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Why stocks suck but you should buy them anyway

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by Peter Switzer

Here’s a great wealth-building question: “What are the top 10 reasons for not investing in shares, and what is the main reason why you should ignore them all?”

So, here are the top 10 reasons:

There are so many negative factors — more than at any other time any of us could recall — that could cause a crash.
The debt concerns in Europe look insurmountable.
The US debt predicament could result in default.
The US economy, even if it gets through its debt impasse in the Congress, will be lucky to grow by much when the Yanks start repay their debt.
China is a bubble that could burst and drive us into a Great Depression.
The US economy will go into a double dip recession this year.
Problems in oil-producing countries will drive up the price of oil and cause a global recession.
Interest rates look really attractive in fixed deposits and so why worry about stocks?
The stock market is always prone to crashes and it is just too unsettling for me and other assets are better, such as property.
I don’t trust hedge funds, short-sellers and financial institutions that manipulate everything to their own favour at the expense of small investors.

Ignore the top 10

Okay, there are my top reasons for not buying stocks and I reckon you should ignore all of them. The fact is stocks, bought properly and managed wisely, are a great way to build wealth. There are old clichés about investing in shares and while they can occasionally not work out, they have stood most tests of time. One such cliché is — it’s not timing the market but time in the market.

I love Warren Buffet’s maxims that can be summed up as buy quality companies and hold them; don’t buy anything you don’t understand, and; when everyone is greedy be fearful and when everyone is fearful be greedy.

I also like what John Maxwell, the leadership guru, calls the Law of Process. He describes it as leadership developing daily, not in a day. I reckon you build wealth by growing in your self-leadership. You go from being uninformed and undisciplined to informed and disciplined. You grow and you know your strategy and you stick to it.

Those who stuck to their strategy of buying say their favourite, top 10 quality companies through the GFC would have been dollar cost-averaging down their share purchase prices and reduced the impact of the crash.

Maxwell’s Law of Process

However, most people would have panicked and missed the Big Four banks at ridiculously low prices. They gave up on their strategy and they broke the Law of Process.

Maxwell in his book The 21 Irrefutable Laws of Leadership tells a story of Anne Scheiber who died at 101 years of age in 1995. She had retired as a low-paid employee at the IRS, which is our ATO equivalent. She was a lawyer but was a victim of female wage discrimination and retired at age 51 on a salary of $3150 in 1943. She lived in an old $100-a-week apartment in Manhattan. She didn’t buy newspapers but went to the NY public library on Saturdays to read the Wall Street Journal.

This was not a great life. However, this woman left the Yeshiva University $22 million!

How did she do it? She kept the Law of Process.

When she retired she had saved $5000, which she put into stocks. By 1950, she used her profit to buy 1000 Schering-Plough shares valued at $10,000.

By the time she died, because of dividend re-investment and stock splits, she had 128,000 of the companies’ shares valued at $7.5 million.

She stuck to her knitting through thick and thin — her investment strategy. She didn’t say 'that will do, it’s time to cash out'. No, she stuck to her plan and it’s only a pity she didn’t enjoy a bit of a better life but she certainly proved that if you stick to stocks they do deliver. However, they have to be quality stocks and I prefer good dividend payers as over half of the return on shares comes from dividends.

Moral of the story? Get a great plan and stick to it and by the way, buy quality property and save in fixed deposits when they yield great returns and one day you might do an Anne Scheiber.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Thursday, July 14, 2011

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