The best time to be buying shares is when nobody wants to. Especially you.
That's the only way you can be sure that you're not paying too much for a stock. As any broker will tell you, the biggest mistake made in the sharemarket, apart from picking a dud, is buying at the wrong time. That's when the market has peaked, prices are too high and are about to plunge.
Buying when all your instincts are against it, and especially when your friends say you must be crazy, means there's a good chance that prices are bumping along the bottom.
As stockbroker to the stars Rene Rivkin puts it, buy in gloom and sell inboom.
This, you'd have to say, is a time of gloom. Perfect for building a portfolio on the cheap.
The outlook
Ah, but what if share prices drop evenmore?
They probably will, and it may well be that it's worth waiting another six months. Or longer.
But the trouble is this will only become obvious with the benefit of hindsight. And what if we're all wrong and prices suddenly take off?
It's possible. Previous bull markets have shown that it can take only a few weeks, sometimes just a few days, for a price to run up and stay there, showing it would have been better to be earlythan never.
You don't have to put together yourwinning portfolio overnight, but you should be starting now, especially since there's a sure-fire way of doing it. It's called cost averaging and means you set aside a certain amount, say $1,000, every three or six months to buy the stock of your choice. Whatever its priceis will determine how many sharesyou buy.
If the price then drops, you get more. If it rises, you buy fewer. Either way, at any point in time you're sitting on at least some shares that have done all right. And since even share traders like Rivkin urge mum and dad investors to buy for the long term with the proviso you regularly check your portfolio the laggards should eventually come good.
Nobody's predicting profits will rise by double digits, so it's unlikely that share prices will, either. So a winningportfolio will have stocks thatpay a decent dividend, and will grow over time. Most dividends will giveyou tax credits, too.
Brokers
Your first step is to find a stockbroker. This is best done by asking family or friends who've had some experience of the sharemarket. Every trade, whether buying or selling, incurs brokerage which can be as cheap as $16 or as high as $100 on a transaction worth $5000.
The dearer brokers offer advice and recommendations. But be careful. Brokers are under a lot of pressure because the market is so weak (remember that's why you're buying) and accordingly they're being downsized. They're hungry for commission so don't do anything rash.
It costs you nothing to register withabroker you're only charged when youtrade.
Discount brokers who don't offer advice or operate through the internet are naturally cheaper. The biggest and most mum-and-dad-friendly is Commonwealth Securities, or CommSec, which charges $31.60 on a trade of up to $10,000. Its website, www.comsec.com.au, has an amazing amount of company detail on it. So while you won't find any recommendations, you'll certainlyfindthe figures to do your own legwork with.
Online broker TD Waterhouse is also popular, especially since its brokerage starts at $25.95.
Borrowing
Next you have to decide whether you'llborrow to buy shares. This is inherently risky, though at least you have relatively low interest rates on your side at the moment.
The benefit is that you'll have a bigger portfolio if you borrow, and therefore potentially bigger returns. Or at least you'll have something to start out with.
Since you have to pay interest on the loan, although it is tax deductible on investments, you need to be sure that your chosen stocks will gain in value.
A quirk in the tax system for higher income earners means that if your shares pay franked dividends, and so carry a 30 per cent tax credit from the company, the interest is deductible at the full marginal rate, but the income is taxed at a lower rate.
So if the franked dividend is close to the interest rate and the average dividend is about 4.3 per cent then after tax you're ahead on the dividend payments alone.
The cheapest way of borrowing to buy shares is a home equity loan. If your home is worth more than the mortgage, you may be able to tap into some of that equity, in which case the after-tax interest you're paying may be as low as 3 per cent. But don't get carried away a 3 per cent interest rate is little consolation for a 10 per cent fall in share prices.
After home equity, margin loans are the cheapest loans. The interest rate on these is about 7.5 to 8 per cent.
But they are riskier if share prices fall because your lender might be forced to make a margin call, in which case you have to put up more cash, which you might not have, or sell some of the stock, invariably at distressed prices.
Mums and dads have been flocking to warrants even though they're the most expensive way of borrowing for shares.
Their siren call is the fact that you're buying shares by only putting up half, or less. That makes it an easy way to kick-start a share portfolio.
The problem comes with the payment for the rest.
Warrants come in two flavours endowment and instalment. Both are like laybys.
Endowment warrants go for about 10 years and the dividends paid by the underlying shares are used to pay off the interest in the meantime.
"In practice, the sum of the initial price of an endowment warrant and the initial loan always exceeds the market value of the underlying shares by a considerable margin," warns longtime financial adviser Nick Renton, author of Learn More About Shares (published by Wrightbooks, $24.95).
"From its very nature, the deal can thus never truly represent value for money in a conceptual sense.
"Admittedly, this applies equally to many other leveraged products."
Don't say you weren't warned.
Mind you, endowment warrants are a good way of buying shares for children. There's no fiddly tax or paperwork, and they won't care how much you were paying.
With instalment warrants, on the other hand, you get all the dividends and tax credits and the maturity period is less than two years.
"A standard instalment warrant with 18 to 21 months to maturity might cost an initial investor about $111 for every $100 of market value," according to Renton.
