing against your shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523 Using the tax tactic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523 Sleep-friendly leverage: Protected loans. . . . . . . . . . . . . . . . . . . . . 524 Speculating with Contracts for Difference. . . . . . . . . . . . . . . . . . . . . . . 524 How CFDs work. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 525 ASIC’s CFD crackdown. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527

PART 6: THE PART OF TENS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 531 CHAPTER 23:

Ten Great Investors and Their Strategies . . . . . . . . . . 533 Warren Buffett and Charles Munger . . . . . . . . . . . . . . . . . . . . . . . . . . . 533 John Neff. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 537 Benjamin Graham. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 538 Philip Fisher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539 Jim Slater. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540 Charles Viertel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 541 Peter Lynch. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542 John Bogle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543 John Templeton. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544

CHAPTER 24:

Ten Great Books to Read Next . . . . . . . . . . . . . . . . . . . . . . . 547 The Warren Buffett Way. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547 One Up on Wall Street . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 548 Value.able. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 549 Where Are the Customers’ Yachts?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550 Common Stocks and Uncommon Profits. . . . . . . . . . . . . . . . . . . . . . . . 550 The Battle for Investment Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 551 Masters of the Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 552 The Ascent of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 553 The Mining Valuation Handbook. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 553 Crashes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 554

CHAPTER 25:

Ten Great Sharemarket Crashes. . . . . . . . . . . . . . . . . . . . . 555 The Tulip Mania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 556 The South Sea Bubble. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 556 October 1929. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 557

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October 1987. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 558 The Great Japanese Crash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 558 October 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 559 March/April 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 560 September 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 560 The Global Financial Crisis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 561 The 2020 COVID Crash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 562 CHAPTER 26:

Ten Great Australian Stocks. . . . . . . . . . . . . . . . . . . . . . . . . . 565 Westfield Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565 CSL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 566 Cochlear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568 Pro Medicus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 569 Washington H. Soul Pattinson. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570 Fortescue Metals Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572 Sonic Healthcare. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 574 REA Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575 Afterpay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 577 BHP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 579

CHAPTER 27:

Ten Things Not To Do, Ever . . . . . . . . . . . . . . . . . . . . . . . . . . . 583 Don’t Think You Can Get Rich Quick. . . . . . . . . . . . . . . . . . . . . . . . . . . . 583 Don’t Underestimate Volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .584 Don’t Be Panicked Out of Your Shares. . . . . . . . . . . . . . . . . . . . . . . . . . 585 Don’t Ignore Dividends (Especially Franked Ones). . . . . . . . . . . . . . . . 586 Don’t Buy a Share You Know Nothing About. . . . . . . . . . . . . . . . . . . . . 586 Don’t Expect Things to Stay the Same . . . . . . . . . . . . . . . . . . . . . . . . . . 587 Don’t Delay a Sale to Save Capital Gains Tax. . . . . . . . . . . . . . . . . . . . . 588 Don’t Let Tax Drive Your Investment Decisions . . . . . . . . . . . . . . . . . . 588 Don’t Fret Over Lost Profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 589 Don’t Try to Time the Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 589

GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 591 INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 611

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Introduction

I

said these important words in the first three editions of this book, and now I’m saying them again — thanks for choosing Share Investing For Dummies. In this fourth edition, I bring you up to date on how the Australian sharemarket is dealing with the massive societal and economic changes wrought by the global COVID-19 pandemic; as it happens, in the introduction to the third edition I talked about bringing readers up to date on how the market was recovering from the massive financial storm that hit it (and all its global peers!) between 2007 and 2009, during the global financial crisis (GFC). Just as the GFC and the market slump that ensued eventually receded into history — despite denting many investors’ faith in investing in shares — I’m reasonably confident that COVID-19 will do the same.

In any case, just as in the preceding editions, such changes in the sharemarket give me a backdrop to set out how, despite the scary headlines and the everpresent possibility of a market fall, profitable companies continue to generate capital growth for their shareholders over the long term. The great paradox of the sharemarket is that while it is the most volatile of the asset classes, it is also the one most capable of reliably building wealth over the long term for the individual investor; I show you how in this book.

I’ve attempted to describe some of the wondrous investment stories that have played out on the corporate paddock since the first edition of the book was published 21 years ago — as well as some of the less luminous stories that are always possible when you’re investing in shares. This fourth edition also updates my advice on where to start if you’re a first-time investor, some of the newer tools that are available to you, some of the pitfalls to avoid and how to have fun (and not take too many risks) while your money goes to work for you.

