Investment Myths

It’s all a big gamble

where to invest

While there are aspects of gambling in investment they are in no way the same practice, which is a common misconception. When you gamble in a casino chances are that the odds of success are not in your favour, however if you make a shrewd investment in the stock market then you are likely to see a steady rise in your fortunes. However for some the thrill of investment leads to risky decisions and in this respect parallels between gambling and investment can be drawn. Instead of making a planned, long term investment the “investment gambler” could go for the quicker, high risk type of investment, which brings all the get rich quick potential that gambling does. You must be aware though that when you blur the line between investment and gambling too much then it really is no different to taking a punt on the horses. Signs that show you are developing a taste more for thrill-seeking than investment can be: you enjoy bragging about your investments, you often make investments without proper research, you think of investment success in terms of luck rather than planning. If these points apply to you it may be time to let professionals help manage your accounts.

Speculation is key

People sometimes say that to make money you have to speculate. There is a proverb that states “you’ve got to speculate to accumulate” but this couldn’t be further from the truth. People who accumulate vast sums of wealth through investments like property have no account of speculation at all, their investments are careful and well thought out. Investing in shares should be the same thing, a well thought out business decision that should ultimately see you profit. Speculators eschew the meticulous planning part and lay money down on shares with little financial advice or knowledge. The main motive for this type of haphazard investing is the relentless pursuit of money, yet this method is probably the likeliest way of ensuring that you lose money.

If you are buying shares then you should follow a few guidelines when it comes to research. Be sure to establish the true value of your purchase to lessen any extra costs. You should also aim to keep the actual costs of your transaction at a minimum as this will prevent the marketmakers and brokers from pocketing more cash from your investment than you do. Never be afraid of waiting out your investment so that you get a clear idea of what is working out and what needs to be changed, don’t be hasty with important decisions!

In the report “What Works On Wall Street” experienced financer James O’ Shaughnessy found that: long term investment strategies can ultimately work equally well as short term growth investments, value factors play a significant part in the most successful growth strategies and that both growth and value strategies have the potential to underperform. But some people disagree with this, Robert Hagstrom claims: "Growth and value investing are joined at the hip, says [Warren] Buffett. Value is the discounted present value of an investment's future cash flow; growth is simply a calculation used to determine value. Growth in sales, earnings and assets can either add or detract from an investment's value. Growth can add to the value when the return on invested capital is above average. However, growth for a business earning low returns on capital can be detrimental to shareholders."

Another popular argument in the world of investing is the blue chip versus small company debate. By taking a good look at the market we can see that in fact favour swings back and forth over different periods of time. To capitalise on this potential fluctuation a balanced portfolio must be exposed to both markets. A more dynamic portfolio will interchange between the two in accordance to what has more market value at the time.

When working with a static portfolio, constants shifts and changes are not desirable so it is wise to keep a portfolio mixed with smallcap growth funds, small company trusts and also largecap that are strong in their respective industries. With dynamic investment portfolios one should monitor the performances of smallcaps thus enabling you to switch over and capitalise on economic growth.

The topic of penny shares often incites debate as to their exact meaning. While their name clearly suggests that the term applies to shares of a value lower than £1.00, recent reports by the FSA (Financial Services Authority) refers to them simply as shares that are difficult to sell in great amounts without a change in price, or limited liquidity. Of course this means that the term would apply to shares that are indeed of a higher value than £1.00, which conflicts with the name penny share. But what one should take heed of is that penny shares are not a low cost pathway to big returns. Just to break even a penny share needs to gain a rise of 12 per cent, you will find that if the shares see a 20 per cent drop in their mid price and you then choose to sell you will potentially lose a sum of money of about one-third. Drops of this value can happen very quickly in penny share quoted companies. The argument lies in the claims that the potential of massive returns can negate the risks involved. Unfortunately there is absolutely no guarantee that penny shares have any more potential for growth than shares of a higher value. Ultimately, when considering penny shares you should give each case a detailed look so you can evaluate if they do indeed offer potential value.

Penny shares generally consist of various factors that include: cash shells, new issues, warrants from investment trusts, oil mining companies, terminal decliners and fallen stars. Another false impression is the thought that investing in a big company will reap reward simply because they are a big company. Again, this is untrue. Big companies will be in high demand so you will be more likely to overpay. Another factor is that big companies face a constant battle to stay at the top. If a market leader is usurped by a new company their value will see a drop.

As an investor you may find that you are tempted to delve into exciting new areas that you have little knowledge of, simply to keep pace with the fast moving world. The most successful investors will always advise you to stick to what you know. By moving out of your own realms you will open yourself to risks as you may not know the true value of purchases, or even what you are doing in a basic sense. Looking at a business that has seen a boom and attempting to capitalise on this is potentially a bad move as the money will already be made by the people who were involved before the boom took place.