Making Babies on the Stock Market

Hey Barefoot ...

New Year’s resolution number one for 2021 — invest in shares.

HELP!

There are so many options and so much conflicting information out there. Superhero, CommSec, Vanguard ... EFT, index fund, AFIC, Raiz ... It is doing my head in. I have read the ins and outs on most websites but still have no idea where to start or what features I really need.

Superhero offers $5 trades, and it seems to be marketed directly to me — a millennial starting out in the share game — but is it too good to be true?

I just want to pay low or no fees (I do listen to you sometimes!) and be able to sit back and watch my money make babies.

I would LOVE a simple, no-fuss, Barefoot-style guide to getting into shares before I’m an old lady regretting not following through on my 30-year-old New Year’s resolution.

Thanks for helping me kill the finance game thus far. In the last five years I have bought a house and paid off a pesky credit card ... now I am ready to take the next step!

Nat

Hi Nat,

The share market is so hot right now.

It’s like TikTok.

In fact, there are a lot of young gurus giving trading tips to millennials on social media.

I may be getting old in the toe, but there’s a lot of stupid stuff happening in the market right now, and a lot of it is being targeted at young, inexperienced traders.

Mark my words: this will not end well.

Yet you are killing it.

You say you want a Barefoot-style guide to investing before you end up a regretful old lady?

Well, here it is:

You’re already through the fourth Barefoot Step (Buy Your Home), and now you’re onto Step 5 (Increase Your Super to 15%).

That is your next step. Do it, and you’ll be investing in the share market, compounding your returns over the (very) long term, and getting a tax deduction to boot.

Tik. Tok.

Scott

Reminder: I first wrote about this years ago and highlighted the low costs. Today there are better deals on offer. How do I know? Because my readers constantly email me about them! So before you do anything, do a quick google.

Underage Drinking

Hi Scott,

I am a 16-year-old boy, and I love your work!

Recently, after browsing Investopedia, I was targeted by an advertisement promising a guaranteed 8% return on a $10,000 investment. The investment opportunity is in whisky and is being offered by Coburns Distillery.

This investment is being offered with no risk, allowing for an 8% return for each year plus cost price after 5–7 years. It is also being marketed as ‘SMSF approved’, which suggests to me that unsuspecting middle-aged superannuation investors are being viciously targeted.

These unsuspecting investors are likely to be enticed by the mention of valuer Knight Frank suggesting that exclusive whisky has seen a 580% return — which will most certainly not be occurring with this non-exclusive whisky from Burrawang, New South Wales. Would seriously love to see a piece by you on this. The wider public needs to be aware!

Regards, Brett

Hi Brett,

You’re my type of teen. At an age where many kids would be working out how to raid their parents’ liquor cabinet, you’re warning oldies about the potential financial hangover from these (lubricated) investment schemes!

I agree, it sounds too good to be true. In fact, it sounds a lot like another outfit, Nant Whisky, that I uncovered a few years ago. They too were touting high returns and encouraging SMSFs to ‘invest’ in barrels of whisky which (they promised) they would buy back after the maturation period.

The problem wasn’t with the whisky — it was awarded as one of the world’s best — but that they sold more barrels than they’d actually created.

ABC News stated:

“The ensuing scandal of Nant’s collapse would wipe out small investors who ploughed in up to $20 million. It would spark the largest fraud investigation in Tasmanian history.”

Will Coburns Distillery suffer the same fate?

I have no idea.

Whisky aficionados give things a good hard sniff before they imbibe. That sounds like wise advice to me.

Finally, the fact that a 16-year-old wrote this warning warms the cockles of my heart ... like a fine old aged whisky.

Scott

Investment Wars

Hi Scotty,

I am 19 and considering investing in NEOM, Saudi Arabia’s new $700 billion ‘mega-city of the future’. Considering it is being built in an area that may be subject to wars, is this a stupid investment?

Billy

Hi Billy,

If I asked my five-year-old son to design a mega-city, this is what he’d probably come up with:

“There’s going to be a dinosaur park! And flying cars! And robot maids! And glow-in-the-dark sand! And, and, and a giant artificial moon!”

Sounds good, huh?

Well, these are just some of the wild ideas Saudi Crown Prince Mohammed bin Salman (age 38) has dreamt up from his sandpit.

No seriously.

