Fantasy versus Reality


Marcus Padley has always said that half the stock market game is about not cocking it up and ridding yourself of foolishness is step one on the road to achieving your financial ambitions. Bringing you the reality instead of the fantasy has always been a big driver for him. In that vein let him finish the financial year with a distillation of some of the themes in his book “Stock Market Secrets”. Reality and Fantasy. Hope it saves you a dollar.


  • Fantasy: It is clever to take control and set up your own self managed super fund.

Reality: It is a huge fee generator for a host of financial industries to have you set up an SMSF and trade shares directly (not through managed funds). Because of that there is a lot of very persuasive marketing pushing you that way. But the reality is that a lot of people are doing it because they can, not because they should or in many cases even really want to. Say “Yes” to independence and you will become just that, independent and alone. This trend towards ‘taking control’ is delivering a lot of beginners into the equity market with the ability to invest their family’s future on their own amateur judgement. This is potentially a recipe for financial and investment disaster. Any properly qualified financial adviser (not one that’s done the four week course to get a licence) will assess if an SMSF is appropriate for you and your level of sophistication, it may not be.


  • Fantasy: The stock market is fun.

Reality: Looking after your own investments is a responsibility, and when it goes wrong it can quickly become a burden. If you are investing joint money (the family super fund for instance) it can also be divisive to relationships if you get it wrong. Before you fall for the marketing and take control you have to ask yourself. Do you really want to do this and if you decide you do, for goodness sake involve everyone in the investment process. No surprises.


  • Fantasy: Anyone can do it.

Reality: Some people have spent a lifetime trading and investing and still make mistakes. You never finish your education in the stock market and you will only do well if you devote the time to gain the experience and skill and you will only do that if you are genuinely interested. You will not do well if you are doing it out of necessity. Its like anything, you simply have to want to do it, not think you have to do it. If you are not interested, stick your money in a big fund somewhere and get a letter a year telling you how you went.


  • Fantasy: The stock market goes up 9% per annum.

Reality: The All Ords has gone up 5.7% per annum since 1935 before dividends. So 9% is a common quote. But the real long term return from equities after inflation, tax, management costs, dealing costs and the index fudge is close to zero. No-one will tell you that but the reality versus the marketing is quite an equation to behold. There is no free lunch. You have to do better than just invest and trust the market to perform.


  • Fantasy: Its time “in” the market not time “ing” the market.

Reality: You need to do more than just invest, because anyone who sat through it like a stunned mullet has so far seen the GFC cost them 10 years in lost investment time, going nowhere. Ignore the possibility that there are times you should be in and out of the market and you are in denial. You have to avoid the big drops and despite the industry telling you they can’t (because they don’t want to) its not that hard. We (slightly fortuitously) sold everything in December 2007 and spent the GFC trying to keep a newsletter in business that said “Cash”. It was worth it in the long term for our brand. You have to consider timing.


  • Fantasy: Set and forget.

Reality: Set and forget is a mantra that promotes laziness, denial and disaster. It is incredible how popular it is to do nothing after you buy a stock. But it is blind arrogance to believe that an investment judgement made today on current information will persist in the long term. “Set and Forget” is like “Sell in May and go Away”. It is popular because it rhymes, not because it is right. It would be “Set and watch like a hawk”, but it doesn’t rhyme. (Actually “Sell in May and go away” works on paper).


  • Fantasy: Financial professionals know which stocks are going up and which are going down.

Reality: When it comes to telling the future you are just as clever as us. Financial professionals are there for their experience, administration and for narrowing the odds of getting it right and not getting it wrong. But we still can’t tell the future.


  • Fantasy: History repeats

Reality: The finance industry is in the habit of taking the past and projecting it forward as a prediction. It is more misleading than admitting the truth, that the future is a blank canvas. Using history as a guide suggests certainty and certainty sells but it is lazy research to regurgitate statistical coincidence as insight. Analysts saying things like “In every year there is an election the stock market goes up on average 9% in the next twelve months” needs to get down to Bunnings and start their landscaping career before they get too old.


  • Fantasy: You have to choose to be an investor or trader.

Reality: There are principles of both trading and investing, of both fundamental and technical analysis, that have tremendous value and ultimately you need to assess the best bits of both and develop a combination of these skills. Traders are great planners, use systems, have discipline, and control losses. Investors could learn a lot from that. At the same time traders could do with understanding fundamental factors that drive share prices in both the short and long term if for no other reason than as an added filter on the stocks they trade.


  • Fantasy: Everyone is making money except for me.

Reality: People like to talk about Victory, not defeat. Don’t let that worry you. If we talked about all the mistakes we made in the stock market we’d all be pretty busy talking. It’s like golf. Play your own ball. It’s the only thing that matters.


  • Fantasy: One day my boat will come in and the stock market will make me rich.

Reality: No it won’t. Nothing will happen sitting on your bottom waiting for money to one day land. It takes planning, effort and risk. The stock market is primarily there to invest money that is excess to your daily requirements. To preserve the value of that money. To prevent you from getting poor whilst the rest of the world gets rich. Sure you can use it to take risks and make a fortune, but great changes in your standard of living through the stock market are not “normal”, not without a lot of luck. Pay your mortgage first.


  • Fantasy: Every dog has its day.

Reality: Most dogs are dogs.


  • Fantasy: Fund managers are charging too much to do an average job.

Reality: I don’t know about you but I reckon paying 1-2% per annum to have all my investments looked after, to regain every weekend and evening let alone the hours lost at work trying to make investment decisions and trade instead of focusing on my family, my career or myself, plus being free of the every day burden of responsibility for my family’s super fund is probably worth 1-2% off the average return. Especially when I could drop 2% in one trade doing it myself. When you elect to use managed funds you can be guaranteed of three things. No big mistakes, the average return less 1-% and your freedom and freedom has value.


  • Fantasy: You too can be Warren Buffett.

Reality: There is only one Warren Buffet and its not you.


  • Fantasy: The stock market is not gambling, it is sophisticated long term investment.

Reality: It’s really up to you how you treat the stock market but one thing is for sure, the fact that it is the stock market doesn’t make it sophisticated. Gambling is gambling whatever the medium and gambling and investment can get very similar if you let it. There are no long term returns gambling and if you treat the stock market as a casino and you can consider the “investment” an entertainment expense. And even if you win at gambling, eventually you will lose. And spouses and partners, don’t let your loved one fulfill their gambling weakness and call it investment. Call them out if its your money they are flinging around.


  • Fantasy: It’ll be alright in the long term.

Reality: Only if you have a long time. Catch the wrong two, five or ten years at the wrong stage of your investment timeframe and you may not have enough time for it to be alright in the end. The older you are the less time you have and the more important it is to protect your investment from disaster.