Picking Stocks

Business Will Never Go Out Of Business

By Pip Kean, Cambridge Partners Senior Adviser

Benjamin Roth was a lawyer in Youngstown, Ohio, when the stock market crashed in 1929. Two years later he decided to keep a diary to detail the effects that the financial collapse had on himself, his neighbours, and the nation. He kept his diary for ten years. In the late 1930s, when the depression had mostly passed, he summarised a few points he had learned from the experience.

He wrote: “Business will always come back. It will remain neither depressed nor exalted…. Depression is a time of greatest profit. The investor who has liquid funds and the courage to act can lay the basis for great profits.”

Whether a depression or recession, some businesses will fail. They could be businesses chasing unprofitable objectives, or overloaded with debt, or suffering from poor management.

A mere week after the COVID-19 lockdown, Bauer Media announced it was closing its New Zealand business. Bauer had indicated for some time that they were facing challenges around the viability of their operations. The decision was made at the same time as the pandemic but was not because of it.

Another media institution, NZME’s Radio Sport, abruptly ceased broadcasting on 30 March this year. The fact is that Radio Sport had been balancing on a fiscal knife edge for most of its existence.

 In February, NZME chose not to renew the rights to broadcast live cricket commentary, which revealed the vulnerable position the station was already in.

The fact is some businesses will fail while some businesses will ride out the storm and come through the other side stronger. Entrepreneurs and start-ups will emerge with new ideas and innovations. For instance, following the 2008 crash, startups like Uber, Airbnb and WhatsApp appeared. We also have Kiwi successes – such as Xero, Rocket Lab and PowerbyProxi.

The trading of goods and resources has never gone out of business, and the fact is, it never will. Throughout every crisis in history, business has survived and thrived every time; Covid-19 is no different.

It was true in the 1930’s and it’s just as true today: “Whilst any business can go out of business. Business itself will never go out of business.”

Sources: Consilium, Stuff & NZ Herald, Market Falls and Recoveries

The Top 10 Money Excuses

By Jim Parker, Vice President, Dimensional

People who make bad money decisions can often rationalise them. Here are 10 common excuses.

Human beings have an astounding facility for self-deception when it comes to their own money.

We tend to rationalise our own fears. So instead of just recognising how we feel and reflecting on the thoughts that creates, we cut out the middle man and construct the façade of a logical-sounding argument over a vague feeling.

These arguments are often elaborate short-term excuses that we use to justify behaviour that runs counter to our own long-term interests.

Here are 10 of them:

“I just want to wait till things become clearer”.

It’s understandable to feel unnerved by volatile markets. But waiting for volatility to “clear” before investing often results in missing the return that goes with the risk.

“I just can’t take the risk anymore.”

By focusing exclusively on the risk of losing money and paying a premium for safety, we can end up with insufficient funds to retire on. Avoiding risk also means missing the upside.

“I want to live today. Tomorrow can look after itself.”

Often used to justify a reckless purchase. It’s not either-or. You can live today AND mind your savings. You just need to keep to your budget.

“I don’t care about capital gain. I just need the income.”

Income is fine. But making income your sole focus can lead you down dangerous roads. Just ask anyone who invested in collateralised debt obligations.

“I want to get some of those losses back.”

It’s human nature to be emotionally attached to past bets, even the losing ones. But as the song says, you have to know when to fold ‘em.

“But this stock/fund/strategy has been good to me.”

We all have a tendency to hold on to winners too long. But without disciplined rebalancing, your portfolio can end up carrying much more risk than you bargained for.

“But the newspaper said….”

Investing by the headlines is like dressing based on yesterday’s weather report. The news might be accurate, but the market usually has already reacted and moved on to worrying about something else.

“The guy at the bar/my uncle/my boss told me…”

The world is full of experts, many of them recycling stuff they’ve heard elsewhere. But even if their tips are right, this kind of advice rarely takes account of your circumstances.

“I just want certainty.”

Wanting confidence in your investments is fine. But certainty? You can spend a lot of money trying to insure yourself against every possible outcome. It’s cheaper to diversify.

“I’m too busy to think about this.”

We often try to control things we can’t change – like market and media noise – and neglect areas where our actions can make a difference – like costs. That’s worth the effort.

Given how easy it is to pull the wool over our own eyes, it pays to seek out independent advice from someone who understands your needs and your circumstances and who keeps you to the promises you made to yourself in your most lucid moments.

Call it the ‘no more excuses’ strategy.