However, reports in the Wall Street Journal have raised doubts that this mega-expensive project will ever see the light of day.

Billy, before you invest in this, I’ll give you the same advice I give my five-year-old: “Go into the contemplation corner and think about things for a moment.”

Mum Makes 400% on Share Market

Scott,

You’ve made it no secret you are not a fan of AfterPay. I, however, am a massive fan. It has helped me to budget bigger (and smaller) purchases, Christmas presents and (now) essentials for our first baby. I love AfterPay so much that, when the coronavirus hit the share market earlier this year, my partner and I decided to enter the share market — and AfterPay shares were the first thing we bought. Those shares have increased by around 400% over the last six months, in comparison to a 20%‒60% increase for the other shares we purchased. I’m surprised, I’m elated, but I’m confused. Why have they increased so greatly? When will it stop?

Anna

Hi Anna,

Hee-haw, now that is an epic story.

Good on you!

Now let me zoom out and give you some perspective:

Over the last 50 years, the Aussie share market has returned an average of 9.5% per annum, including dividends.

In other words, rookie, you’ve made out like a bandit!

Now to your questions:

The sharemarket has rebounded so strongly for a few reasons:

First, because interest rates are as low as they have ever been in history, and that has forced many investors to take on more risk (most can’t pay for their sausages on the interest they earn from cash or fixed interest).

Second, because we’ve seen an unprecedented amount of financial support: trillions of dollars have been printed to help prop up ailing businesses and consumers.

Third, and most importantly, because shares were panic-sold on the way down … and then hot stocks like Afterpay ricocheted right back up. And it went up like a slingshot … or maybe a shotgun. AfterPay is up a staggering 1,000% since March, despite the fact that it’s never turned a profit.

What happens from here?

I honestly have no idea ... and that’s kind of the point.

When you’re investing in the stock market, you’re giving up control of the outcome, at least for the short term.

All I can do is point you to the 50-year return of 9.5% per year and tell you I’d be very happy if I achieved that over the next 50.

I’m Rich! I’m Really Rich!

Hi Scott,

As a result of recently selling our (multi-generation) family business, my husband and I are now $34 million wealthier (after tax). We have gone to see a firm that specialises in helping ultra-high net worth families like ours. The portfolio they have recommended is not open to the general public (it’s only for sophisticated private equity funds and the like). There are multiple fees that add up to around 1%, though they say they will have stronger returns than we could expect from the share market. My husband thinks they sound great, but I am not sure. I told him I was writing to you for your opinion, and he laughed!

Janice

Hi Janice,

Congratulations on the sale — that’s a life-changing amount of money!

And now for the bad news: being filthy rich won’t buy you higher investment returns.

Really.

A good example is Harvard University’s $42 billion endowment fund (built up over many years by donations from Harvard alumni). Harvard has literally got some of the smartest people in the world managing their nest egg. Over the years they’ve deployed high-octane trading strategies, invested in private equity deals, bought natural gas pipelines, even ventured into exotic investments like forests in Latin America. They literally scour the earth to make money.

And yet their returns have failed to match a no-frills index fund over one, three, five, 10, 15 and 20 years.

All that hard work and effort, all that stress, all the millions of dollars in fees, to end up with less than you’d have by simply buying a broadly diversified, set-and-forget index fund.

So what would I do in your situation?

Well, understand that my opinion is worth roughly what you’re paying for it (nothing).

Yet my thinking would be that you’ve already made your fortune. So I’d focus on simplifying your life, not making it more complicated by paying an advisor 1% — which in your case amounts to $340,000 a year — to farm out your investments.

Instead, I’d think of your wealth like owning a farm: focus on harvesting dividends … you’ll earn close to $1 million a year. And just like farming there will be good years and bad years (and there will be 2020!). Yet over the long run there will be more good years than bad. And if you never ‘sell the farm’, you and your loved ones can sit back and reap a harvest for generations to come.

The Trouble Began When My Sister and Her Husband Were Murdered …

Hi Scott,

My sister and brother-in-law were murdered in 2013. I have spent seven years and a lot of money fighting for their orphaned kids — my nephews and niece. I bought your book and am slowly getting myself out of debt. I have also been fighting the federal government and will be hopefully getting $750,000 for the kids. I want them to make the most out of the money in 10 years. So should I buy them a property? Shares? What should I do?