"The implicit rate of interest on theborrowed portion, allowing for thefees,can be as high as 25 per centperannum."
What to put in your portfolio
Just think what would have happened if you'd started a blue-chip portfolio a year ago with stocks such as AMP, BHP Billiton, Brambles, CSL, Computershare, Lend Lease, Macquarie Bank, Mayne Group and Westfield Holdings.
Every one of them has gone backwards and some, such as AMP, Brambles and Lend Lease, precipitously. Yet they're all supposed blue-chip stocks. As Rivkin put it, "all long-term stocks and look at them".
Of course just about any stock you bought a year ago would be down today, so singling out blue chips mightn't be fair. Except they've done even worse than most other stocks.
The upshot is that although your portfolio should be long-term-looking at least five years you need to visit it regularly, taking some profits and topping up.
Think outside the square, too. There's more to the sharemarket than ordinary shares. Preference shares from the same company can offer a better return, yet trade more cheaply.
For example, Australia's biggest company, News Corp, has what it calls non-voting preferred shares, which trade at a discount to the ordinary shares but are arguably more valuable.
In fact, Renton devotes a chapter in his book to the peculiar behaviour of the so-called prefs.
Pointing out that the prefs give up to 12.5 per cent extra bang for your buck, Renton says that "paying a significant premium for the academic right to casta vote once a year or so makes verylittle sense".
He argues the prefs should have a higher price than the ordinary shares and the reason they don't is because the big end of town only holds shares "with full voting rights".
A similar peculiarity is at play with another media stock, Rural Press. Its preference shares, although ranking ahead of the ordinary shares and paying a higher dividend, almost always trade slightly below them. Why?
Because they are a bit less liquid, and for that reason the big end of town doesn't like them. But the big end of town's loss can be your gain.
This is true of smaller stocks generally. Brokers and institutions can't be bothered with them, which offers mum and dad investors the rare opportunity to snap up a bargain before the pros trample all over them.
If the past year shows nothing else, you need to have a diversified share portfolio. Holding one stock, especiallyif it's AMP or Telstra, is a recipe for disaster.
Telstra at least is coming back into favour with brokers. AMP is more problematic because the brokers who say it is cheap now were also saying it was cheap at $12. And $14. And $20.
On the easiest and virtually foolproof test available that a stock pays a good dividend AMP still isn't cheap.
A track record of steady or increasing dividends, by the way, not only suggests a company that is thriving, but also one that is honest. Dividends can only be paid from genuine profits, so if they are paid year in and year out, the accounts must be sound.
And as one leading US analyst said last week, a company that is paying a 5 per cent dividend is under immense pressure to keep it up. No board can afford to cut it.
Just think if AMP had paid a decent dividend when it was floated, instead of squandering its money on GIO, it would probably be a star performer today.
A diversified portfolio should have at least six stocks, including banks, property, media, transport and resources in it.
The six-stock starter table opposite has the stocks most cited as buys by analysts. But since nearly all of them pay a lousy dividend, you can always select some from the big-payer table, too.
The banks were the mainstay of the market last year, protecting us from the more savage Wall Street declines.
That's because their profits have beenthriving on the property boom and they pay exceptionally generous, tax-effective dividends.
Brokers prefer Westpac, despite its problems with BT and Sagitta, the oldRothschilds.
Among resource stocks, analysts think BHP Billiton and Rio Tinto are good value.
But with the boom in bullion, a gold stock could be a good bet. The biggest independent Australian miner is Newcrest and, as it happens, its share price has trailed behind the recovery of other gold stocks.
Among transport stocks, analysts like Patrick Corporation, the half owner of Virgin Blue (see Stocktake, page 11), and Toll Holdings. But both are growth stocks and so pay a low dividend. Brambles, on the other hand, has been marked down so far that it's cheap and offers a good dividend yield.
Westfield has been one of the most spectacularly successful stocks ever listed on the stock exchange. Like the rest of the market it's going through a bad patch now, which makes it cheap.
Since it controls Westfield Trust and Westfield America, you get property, too.
Although retailers are doing it tough,Westfield's shopping malls are pulling in the cash, which just goes to show it's always better to be the landlordthan the tenant.
Bourse Sauce
If you'd bought $1000 worth of shares in Westfield when it listed in 1960, and used your dividends to buy more shares over the years, you'd be worth $109 million.
Stock exchanges can be traced back to Florence in 1344. That's when the city-state converted some of its debts into 5 per cent stock, so that its creditors wouldn't have to wait for payment but could sell their interest instead.
The final debenture payment by the receiver of Reid Murray Acceptance Limited, which collapsed in 1963, was not made until December 2000.
India has more listed companies than the US.
Source: Learning More About Shares by N.E. Renton, published by Wrightbooks.
Milestones
October 28, 1929. The great crash ushering in the Depression. The Dow Jones Industrial Average plunged 13per cent in one day, or 38 points.
October 19, 1987: Black Monday crash, when the Dow fell by a record for a single day of 22.6 per cent, or 508 points.
January 14, 2000: Wall Street rose 141 points to a record 11723.0.
July 21, 2000: The ASX hit a record 3290.3.
Each week financial advisor Noel Whittaker answers your
questions.
