Sweet equity

Thursday 1st March 2001

How five ordinary New Zealanders are using the sharemarket to make their fortune. By Nikki Mandow

It's hard to believe, but according to one survey by the New Zealand Stock Exchange, over four in 10 New Zealanders (44%) hold some form of direct or indirect investment in shares. Maybe that's why we're so poor. The fact is, if you'd just invested in the top companies listed on the NZSE, you would have made a negative return in 2000, with the NZSE40 Gross Index falling 8% during the year.

But don't give up on investing in stocks. Unlimited talked to five New Zealanders who've used the sharemarket, though not necessarily New Zealand's, to make money - good money. Each has a totally different philosophy and most have learnt a good deal over the years, but each has been successful. All follow one general rule - buy what you know about. If you don't know about it, find out, or get advice from someone who knows.

Read on and take your pick.

THE ENTHUSIAST
CHRIS SLATER

Chris Slater, 52, is a technician for a photofinishing company in Wellington. A job you might expect of a successful investor? No, but in his spare time he's a serious one; this "hobby" now takes up a couple of hours a day.

Slater dabbled in investing in the 1980s, buying, along with most of New Zealand, stocks like Brierley Investments. But mostly Slater invested in property. Then in the mid-1990s came the Kobe earthquake and a -remin-der that all his capital, and considerable debt, was tied up in properties 100m from New Zealand's major fault line. Slater also read an article in Fortune magazine about the potential effects on property prices when the baby boomers start selling off their houses to free up capital for retirement. As a baby boomer himself he clicked with the Fortune arguments, -decided the era of making good money from property was over, sold up and bought shares.

By his own admission, he's not done too badly, making an average annual return of 13.4% over the past five years in New Zealand dollar terms.

Slater's investment decisions are geared around trying to second--guess the baby boomer phenomenon. He's convinced that what this post-war generation does over the next two decades will be the key driver in stock market movements around the world. At the moment the archetypal boomers are settled, children off their hands, a mortgage-free house and are at their peak salary. They are buying stocks, lots of them, and squirrelling them away for their retirement. But some time over the next 10 years, they will start to realise the capital behind their investments and then, Slater warns, watch out world markets.

In theory, this shouldn't happen until around 2010, when the first baby boomers reach retirement. What is difficult to gauge, however, is the anticipatory effect of a whole lot of baby boomers like himself all trying to second-guess each other. If enough Chris Slaters begin to suspect that their worldwide counterparts are selling stocks in anticipation of a future slump, that will hasten the slump.

"You have to start looking more carefully at safe investments, blue-chip stocks with good, steady earnings records that the baby boomers will pull out of last ... I believe we are entering a period where stock picking will be a much tougher sport and much more critical to a good portfolio. We have also entered an era of single-digit returns, and that could last for a long time."

Slater believes the effects of shifting money are beginning to show in the US market already. "Over 2001 I will be gradually shifting some money out of overseas funds, particularly funds with US exposure." At present, around 45% of his share portfolio is in overseas stocks (including Australia) through funds. The rest is at home. As an example, Slater intends to withdraw about 50% of the money he's invested with the AMP's World Investment New Zealand fund, a fund with considerable US exposure. He's more positive about New Zealand stocks for next year, believing that New Zealanders will pull money in from US investments and look at the local market, though he might even take the money out of the stock market altogether for a time. "I believe share markets, particularly in the US, will be wobbly for a time, so it's probably a good idea to get out of the direct share market for the next few months and then reinvest later in the year."

In late 1999, Slater started a share club for technology stocks, investing money for himself, a few colleagues and family members. "When I figured out what was happening [with the baby boomer money], my plan was to look at what sort of investments would provide reasonable returns with an acceptable level of volatility. A major area where I saw investment would be worthwhile was in technical stocks - patent-holding companies taking a good idea through the various stages from private capital to an overseas listing." Slater now has around 10% of his portfolio invested through the share club and is actively looking at, or investing in, the risky end of the New Zealand spectrum, with companies such as Pacific Lithium, Mooring Systems, Software of Excellence, A2 Corp, Wellington Drive Technology and Indranet.

The more active approach has forced Slater to spend more time on his portfolio. He spends, on average, two hours a day on research, sourcing information from newspapers (The National Business Review and The New Zealand Herald), magazines (including Unlimited), independent tip sheets (his favourite is James Cornell's Market Analysis), the internet ("Goodreturns.co.nz and Garethmorgan.co.nz are useful"), brokers' analysis ("though by the time the news gets to me, the small investor, I have little faith in it") and, to a lesser extent, share chatrooms.