Renata

Hi Renata,

What an absolute tragedy.

My heart goes out to your entire family.

I don’t have enough details to give you a considered opinion, but I’d caution you not to jump to the final step of ‘where to invest the money’ too soon.

First things first. I’d have a lawyer set up a trust structure that specifies what the money can be spent on (like short-term needs or education) and the age the children will gain access to the money.

That will dictate what you invest the money in, though I’d suggest you focus on easy-to-manage, diversified investments that can be sold quickly and cheaply. In other words, I personally wouldn’t buy an investment property.

Generally, I’m a fan of limiting access to lump sums until children are in their late twenties, when they’re a bit more settled in life. Inheriting large amounts of money when you’re immature, or not mentally prepared, will often do more harm than good.

Finally, I’d work on educating the kids about money so they know that, when the funds are eventually released, they’ll be able to use them to honour the legacy of their parents.

My eye-watering returns

When I look at my bank balance these days, I have the same reaction as getting a COVID test up the schnozz: 

Eye-watering pain. 

See, as a lifelong saver, it pains me to see the amount of interest I’m earning on my so-called ‘high interest online savings accounts’: a tearful 1.5% per year. On a lazy 10 grand that’s a whopping $150 a year. 

Ouch! 

But I guess that’s better than nothing, right? 

Actually it’s worse: after I pay tax on the interest, and then account for prices rising (inflation), I’m in the red. 

Yep, the money I have in my savings account is guaranteed to lose me money.

And remember, that’s with me earning a (relatively) decent 1.5% per year. If you’re saving with one of the Big Four, you’re probably not even earning half that. According to comparison site Mozo, over the last six months banks have cut the interest on 1,479 savings accounts and term deposits. And they’re likely to keep cutting, with the Reserve Bank of Australia (RBA) considering another rate cut as early as next month. 

When will it end?

The RBA has said that it expects rates will be low for the next three years. At least.

Pass me a hanky, Daddy’s got a nosebleed!

Yet don’t cry for me Argentina. Of all the people who write to me, there are two groups I feel most sorry for: young people saving for a house deposit, and retirees trying to live off term deposits.  

While they’re at opposite ends of the limbo stick of life, they both ask me the same question: 

“Should I invest some of my savings in the sharemarket?”

You can see their logic. After all, the week after last the share market went up over 5%. 

In a week!

However, my answer is always the same:

Never invest money in the share market that you’ll need — or think you may need — in the next five years. It’s just too risky. Chances are you could lose a chunk of your money. When you think of it that way, 1.5% doesn’t sound so bad after all, right? So keep your short-term cash in a boring savings account that’s covered by the government guarantee (up to $250,000).

Still, I know it sucks.

To deal with the post-traumatic stress of low rates, I’ve had to reframe the role that cash plays in my financial life. What cash buys me most is peace of mind. It gives me options in a time of crisis. And if there’s one thing we’ve learned in 2020, it’s that the world is a very unpredictable place. 

And that’s the rub: interest rates are said to be at their lowest levels in 5,000 years (and remember the pharaohs didn’t even have AfterPay). This is discouraging people from saving, and encouraging them to borrow up big and take risks. History tells me this will (eventually) end in tears.

Tread Your Own Path!

The Fortunate Son

Hi Scott,

I like reading your column, but last week’s hit me so very hard. I am currently having the exact experience with my 18-year-old son, who has lost some money through trading. He does not want any advice from his parents, yet still hopes to be a ‘trader’. We read your book as a family and did the three buckets with our kids for some time, but he now wants to manage all his own money (which I understand, as he is 18). But gee it’s hard to sit by and watch him make some not-so-good choices (and hopefully learn from them). Any suggestions?

Linda

Hi Linda,

The fastest growing segment of the gambling industry is young men. That explains those ads on the telly that show young lads gambling and having a roguish, laddy good time on the punt.

What I’d explain to your son is that if he gambles on sports or stocks he’ll end up a loser.

And the reason he’ll lose his money is quite simple: he can’t control the outcome. He has no edge.

He’s a patsy for the big professional investors, who will chew him up and spit him out, just as surely as the gaming industry is sucking dry the accounts of impressionable young gambling-addicts-in-training.

If he really wants to be a big man and chart his own course in life, he should gamble on himself.

