How to pick the best investments
By Nicole Pedersen-McKinnon | smh.com.au | 11 August
Think the greatest risks you face at a barbecue with friends are burning the sausages or ingesting a bit too much plonk and making a twit of yourself? Think again.
You could also be in financial peril.
Barbecue risk is the danger that, in between flipping burgers, you will hear - and heed - a hot share tip. You know the type: "I've made a packet - and I know a guy who says the price is about to go ballistic. You'd be crazy not to get in."
And if you think it's only a problem in bull markets, you'd be wrong there too. The market's dramatic retraction has seen backyard bargain-hunters come out of the woodwork.
It's certainly seductive to take on board the opinions of friends you trust and respect, presumably why this ranks as the No.1 source of financial guidance. A Nielsen Retail Brokerage report found 35 per cent of people seek investment advice from family and friends, followed by 32 per cent from financial advisers, 31 per cent from online sources, 20 per cent from accountants and 19 per cent from the financial press.
The thing is you should be getting your information from a variety of these sources - and then applying your own judgment as to whether the investment might be a good one.
So just how, in a market that continues to jump all over the place, can you recognise the shares that are truly investment-worthy? By investigating five key measures:
* Model Your first criterion should be the basic premise of the business. Is its business model sound? And does it have something over the competition - say, a markedly better product, long-term, stable contracts or a protected trading position? Essentially, you are looking for an enduring advantage that will see it rise above the rest.
* Management Is the team tried and tested? How experienced are they? Do they engender confidence?
* Debt levels This one is now more important than ever and it's simple to ascertain. Just look up the company report, which will be available online, and check the amount of debt in relation to the amount of equity. Ideally, this gearing ratio should be less than 60 per cent. Watch also that debt is not due to be paid back or refinanced for a couple of years because in the current market this will be costly. And diversity of funding can add an extra layer of protection (so debt funded by a spread of perhaps corporate and structured debt markets, and retail investors).
* Profit growth Always remember in investment that the trend is your friend. Flick to the end of the company report for a five-year profit comparison and check it is trending steadily upwards.
* Price growth Speaking of trends, it's far less risky to buy a stock that has already turned up than one that has been falling for ages and you expect to start climbing shortly. As the market has shown, it's possible to get that very, very wrong.
Take a punt now on a stock about which you've had a hot, unsubstantiated tip and it's not sausages that will be in danger of getting burnt. But do your research, invest only a small portion of your overall portfolio and adopt a longer-term outlook, and you may find you have something to brag about at a barbecue.
First published by Smh.com.au on August 11 2008
Visit smh.com.au for the latest news updated throughout the day