Australia has grown and developed in many directions since the first edition of Share Investing For Dummies welcomed investors taking their first steps into the sharemarket. If you followed the first three editions, you’re hopefully now managing a portfolio, researching stocks that interest you, keeping abreast of the daily market play and boosting your initial investment to something that’ll at least pay for your dream holiday and at best see you comfortably through the years.

In many of the speeches and presentations that I’ve made around the country in 33 years as a finance journalist, I’ve tried to present the sharemarket as a hugely

Introduction

1

interesting institution. Because it is! And, moreover, this market, which touches everyone’s lives in one way or another, doesn’t have to be daunting. The sharemarket is not a hard concept to understand. When people say to me that I make the idea of buying and selling shares understandable for them, I curse whatever it was they’d been reading or hearing that made it appear the opposite.

About This Book Share Investing For Dummies explains the sharemarket’s intricacies in terms that anyone can understand. Although the sharemarket looks like a high-tech computer game, with its flashing lights and scrolling letters and numbers on the trading screens, the sharemarket is actually based on a very simple concept. Companies divide their capital into tiny units called shares, and anyone can buy or sell these units in a free market at any time. Companies use the sharemarket to raise funds from the public, and the public — meaning you — invests in the companies’ shares. You invest your money in shares because you expect to get a better return in earnings than with other investments.

Most of the time the sharemarket is profitable for investors. Despite the occasional spectacular market fall, such as the great ‘bear market’ of 2007 to 2009 — or even the odd collapse of one of its constituent companies — the sharemarket generally plods along making money for its investors. The sharemarket revolves around money, but it is also very much a human institution. The sharemarket is sometimes described as a living entity (for which we finance journalists are often mocked). Oddly, the sharemarket does have human moods because it reflects the greed or fear of its users, who are sometimes very human.

Greed is a powerful influence on the sharemarket, and so is fear. A saying on Wall Street suggests that these two emotions are the only influences ever at work on the sharemarket, and they fight a daily battle for supremacy. On a day-to-day basis, the sharemarket wavers between the two. The 2000s began with the fear of the ‘tech bust’, then switched firmly to greed for the middle part of the decade, only for fear to come roaring back into the spotlight in late 2007. Greed regained its primacy in early 2009 and — despite a major interruption in 2020 as COVID-19 reared its ugly head — the ‘risk-on’ approach of viewing the sharemarket as a money-making machine has prevailed virtually right through until the time of writing. All of which goes to ensure that fear will have its day again, and sooner rather than later.

The sheer range of activities of the companies listed on the Australian Securities Exchange (formerly the Australian Stock Exchange) makes it a very interesting place — if a trading system that you can see only on computer screens all over the

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nation can be called a place. The number of different types of shares you can invest in is mind-boggling — perhaps there is too much choice. As an individual investor, you can’t own every type of share so the solution is to come up with an investment strategy.

As you will discover, of the 2,200 or so stocks listed on the Australian Securities Exchange (ASX), most investment professionals confine their activity to about one-sixth of them. Even in the 500 stocks that comprise the S&P/ASX All Ordinaries index (one of the Australian sharemarket’s main indicators), the last 1,900 or so don’t hold much interest to Australian fund managers. This is where a selfreliant investor like you can find some undiscovered gems caught in that bind of being too small to attract the fund managers’ and brokers’ attention, and then remaining small because they can’t get this attention. Some of the sharemarket’s acorns really do become great oaks. As a self-reliant investor, with the knowledge and the time to thoroughly research potential stock purchases, you can really steal a march on the pros.

It gets harder and potentially more rewarding the deeper you delve into the sharemarket. In the bottom 1,900 or so stocks, you may find some real dogs that should not be listed (and probably won’t be for much longer), but you can also discover wonderful companies that are about to flourish. This kind of investing is called bottom-fishing. You need to be wary and know how to back up your discoveries with solid research. At these depths of the market, you can make some very wrong moves.

You don’t actually have to own some of the 2,200 stocks in order to experience the ups and downs of the sharemarket; one of the big changes in the market in the last two decades has been the introduction of (and growth in) simple and cheap listed instruments that give you instant, diversified exposure to the sharemarket (whether you choose the Australian, US, global or other country markets) and asset classes in general. Access to the sharemarket has never been easier, and I take you through that, whether you want to invest at the individual stock (company) level or the index (sharemarket itself) level. The tools that enable you to get into the market intelligently are right here in this book.

The sharemarket should be an essential part of everybody’s investment strategy.