Get a job, learn everything he can to start a business of his own, and then double down on starting his empire.

Take on the world and win! 

But do it in a game where he can tilt the odds in his favour.

Superhero

A father was walking past his 20-year-old son’s empty room when something caught his eye.

A Post-It note was taped to the middle of his son’s computer screen.

“Turn on the computer”, it read.

It took 30 seconds to boot up his son’s computer ... and 10 seconds to turn his life upside-down.

“If you are reading this, then I am dead”, the letter began.

What follows is the true — and tragic — story of a young American university student named Alexander Kearns.

Like many guys his age, Alexander began share trading during the pandemic.

Also like many guys his age, he kicked things off by downloading the Millennial-friendly trading app Robinhood.

Robinhood is the hottest finance app in the world, with 13 million accounts. It not only offers free trades, you can open an account with just a few bucks, which is a big reason Millennials love it. Yet the real reason it’s so popular is that the app has gamified the trading process:

Digital confetti falls onto the screen after you make your first trade.

And the app sends push notifications to your phone to encourage you to keep trading.

For his part, Alexander began trading highly risky options contracts on Robinhood.

The night before he took his life, Alex logged into his account and got the shock of his life: 

A trade gone wrong. Very wrong. $730,165 wrong!

For a university kid living at home with his parents, it was a mind-boggling amount of money to come up with.

Money he didn’t have.

In a blind panic, he wrote his letter, attached the Post-It note to his screen, and jumped on his bicycle ... never to be seen again. Of course, suicide is rarely caused by just one event, yet stressful experiences can be a trigger.               

Robinhood’s mission is to “democratize finance for all … making investing friendly, approachable, and understandable for newcomers and experts alike”.

Well, this week Australia got its own Millennial-focused trading app, called Superhero.

Like Robinhood, Superhero’s goal is to “make investing accessible and understandable for everyone — no matter if you’re a seasoned trader or buying your first stock”.

Like Robinhood, it offers cheap trading, charging a flat fee of $5 per ASX trade, with minimum investments of $100.

Unlike Robinhood, Superhero doesn’t offer risky options trading.

I spoke to their CEO this week, and he seems like a decent bloke who is aiming to simultaneously attract new and younger investors into the market and bring down the costs of trading.

Still, I am not a fan of apps like these.

Yes they’re cheap, yet they encourage often young and inexperienced users to trade, and that is toxic to their wealth. 

Contrast this approach to Vanguard, the largest fund manager in the world, which is owned by its members.

When they unveiled their ‘personal investor’ offering earlier in the year, they gave me a demo.

They had intentionally added in ‘friction points’ in the buying and selling process to dissuade people from actively trading.

And I absolutely LOVED it.

“Make it more boring!” I cheered.

In fact, I suggested that they didn’t need to build an accompanying app: “Just keep it on the daggy desktop. There’s no need to trade shares when you’re on the toilet.”

(They’re in the process of creating an app.)

Still, my idea of a great investment app is something you set up once: a regular investment into various low-cost index funds. In other words, set-and-forget. And that is a plan that would have worked out well for Alexander, a young man with the world at his feet.

Instead, his father sat at his son’s computer reading his suicide note.

His son was distraught at losing so much money, and admitted in his letter that he had “no clue” about trading.

Tragically, he was right.

Even more tragically, Alexander had actually misread his Robinhood account balance: he hadn’t lost the money at all.

Tread Your Own Path!

Rest In Peace, Alexander Kearns

If you or someone you know needs help, contact Lifeline on 13 11 14 or visit lifeline.org.au.

My Doom and Gloom Dad

Hi Scott,
 
My dad and I are classic doomers. Dad would often speak around the dining table about the looming subprime mortgage crisis — among other things, like public debt, and the devil in credit cards — when I was a teen. Now I am a Millennial who turned 30 this year.  
 
I have a modest but secure(ish) job in the Queensland Public Service, and was rattled to see my superannuation wiped by the corona-crash. Naturally, I went to my father for advice. He told me a huge crash is coming and to put my super into cash. However, I have seen it recover very quickly. So is my dad an economic genius or is this all pure coincidence? 

Jim

Hey Jim,
 
How lucky are you to have had serious, meaty discussions over the family dinner table growing up!
 
Now, no one can predict the future, yet you should internalise the real message your old man is giving you: 
 
“Life is risky, so be sensible with your money.”
 
