Saturday, 27 March 2010

Money for nothing

Is it a bad thing to get money for nothing?

Dan's comments have certainly got me thinking. I do want to be an ethical investor. I want to make money in a way that honours God.

I also want to make a "quick buck!"

Is it possible to do both?

I find this comment about speculating especially unsettling: "It doesn't contribute or add anything positive to society, it just aims to skim off the profits that other people have worked for."

I've been very focussed on trying to build up my savings. I wanted to have a buffer for the situation I now find myself in, being out of work, and also provide for my own and my families future.

Making money on the stock market seemed like a way I could do this while working. This is my perception of the stock market:

1. Companies sell shares to allow them to build up their companies and make more profits. once those shares are initially sold, through an Initial Public Offering, companies do not receive any more money from the buying or selling of shares. Unless of course they release more shares through a rights issue.

2. If I buy shares, I am not buying them from the company. I am buying them from a previous holder of those shares. I buy them because I think the shares in that company are undervalued or that the company is growing in such a way that the share value will increase.

3. If the company grows in value, my shares will be worth more. I can keep those shares as long as I want. If I feel there is unlikely to be further growth in the value of that company's shares, I can sell those shares. Hopefully I will sell at a profit.

I recently bought shares in Ferrexpo PLC (FXPO.L). At some point in the past, Ferrexpo floated on the stock market and used the share capital raised to fund a massive expansion in its operation. Somebody or some institution bought shares in Ferrexpo at that time and contributed to the building up of that company. Then, later on, that shareholder decided they no longer wanted those shares and for whatever reason decided to sell. I'm fairly certain they made a profit out of that investment.

Then, along comes me. Shares can only be sold if there is a buyer. I buy the shares. I now own a piece of Ferrexpo. The company has gone up in value twenty percent since I bought it a month ago. I did not work towards that in any way. But, I did contribute because if I had not bought those shares, the original shareholder could not have sold. I effectively bought all the contribution that original shareholder made, as well as all the risk. I now own a stake in that company and its future. I will sell those shares when I feel I cannot gain any more value from them, but isn't that my right? I can only sell if someone else wants to buy and take on the potential opportunity and associated risk.

To me, this is about seeing an opportunity and taking advantage of it. I have speculated in the past, and don't commit myself to never speculating in the future but I do intend to gain experience and knowledge and become better at seeing opportunities and avoiding danger.

What I have just written has very much been influenced by this debate. There was a time when I was a child when I understood the stock market to be about investing to get dividends and while that still happens, it seems to do so much less as many companies return value to their shareholders by increasing the value of the company and hopefully as a result, the value of the shares.

I am very open to suggestions for how to better invest my money. Is there another way I can get 20 percent return annually?


  1. Hi Mark,

    The way you describe speculating, it doesn't affect Ferrexpo - it's basically a bet between you and the buyer and/or seller of the shares. If you buy, then you're betting the value will go up, they're betting it will go down and vice versa - one of you wins, one of you loses. Of course, they may not be speculating, they may be investing for the longer term, or getting out of a long term investment, but you're still trying to outdo another investor or speculator (you don't know which) in order to make money.

    Unfortunately though, it does affect Ferrexpo I think, because it increases instability in the market. If it looks like they're going to do well, then speculators (especially) will buy and the share price will be inflated as demand rises. If it looks like they're going to do badly, speculators want to get out and the price crashes. I'm a bit hazy on the next bit, but I know that really low share prices are bad for business. I guess it makes it harder to raise money by selling more shares and also leads to a decrease in market confidence making it generally harder for Ferrexpo to raise capital. Of course investment, as well as speculation, also affects market stability, but not I think, to the same extent. Speculators are always trying to second-guess the markets, which means that small changes in the market (perceived or actual) are amplified, sometimes with dangerous consequences for businesses.

    Is there another way you can get 20 percent annual return? Personally I think 20%, consistently is pretty ambitions. You could try starting your own business, or investing in high risk startups. The problem is, as I think you've already pointed out, that to get high returns you have to take high risks and these can often backfire on you! If you want a 20% return, you might have to risk a 50% loss to get there!

    In terms of my own retirement, the best I've been able to come up with so far is a regular pension. Pension funds - as I understand it - tend to invest for the longer term. I've chosen an "ethical" pension fund with Friends Provident. It has its drawbacks though. I'm not convinced that it's always as ethical as I'd like it to be and to be honest, the rate of return so far has been really poor. The main thing in its favour has been the fact that the government allows you to reclaim tax on pension contributions, so that alone means that I make a profit - unless it does REALLY badly!

  2. Regarding risk, there will always be a certain amount. It can never be totally eradicated. But it can be kept to a minimum. My investment strategy is very much based on a verse from Ecclesiastes,

    "Give a portion to seven, and also to eight, for thou knowest not what evil shall be upon the earth."

    So I have decided to have no fewer than 7 or 8 stocks at any one time. This will reduce the impact of a wrong decision or two, but still allows for decent gains. Of course fees are an issue, but it would seem this structure is the lesser of two evils, besides, I am planning on holding my present stocks for at least a year, all of which I consider to high upside/low downside investments for at least the medium term.

    Warren Buffet said, you should avoid over activity on the Stock Market. "If you go changing you portfolio around all the time, your Broker will get rich while you get poor"

    Benjamin Graham pointed out the difference between speculation and investing. "investing is buying a security with safety of principle and with an adequate return." This is called "value investing". He taught that when you look to buy shares, you should treat it as if you are going to the supermarket: you are looking for value, you are looking for good buys, good deals at a good price... I tend generally to look for a good Price to Book ration, and a low Price to Earnings ratio, although to be honest some stocks in my present portfolio would not reflect that on the face of it. For example I bought 3 oil stocks recently, trading above their Book Value, but seem good companies and are increasing assets and producion (production=revenue, which should translate into profit especially given the present favourable oil price).

    My present portfolio consists of...

    Barclays BARC
    Enquest Plc ENQ
    Global Energy Development GED
    Goldenport Holdings GPRT
    Hellenic Carriers HCL
    Heritage Oil HOIL
    Valiant Petroleum VPP
    Xcite Energy XEL

    I have a little in

    I can only afford the commission on so many because Halifax only charge 150p per purchase on the Sharebuilder a/c.

    My holdings is valued at a little over £2200, that is 32.22% profit, about 40% up from my valuation 6 months ago following a terrible start to my investment career.

  3. Aidan, may you continue to prosper!

    I'm currently holding:
    Caza Oil & Gas CAZA.L
    Anglo Asian Mining AAZ.L

    and a few shares each in

    Berkeley Mineral Res BMR.L
    GoldStone Resources GRL.L
    Range Resources Ltd RRL.L

    to remind me of previous investing mistakes!