Sharemarket participation in Australia is among the highest in the world, but too many people still don’t understand its benefits. As the nation’s population ages and superannuation grows in importance, the amount of Australians’ investment assets (and retirement nest eggs) going into Australian shares is set to rise dramatically. My aim in this book is to help you understand the sharemarket so that you can control your future financial security.

Introduction

3

Foolish Assumptions This book doesn’t require you to have any prior knowledge of investing in shares — that’s my job. However, I do make a few assumptions about you — I assume you’re interested in the sharemarket and you want to find out a bit more.

Perhaps you’ve read a few blogs, watched a few YouTube videos or read other books that piece together various aspects of share investing, and you’re looking for something to help you turn the theory into reality. Perhaps you’ve already traded shares online at some stage, or maybe you’ve realised that the bulk of your superannuation is held in shares, and you want to know why — and how that works.

Wherever you’re starting from, this book is designed to help you build on your existing knowledge and develop your understanding of the sharemarket and the things that influence it — for good and bad.

Icons Used in This Book Throughout this book you see friendly and useful icons to enhance your reading pleasure and highlight special kinds of information. The icons give added emphasis to the details that I think are extra important.

Take extra special notice of this piece of information. You may find this detail is something to store away for future use.

It’s not vital that you read this stuff as you’ll get a good understanding of the subject matter anyway. But it’s often interesting and sometimes an entertaining diversion.

This is information I think you can profit from, so I’ve pre-highlighted it for you (I’m trying to save you from getting highlighter ink on the opposite page when you close the book).

Uh-oh! Wealth hazard ahead! Manoeuvre carefully around this obstacle, and mark it down in the memory bank.

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Share Investing For Dummies

Where to Go from Here In this book, I set out the risks and the rewards of share investing, explain where the returns come from that can make share investing a rewarding and lucrative experience, and outline the many things that influence the prices of shares.

I follow a logical order so that you can easily navigate to the correct chapter to find out more about particular aspects of share investing. For example, you may be itching to explore investment strategy ideas (which I cover in Part 2) or prefer to start with the basics in Part 1. Alternatively, you may be looking for inspiration when picking the stocks that suit your risk ‘comfort zone’ (Part 3), or you might want to contemplate looking further afield at overseas shares and derivatives (Part 5). And if you’re feeling particularly keen, you may find yourself drawn to the number-crunching involved when making sense of fundamental and technical analysis techniques (Part 4) — just don’t forget your calculator!

I hope that after you go through this book, you’ll want to take the next steps to starting your first portfolio of shares. And if you’re already an investor — great!

You’ll be ready to become a better-informed and more effective investor. Work out what financial security means to you, sit down with a financial adviser (or not; but it is advisable) and decide how shares can help you achieve your goals. Then, get started. Today!

Thanks for allowing me to play a small part in your journey — I’m excited for you too, as I know what an adventure it can be.

Introduction

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Putting the Share in Sharemarket

IN THIS PART . . .

See how the sharemarket builds wealth.

Figure out the two functions of the sharemarket.

IN THIS CHAPTER

»» Timing your investments »» Defining a share »» Buying for profit »» Discovering the five big pluses »» Reducing risk

Chapter

1

So, You Want to Invest in Shares

I

f you’ve been hearing about the sharemarket for a long time, but you’re only now taking the plunge, welcome aboard. There simply isn’t a better place to invest money.

You’re probably already familiar with shares and how they generate long-term wealth. In that case, you may want to skim through Chapter 1 and Chapter 2 quickly and then move on to Chapter 3 for an in-depth view of investment strategies. If that isn’t the case, then you’re in the right spot to get started.

Investing Is All about Timing Australians are among the world’s most avid share investors, with the Australian Securities Exchange (ASX) reporting in its 2020 Australian Investor Study that 35 per cent of the adult population, or 6.6 million people, directly own listed ­investments — a term that covers shares, real estate investment trusts (REITs), exchange-traded funds (ETFs), listed investment companies (LICs), listed hybrid securities and anything quoted on an exchange (the ASX and international exchanges). The figure is slightly lower than the 37 per cent of adult investors who owned on-exchange investments in the 2017 Australian Investor Study.

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While this proportion has fallen from the 55 per cent that owned shares in the ASX Share Ownership Study in 2004, the ASX now looks more broadly at investing. The ASX used to compare Australia’s share ownership levels with its overseas peergroup of markets, but differences in methodology mean that it no longer does so.