But what about his suggestion to move to cash?
 
Well, I wouldn’t do it.
 
That’s because I worry that all this money-printing will at some stage lead to inflation: if inflation averages just 2.5% per year, then after 15 years a third of your purchasing power is gone. After 30 years, more than half the real value is gone. 
 
You need to outrun inflation, and historically the best way to do that is by investing in the share market.
 
Know this: investing, like parenting, is the ultimate act of faith. 
 
Things are never clear. There are no guarantees. You just put your best foot forward. 
 
It sounds like you have an awesome dad. So learn from his wisdom, plan for the worst, and hope for the best.

Scott

Message in a Bottle

Dear Mr Pape,

I have $10,000 in a bottle buried for my only granddaughter, who is two. I want to buy her a car when she turns 18, but I may not be here by then as I am nearly 68, and I also realise it will not be worth much by then. I would like to know how I could grow it better. 

Loving granny, Mary

Hi Granny,

Money in a bottle?

That reminds me of a guy I know who does a lot of cash jobs. Over the years, he has buried some of this cash in his large yard. Yet one day he went to dig it up and, lo and behold, he’d forgotten where he’d buried it.

So he got what he uncharitably called a ‘yokel’ (local) to find it for him, being careful to describe it as “just an old box of papers”.

“I’ll pay you ten bucks an hour … but no bloody lunch breaks!” he snarled, as he left in the morning in his Merc.

That evening when he returned home, he couldn’t believe his eyes: the yokel had dug up every inch of his expensively landscaped yard. Seriously, there were more craters in it than the moon. And yet, despite his hard work, the poor yokel never did find the box. (Or so he said.) True story!

And the moral of the story is that keeping your money in a bottle is not a good idea. You have 16 years to grow it: I’d suggest thinking about investing it in the share market via a low-cost fund. You may also want to investigate a share investment bond, which allows you to nominate what age your granddaughter can receive the money, and for what purpose. Do that and the only bottle you’ll have to focus on is champagne at your granddaughter’s 18th.

Scott

I Turned $30,000 into $900,000 — Now What?

Hi Scott,

Many years ago when I was single I invested $30,000 into Apple shares, and this has grown to just over $900,000. I have a young family, and a mortgage, and due to COVID my work has dried up. My big worry is that holding so much of Apple means all my eggs are in one basket. I have a ‘glove puppet’ argument in my head, with one puppet (Warren Buffet) telling me Apple is a great business and to never sell, and the other puppet panicking about the need to diversify. It does not help that Apple shares are rocketing! Should I take my profits and diversify, or am I suffering from FOMO?

Dennis

G’day Dennis,

You think you have FOMO? I bought my first iPhone way back in 2007. If I’d spent the money on Apple shares instead, I’d have $20,000 today.

Here’s a way to think about your question: if I gave you $900,000 right now, would you invest the lot into Apple? Only you can answer that, but I’m guessing your answer might be “probably not”.

Yes, Warren Buffett is a big fan of Apple, saying “it’s probably the best business in the world”.

His company, Berkshire Hathaway, owns 245 million shares in Apple, which makes up a staggering 43% of the Berkshire portfolio. (Fun fact: his Apple shareholding has increased in value by $40 billion since March. Funner fact: Buffett traded his old-school flip phone for an iPhone … last year.) 

However, despite Buffett’s love for Apple, there’s a reason he’s decided to put his wife’s entire estate into a simple index fund — to stop what you’re going through. Life’s too short for imaginary arguments with glove puppets!

Scott

Should I Buy Gold?

Uh-oh.

I’ve caused a fight with Jimmy and his missus.

All the poor bloke wants to do is to buy his lovely wife some gold … but it turns out she’s not having a bar of it.

Take it away, Jimmy...

Hi Scott,

I am old (71), and not a very bright bugger. I only know one thing: that my wife drives me up the wall because she regards you as her financial guru. I have tried to convince her that gold is a safe and profitable investment. She does not believe me, as you apparently take the Warren Buffet view that gold is not a good investment. Have you changed your opinion as the price of gold keeps skyrocketing daily?

Jimmy

Awesome question!

Yes, you are right, I’ve previously written that I don’t invest in gold, and since then the price has risen spectacularly.

Yes, the price could go much higher as the boom takes off and speculators chase higher prices.

