What did we learn about investing versus trading in shares over the last 12 months?

The book Shareplicity focuses on how to invest in share markets either directly with individual shares or via third party products such as ETFs and/or the more traditional models of actively managed funds such as LICs and LITs. Shareplicity also explains investing fundamentals with a preference for identifying quality shares in long term secular growth markets, that deliver both good capital gains (price appreciation) as well as income generation over time.

However, the COVID health crisis, the resulting economic impact and the extreme Central Bank policies has created a unique set of share market conditions, that like the pandemic itself are unprecedented in recent times. The expansion of the Federal Reserve balance sheet is a case in point.

On that basis it is worth learning how to differentiate between investing and trading the share market; what it means for how you make money and identifying the style that you are most comfortable with and suits your needs.

In one way or another these are the issues that I think have been laid bare over the last 12 months and will mark the difference in share market returns between investors, traders and share investment products.

It is important to understand all the differences as we are exposed to a variety of share styles from the ‘experts’ and when we chose to adopt their style without being in full receipt of the information, it can mean we make unnecessary and sometimes costly mistakes.

Trading versus Investing

For the purpose of this exercise I am going to compare some of the shares that are cited in Shareplicity and look at how they performed over a 12 month period and how they have recovered since the March 2020 crash. The reason will become evident as I explain the dynamics of what has happened.

See Figure 1.1 (below) shows 20 shares compared over a 12-month period from July 6, 2019 to July 6, 2020 (total return including dividends), sourced from Bloomberg and the share prices from March 23 to July 6, 2020, sourced from MarketIndex.com.au (no dividends included).

Figure 1.1 is designed to illustrate how much returns vary depending on timing of the purchase.

Shareplicity advocates an investment process where holding quality companies over time will deliver robust returns. Other experts advocate retail clients (you and me) are better off trading the share market. The two are very different and often confused.

Traders do not generally dwell so much on fundamental analysis such as quality, secular themes and relative value. Instead they look at charts, momentum indicators and extremely sold off situations to buy shares when it is perceived they are cheap, like the lows in the Australian share market around March 23, just after lockdowns were instated.

There is nothing wrong with an approach such as this, although some people find pulling the trigger when fear is extreme very challenging. This means trying to pick the bottom of the share market is not always easy. In the same way as greed holds most share investors from not taking profits when share prices are at extremely high levels.

Looking at the numbers below, it is understandable that those who piled in on or around the market lows of March 23, have done extremely well, arguably better than the longer-term shareholders in some instances, over the time period analysed. For example, you would have made great money holding Xero (XRO) pre – Covid (+46%) and even more money (+53.8%) if you had bought it on March 23. The same can be said of AfterPay (APT) and Appen (APX). Conversely the total 12-month return of ANZ and NAB has been a loss of some 30%, but a trader could have bought at March 23 and made over 30% in a short time span and not worried about the dividends.

But in order to jump in at the bottom, you a) needed the cash to do so; b) you require a specific personality trait  that can take and stomach risk and c) you were probably not already holding a portfolio of shares that had fallen up to 30% or more from the February 19 pre-pandemic  share market high. Also, it is easy to pick the bottom of share markets in hindsight, but not always so easy when you are not in full receipt of all the technical factors at the time.

Do not underestimate how challenging it can be to buy more shares when you have witnessed the fastest and steepest share market crash since 1987.

An investor that subscribes to the themes discussed in Shareplicity would have been better off riding out the crash and waiting for the share price recovery. Sure, some of the shares cited below have not returned to the pre-pandemic levels, but on an annualised basis they have delivered some of the more robust, solid total returns, such as ResMed (RMD), CSL, Carsales (CAR) and Technology One (TNE). There was also nothing wrong in “buying the dip” on the pullback and adding to the quality shares.

Conclusion

The point of this exercise is not to point fingers as to what is right or wrong. Share investing and trading shares are very different sides of the coin. Both involve committing your savings to make more money than if the cash were sitting on deposit in the bank. Investors are most likely more conservative and prepared to play the long game. Traders are happiest when jumping on and off trends and taking profits along the way.

The reason Shareplicity advocates investing over trading, is that picking the bottom and top of shares or the market is not always as easy as it sounds. Equally, quality shares can go on rising for years and even decades, jumping off too quickly like a trader can deprive the investor of real wealth creation. Look no further than CSL, Apple, Amazon and even AfterPay or A2Milk.

For you, the key is working out what works best for you. Fundamental analysis as described in Shareplicity or trade on other factors that never really give a passing glance to secular trends, competitive advantage, governance, PER’s or other valuation measures, or a mixture of both.

Remember as retail players, there is no need to benchmark yourself against an index. You don’t have to front up to shareholders and tell them why you made only 10% and not 150%. Investing for yourself is as much about as what you are comfortable with, as it is knowing your strengths and weaknesses.

Share markets are made up of so many moving parts. By this I mean every participant has a different reason, some are retail investors (people like us); some are algorithm traders; some are technical chartists; some like a name or throw a dart and then there are the industry. Or in 2020, subscribe to the view that “stonks only go up!”… until they don’t.

Finding what method is right for you comes with experience and placing it into the context of the day (don’t fight the Fed!), will help you manage not only your risk, but also concentrate the mind on what your goals are with you in mind!

One thing is for sure, 2020 has been EXTRA-ORDINARY on any measure. Shareplicity will look into just how extraordinary it has been in the next BLOG post.

So, for now goodbye, stay safe, invest or trade with your risk and knowledge to suit you!

This was written on Wednesday July 7 and represents only the views of Danielle Ecuyer, Author of Shareplicity. The Author holds or has held some of the shares listed in her SMSF. Please read the disclaimer.

 

DISCLAIMERShareplicity offers information that is only general in nature. It does not take into account your personal financial situation, needs or objectives. Nor does it take into account the financial needs of any specific person. You should consider your own personal financial situation and needs or seek financial advice before making any decisions based on this information.

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