For example, official US data measures share ownership — directly or indirectly — by households. A survey released by polling group Gallup in April 2020 found that 55 per cent of American households reported having money invested in the sharemarket, either in an individual stock, a mutual fund or a retirement account. That figure was down from 60 per cent before the ‘Great Recession’ (what Australians would call the global financial crisis, or GFC) of December 2007 to June 2009.

The ASX’s 2020 Australian Investor Study found that:

»» 9 million adult Australians own investments outside of superannuation and their primary residence.

»» Of those 9 million, 6.6 million own on-exchange investments, making them

the most widely used type of investment. Other options invested in included investment properties (residential or commercial), unlisted managed funds and term deposits.

»» Of the 6.6 million who own on-exchange investments, 58 per cent own shares listed on an Australian exchange and 15 per cent own shares listed on an international exchange.

»» 15 per cent of Australian investors own ETFs. »» Close to a quarter of all investors had started investing in the two years leading up to the study.

»» Women now make up 45 per cent of all new investors.

In addition to this data, Australian investors own a further $1.2 trillion worth of shares (domestic shares of $595 billion and international shares of $610 billion), which are managed for them in their superannuation accounts.

Furthermore, a 2021 report from investment research firm Investment Trends, the 2021 1H Online Investing Report, found that during 2020, 435,000 Australians began trading listed investments for the very first time amid the pandemicinduced lockdown. The report said this took the population of active retail online investors (defined as those buying or selling shares at least once over the 2020 calendar year) in Australia to a new high of 1.2 million.

Of these new-to-market traders, 18 per cent were younger than 25 years of age and 49 per cent were aged between 25 and 39, indicating what Investment Trends called an ‘unprecedented’ spike in activity by Millennial (born between 1981 and

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PART 1 Putting the Share in Sharemarket

1996) and Generation Z (born after 1997) Australians. This increase in active traders represents a 135 per cent jump since June 2013 and a 66 per cent increase year-on-year from December 2019.

The Investment Trends research also found that the number of Australians actively trading international shares (as opposed to ASX-listed investments) doubled from 54,000 to 109,000 over the course of 2020. The report suggested that growth in the supply of low-cost digital investing and stockbroking products, many of which provide easy access to the US and other offshore markets, was supporting the influx of new sharemarket participants.

So, chances are you’ve dipped your toes in the sharemarket pond (at least indirectly) before picking up this book.

Figure 1-1 shows share investing trends in Australia from 1986 to 2020.

FIGURE 1-1:

Ownership of on-exchange investments in Australia 1986–2020.

Source: 2020 Australian Investment Study, Australian Securities Exchange Note: Where earlier data relies on ownership of shares, the studies since 2014 have used ownership of all listed investment products offered at ASX, which includes shares.

‘Hang on,’ you say, ‘doesn’t the sharemarket crash and correct regularly? What about the headlines that talk of billions of dollars of investors’ savings being wiped off the value of the sharemarket in a day?’ (For one example among many, see the sidebar ‘Just another (crazy) year on the sharemarket’, later in this chapter.)

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Occasionally, that happens. No-one who goes into the sharemarket can afford to ignore the fact that, from time to time, share prices can suddenly move in an extreme fashion — sometimes up, sometimes down. When share prices move down, they attract media headlines. However, what the headlines don’t tell you is that on many other days, the sharemarket is quietly adding billions — or even just millions — of dollars in value to investors’ savings (I expand upon this in Chapter 3).

People want to invest in the sharemarket because the unique qualities of shares or stocks (the terms are used interchangeably in Australia) as financial assets make the sharemarket the best and most reliable long-term generator of personal wealth available to investors. Since 1900, according to AMP Capital, Australian shares have earned a return of approximately 11.8 per cent a year, split fairly evenly (49 per cent to 51 per cent) between capital growth and dividend income respectively.

And since 1950, according to research house Andex Charts, the All Ordinaries Accumulation Index (which counts dividends reinvested, as well as capital gain) has delivered an average return of 11.7 per cent a year up to 31 December 2020, which is enough to turn an investment of $100 in 1950 into $260,786 (see Figure 1-2). That compares to 7.5 per cent a year for bonds, 6.1 per cent a year for cash, and inflation at 4.8 per cent a year (making the sharemarket’s real or afterinflation return 6.9 per cent a year). In the 30 years to 31 December 2020, says Andex Charts, the same index earned 10.1 per cent a year, for a real return of 7.8 per cent a year.

FIGURE 1-2:

The growth of a $100 investment in the ­sharemarket over 70 years.

Source: Andex Charts Pty Ltd

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PART 1 Putting the Share in Sharemarket