So to your question: have I changed my opinion?

Not at all.

Let me explain:

The possibilities for investing your money can be overwhelming. There are more fads in finance than there are in fashion, and there’s always something more exciting to invest in: Bitcoin, shares, bonds, infrastructure, private equity — and of course gold and other precious metals.

So, I’ve come up with a simple, time-tested rule for deciding where to invest my money:

I only invest in things that regularly put money back in my pocket.

Chief of which are companies that pay dividends and properties that generate rent.

And that’s the rub: gold doesn’t generate any income. Which means that the only way you can make money is by hoping the price goes up, and then selling.

Yet that’s not how I invest. I actually don’t focus too much on the price of my shares, because I know that share prices can — and often do — move around quite dramatically in the short term.

So what do I focus on?

The dividends that are sent to my bank account four times a year. 

And, over the long term, owning a portfolio of businesses is the best way to not only safeguard your wealth but grow your income faster than prices rise.

A study by Wharton finance Professor Jeremy Siegal found that if you had invested $1 in gold it would be worth (approximately) $3 today. Yet if you’d invested that $1 in the share market in 1802 it would be worth $1,033,487 today.

That’s not to say that gold isn’t having an amazing run: it’s up 80% since its lows of 2015.

How long will it continue?

I have no idea — and no-one else knows either. But I think that’s the wrong question to ask.

Here are three better questions for you and your wife to ask yourselves:

Firstly, are you buying gold because you’ve got FOMO from watching it go up each day?

Secondly, you’re 71, mate — where are you getting your income to pay for things from?

And, finally, what would you do if gold went down 30%? Would you start panicking and sell at a loss?

If I watched my shares go down 30% (and I did, a few months ago!) I’d grin and bear it, knowing that my dividends were still rolling in.

Tread Your Own Path!

Life-Changing Money

Hi Scott,

I am currently listening to a crowd who are selling a trading program to get into ‘call’ and ‘put’ options. I do not understand a thing about the stock market, and do not have a lot of time to sit in front of my screen watching the stock market to earn “life-changing money”. But in this tragic time, where people are dying worldwide, is options trading something I should look into?

Terry

Hi Terry,

No, it’s not.

Scott

Should I Get a Marginal Loan?

Hey Scott,

There is a lot of uncertainty at the moment and share prices (particularly for the banks) are very low. So I thought of getting a marginal loan for $100,000 and dropping an even spread across the Big 4. It seems a good idea to me, but you warn against it — so is there never a good time to get a marginal loan?

Xavier

Hey Xavier,

A ‘marginal loan’ could be very … marginal.

What you mean is a margin loan, where you borrow to buy shares, using your share portfolio as collateral.

But beware. If the shares go down in value, you’ll get a ‘margin call’ from the lender demanding that you put up more money … or they’ll sell your shares from under you, leaving you with potentially large losses.

Granted, in March as the stock market hit its lows, in this column I urged people to keep buying shares (which the Daily Mail ripped off and ran with the headline: “The Barefoot Investor’s warning on why young people should buy shares NOW”).

Since then, the share market has risen significantly, while — in my view — the economic conditions have got much, much worse.

Bottom line?

I would not be borrowing to invest in this market.

If you do, get ready for some sleepless nights that not even a weighted blanket can help you with.

Scott

My Boyfriend Is Into The Stocks

Holy smokes!

I take two weeks off for the school holidays and my Barefoot inbox goes … to the craps.

Yes, it seems everyone wants to take a seat at the casino that is today’s share market.

And for those who don’t know their stocks from their jocks? Well they ask me … or their boyfriend.

Here’s a question I received last week from 22-year-old “Tina”:

Hi Scott, 

I was wondering who the best companies are to invest in during this pandemic. My boyfriend is into the stocks and has made $1,500 in the last 24 hours, so I have given him some of my own money ($1,000) to invest. But I was wondering what companies you would recommend.

Tina

Tina’s boyfriend is “into the stocks”, and you can bet he’s got a swagger like Jagger over his … 24-hour track record.

“Hey girl, I’m going to make you rich.”

To be fair, for many people shares are just another way to gamble.

And to be even fairer, this is a worldwide phenomenon.

In the US, the three biggest brokers signed up over 1.5 million brand-new customers in the March quarter alone.

