Skydiving taught me a valuable lesson about investing in the sharemarket.
One afternoon, I went skydiving down near Wollongong. I had a fantastic afternoon and got talking to the guys who ran the shop. They told me they were planning to open some more skydiving centres all around Australia.
They had bought some planes, were in the middle of hiring people and had scouted out some tourist spots where customers were keen to skydive.
At $350 a jump, after all the costs, they told me they made a tidy profit.
When I got home, I looked up the company and saw it was listed on the Australian Stock Exchange. I also saw they had announced they were going to open those new shops, so I figured they weren’t lying.
After a bit more of a dig around into the financials, I decided to buy the stock. And now I own a tiny bit of a profitable skydiving company.
This kind of thinking helps make companies and investing real. They’re not just numbers on a screen, they’re businesses operating in the real world and they’re all hoping to make profits, generate revenue and grow.
Welcome to the sharemarket. It’s the way everyday folk like you and me can lend our money to people and companies who are actively trying to generate more cash.
And if you’re a woman, that’s even better news, because you are biologically less likely to fiddle and change your mind about which companies you own, every day.
Here are some ideas about how to approach the sharemarket.
Becoming An Owner
First thing to know is, when you are buying shares, you are buying bits of a company. When a business needs money, it asks the public to lend some, and then offers bits of itself in return for your cash.
When you buy shares, you’re becoming part owner. Doesn’t matter if you have one share or one million shares, you’re a part owner.
So invest in businesses you want to own.
Don’t bother trying to select which share price is about to explode. Ignore your brother’s mate who reckons he knows which company is about to pop. Just buy companies that you think have a future.
How Do You Choose What To Own?
Ask yourself some general questions about what you know and where you live.
Do you work in retail? In construction? In media? In software? In social work?
If it’s retail, do you reckon people are going to be buying from shops like David Jones and Myer in 10 years? Or will they be buying online?
Do you work in IT? Have you noticed that you and your colleagues are installing a lot of DIY accounting software? Or more Adobe than ever before?
If you work in mining or construction, do you know of any big projects that are about to kick off? Who is supplying the iron ore or the planning?
Like my skydiving experience above, it helps to leverage your own knowledge and life experiences and think about how businesses operate in the real world.
If you pick a company that is good at generating profits, you’ll make some money. You’re a part owner after all! And those profits get distributed back to shareholders because you lent them your money to begin with.
That’s the deal.
Now, of course there are risks. Not all companies are profitable, and some that start out profitable become less so.
Companies are run by people and sometimes the people are hopeless, liars or unlucky (or a mix of all three). Sometimes things change in the market really quickly and the company doesn’t do enough to adapt.
Kodak is a good example here. That company did absolutely nothing to change its business model as the digital camera revolutionised that industry. If you didn’t read the signs as an investor, you would have been left being part owner of a company that’s main business was selling film. To no one.
Some businesses try to change and fail, some businesses just aren’t that great and get beaten by more efficient competition and some try and wriggle their way out of trouble by falsifying their documents.
All of that is possible and as an investor it’s up to you to think about the kind of risk you’re okay with.
The entire market is made up of people deciding whether they want to buy or sell bits of companies. That’s why prices move up and down; sometimes everyone agrees with each other and sometimes they don’t.
But please don’t let the idea of risk freak you out!
Shares have a reputation as being perilous and it scares people away from entering the market.
Which means there are only a small group of (generally) guys who get to take advantage of the money that companies make.
There are plenty of companies humming along nicely, growing, profiting, distributing the money back to the people who have given them a bit of theirs.
If numbers freak you out a bit, it’s worth talking to other people about a company’s performance.
Here are some questions that will give you a bit of insight into how well a stock is going:
- Has the business been making money or losing money in recent years?
- Is it making money or investing wisely in its future?
- If the company is losing money, are there signs of a better future ahead? Will it borrow money to drive growth? Will it issue new shares to the market?
- Important! Does the balance sheet show that it has enough current assets to cover any short-term debts? (I.e. If it goes broke, will there be enough to sell to pay you back for your shares).
- How does the company plan to repay any debt it has?
It’s likely you have more business experience than you realise. Breaking down the earning potential of a company is how professional investors spend their time, and there’s lots of information around to help guide you.
Remember, it’s your money and treat it like the CEO has asked you personally for a loan. Because when you boil it all down, they kind of have.
This report contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial planner before making a financial decision.
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