In China, trading apps are struggling to keep up as millions of traders “race to seek a quick buck in a surging market”, according to Bloomberg.

And in Australia the number of new investors has increased by more than threefold.

For me, these are worrying signs.

We are in the midst of a deadly pandemic that shows no sign of slowing, and it’s causing real and lasting economic damage.

We are entering into a deep and sustained global recession.

And yet Tina’s boyfriend is making bank, baby!

So, how long will his luck last?

Well, author Matthew Hale Smith wrote in his timely book Bulls and Bears of New York:

“Speculators do not make money, except by a turn as rare as good luck at a gambling table … Of the countless thousands who throng Wall Street from year to year, the great mass of speculators are ruined. Every broker on Wall Street has an entirely new set of customers once in three years.”

Wise words … written 146 years ago.

Tread Your Own Path!

Should I Buy Shares in a Cruise Liner?

Hi Scott,

I am about to receive money back from Princess Cruises, due to a cancelled cruise. The owner of Princess Cruises,  Carnival Corporation, has just seen its share price hit a record low. With this in mind, I am considering purchasing 10 Carnival shares. This will benefit us, as shareholders get $250 on-board credit for every future sailing of over 13 nights. We are already platinum status members and plan on continuing to build our loyalty. Is it a good idea to buy now?

Dorothy

Hi Dorothy,

So you’re talking about the tub that kicked off the coronavirus in Australia, right?

Just making sure.

Let’s be honest — your motivation for making this investment starts and ends at the minibar. You’re thinking of buying some shares simply to get the shareholder discount.

And I’m perfectly okay with that, so let’s sail:At pre-corona levels, 10 shares in Carnival Corp cost around $850 Aussie.

Today those 10 shares are going to set you back around $280, and you get a $250 credit!

And the more cruises you take, the more shareholder credits you can spend!

Then, when you’ve worn out your sea legs (or hips), you can sell your shares, hopefully at a profit.

Really, the only downside is if the company goes broke. And if there’s a second wave of infection, Carnival Corp could very well sink: the company burned through $US12.9 billion of expenses in 2019 … and post a capital raising they’ve only got $US7.6 billion in cash on their balance sheet.

Yet let’s be honest: if contracting a highly infectious and potentially fatal disease doesn’t bother you, losing a few hundred bucks is the least of your worries. That being the case, if I were in your boat shoes I’d take the punt and buy the shares.

Bon voyage!

Scott

What the hell is going on?

“What the hell is going on?”

It was mid-March — in the depths of the corona panic — and I was in our weekly editorial meeting.

Something weird was happening at Barefoot. While the headlines were full of people hoarding toilet paper, we were seeing a huge spike in people asking me how they could buy … shares? 

A few weeks ago ASIC solved the mystery:

The regulator found that daily share trading volumes exploded during the lockdown, driven by a “sharp increase in the number of new retail investors to the market – up by a factor of 3.4 times”.

The same thing has been happening the world over, as virgin investors try their luck trading. In the US, the three biggest brokers signed up over 1.5 million brand-new customers in the March quarter alone.

Where are they getting their money?

Well, “trading stocks” was cited as among the most common uses for the recent US government stimulus cheques in nearly every income bracket, according to CNBC.

So are they little lambs to the slaughter?

Heck no, these first-time traders are swaggering around like big daddy rams!

This week the S&P 500 had its biggest 50-day rally in history, climbing a staggering 37.7%.

And that’s ...

Despite the largest global economic downturn in our lifetime.

Despite record unemployment in the US, with 40 million people out of work.

Despite rising trade war tensions between China and the United States.

And despite the largest civil riots since the 1960s.

One more time … what the hell is going on?!

Well, share markets around the world are being driven by two acronyms:

FOMO (Fear Of Missing Out), as the US Federal Reserve does everything it can to prop up asset prices.

And TINA (There Is No Alternative), with interest rates low … where else are you going to put your money?

However, there’s one experienced investor who isn’t buying:

Warren Buffett.

The legendary 89-year-old investor has wisely accumulated a billion cash war chest so he can famously “be greedy when other people are fearful”.

And so, when the Corona Crash wiped 37% off the market, we all assumed he’d be buying up big.

He wasn’t.

Instead, he did the exact opposite, dumping his entire holding of airlines, and more recently selling billions of dollars more of his bank stocks.

At the Berkshire Hathaway annual general meeting in May, Buffett cautioned that the $137 billion cash he had on hand “isn’t all that huge when you think about worst-case possibilities”.

Gulp.

The reaction to Buffett’s caution has been savage.

Many pundits have written him off: He’s too old. He’s too cautious. He’s lost his touch. His (short-term returns) suck.

Then again, the last time the press wrote him off like this was at the height of the Dot-com Bubble …

Right before the market crashed.

And in the decade after those headlines Berkshire Hathaway’s book value per share rose by 88%, thrashing the total index return of just 12%.

So, what am I taking out of this?

Well, a couple of things:

I’m still following Buffett’s long-standing advice and regularly buying low-cost index funds.

However, I’m not getting too excited. I believe there’s a good chance Buffett will ultimately be vindicated and we’ll see shares pull back at some stage. 

I’ll leave the last line to the guy who’s delivered a 2,744,062% return over his 55-year career:

“I don’t believe anyone knows what the market is going to do tomorrow, next week, next month, next year.”

Tread Your Own Path!

Cashing in on the Coronavirus

Hi Scott,

I’ve been watching (from afar!) the spread of the coronavirus, and I am worried that people are underestimating the long-term financial repercussions if it is not contained soon (and I don’t trust the Chinese government’s figures). Despite this, the Australian share market is up this year, but I am growing increasingly worried. In fact, I am thinking that, with the market now at record highs, it might be time to take some money off the table and wait for a correction before getting back in. What are your thoughts?

Nick

G’day Nick,

First, let me lay my cards on the table:

I don’t know much about the coronavirus.I don’t know whether it will become the next global pandemic that Bill Gates sagely once predicted “could come from China and infect up to 30 million people within six months”.

I don’t know if it will trigger a share market correction.

Traders have already factored into their decisions that the ‘factory of the world’ is effectively shut, that our biggest source of tourists is not delivering at the moment, and that the bushfires have devastated major parts of Australia. Yet that’s all old news.

It’s what happens next that matters to the share market, and, just in case you’re slow on the uptake, I DON’T KNOW ANYTHING.

So, what do I know?I know … that over the past couple of hundred years we’ve endured a lot of bad things: wars, recessions, depressions, pandemics — and through it all the stock market has never failed to hit new highs. Case in point: $1 invested in the share market in 1888 would have grown to $226,560 today.

I know … that it’s impossible to profitably trade in and out of the markets. That’s because if you decide to sell you have to be right twice: first when you sell and second when you eventually buy back in.

I know … that the bulk of your long-term returns will come from dividends, not share price movements. That’s why I focus on the income I receive four times a year and not the value of my portfolio.

Oh, and I also know that I can’t catch the virus from drinking beer. Other people aren’t as sure: since January, Google searches for the phrase ‘Corona beer virus’ rocketed 2,300% globally.

Don’t drink and trade, Nick!

Scott

A 12 Year-Old Steals The Show

Hi Scott,

I am 12 years old and I have dysgraphia and ADD. My dad has been doing Barefoot for 12 months and now we are able to go to Bali for a holiday ... just me and him. My grandma has promised $25,000 to me from an inheritance she received from her uncle. I want to invest it in shares but Grandma keeps telling me they are too risky. How can I convince her to put some of the money into shares instead of the bank? What can I say to her to let me invest even a little bit? I have saved $600 on my own already!

Corey

Hi Corey,

I have to admit I didn’t know what dysgraphia was, so I googled it:

“Dysgraphia can appear as difficulties with spelling, poor handwriting and trouble putting thoughts on paper.”

Dude, you’re doing great!

Seriously, I’ve employed people way older than you who can’t express themselves half as well as you can.

You need to use those communication skills to help educate your grandmother.

Ask her about all the tough times that have happened in history: the wars, the depression, recessions, and financial crashes.

Well, over the past 120 years, the Aussie share market has returned, before inflation, a 10% per year return.

Next, go to the ASIC MoneySmart website’s compound interest calculator:

Type in $25,000 and then 10% for the return, which, over the past 120 years, is the long-term (pre-inflation) return that Aussie shares have achieved.

When you’re 30 (18 years) that $25k could be worth $140,000.

By the time you’re 60 (48 years) that $25k could be worth $2.5 million.

She’ll be one proud grandma.

Scott