He also keeps his ear to the ground. "When people start talking in glowing terms about a stock and how wonderful it is, you know it's reached its zenith and it's time to sell out. When a number of people start talking about how a stock is so low and is going to go lower, then it's probably reached its low point and you can start buying."

Email Slater at chris.slater@xtra.co.nz

THE PROFESSIONAL
OLIVER SAINT

Once you could go to any annual general meeting within driving distance of Oliver Saint's Auckland home office, and chances were you would see his suave figure among the audience and hear him ask the sort of difficult questions New Zealand board directors don't get asked often enough. Saint, a qualified chartered accountant and former merchant and investment banker in London, Hong Kong and New Zealand, is a vocal shareholder advocate, corporate critic and former analytical columnist for The Independent newspaper. He is also, not surprisingly, an avid investor; the sort of person who describes a couple of hundred thousand dollars invested in stocks as "negligible". Since 1981, Saint's full-time job has been managing his own, and other people's, investment portfolios.

What is surprising, given Saint's profile in the New Zealand -investment scene and given the floor-to-ceiling shelves of neatly filed annual reports (New Zealand and overseas companies) that fill the room in Saint's home where a pantry might be in another house, is that Saint now has no money invested in New Zealand stocks. As well as despairing of the returns of almost all our top companies over the past five years, Saint is put off by our disclosure regime, the lack of enforcement of the regulations that do exist here and the fact that so few good directors are spread over so many New Zealand companies.

It has not always been like that. Saint used to invest in what he saw as "good New Zealand growth stocks" - until he found they weren't any more. Now he concentrates on getting a return on his, and his clients', investments that beats most international indexes, inflation and, when it comes to foreign stocks, the exchange rate. This is more difficult than it used to be. In current conditions, getting a 10% return on investments should be seen as good, he says, though he's looking for 15% and others say they want 20%. "It's not going to be like that. A lot of us are expecting more from our companies than they can achieve."

On the other hand, Saint has been successful, living comfortably off the capital gained from selling investments for the past 20 years. "My quality of life, as someone practising on his own, has been tremendous."

There's no magic about Saint's touch. His success comes from gathering as much information on companies as he can, only buying companies with a good track record and keeping a close eye on the small print, particularly from annual reports. Saint's pantry of -annual reports includes five years' worth of documents for all New Zealand-listed companies and any foreign ones he's interested in. He rarely buys a newly listed stock, arguing that it's easy to fiddle the figures on a prospectus and the first year of accounts, possible to fiddle them on the second year, but much more difficult the third year. "I tend to look at companies for three or four years before I invest in them."

As a former accountant, Saint also spends a lot of time scrutini-sing companies' annual reports, comparing the numbers with pre-vious years. "I was investing in a Perth merchant bank called Rothwells. One year Rothwells' accounts showed a reasonably good profit but a sudden large increase in the provision for bad debt. I know about merchant banks because I used to be in one, and I know the critical thing is that you have to be sure of your debt. I sold out the whole portfolio, and 10 days later the share price was down to practically nothing."- Then there was the case of Stanilite Pacific, a company with considerable Australian defence contracts and former admirals on the board. It performed well for a number of years, then suddenly the annual report showed a marked increase in the value of the intangible assets compared with total assets - a change attributed by the company to "development costs". Saint got nervous, sold, and six months later the price plummeted.

Ironically, the more information available, the more Saint believes you need almost personal contact with a company to be a successful investor. The internet provides a huge amount of easily accessible information, he says. But it has also prompted the growth of day trading which, in turn, has brought a lot more volatility to the market and has made individual stock price movements hard to under-stand without a really detailed knowledge of the company involved.

"When you look at the graph of monthly [price] spreads four or five years ago, there might have been a 2-3% spread. Now there could be a 10-20% variation in share price on a monthly basis. If I buy a share at $2 and it goes to $1.75, in the past I might have sold it. Now it could rock up again to $2.20. It makes it difficult to trade in any country other than your own, where you have a good understanding of what's going on ... I'm a long-term investor, not a trader, but now a long-term investor means three months, not 25 years."

An increasing feeling about the necessity to almost be able to touch and feel the companies he invests in means Saint is looking at changing his overseas-only investment regime. He remembers somewhat ruefully a shopping trip a couple of years ago to a branch of UK retailer Marks & Spencer - a company in which Saint has been a long-term investor and which had, at that time, shown solid growth for almost 125 years. While his wife shopped, he stood in the doorway, and casually noticed that most people leaving the store hadn't bought anything. When they visited the neighbouring Next store, however, the story was different, and shoppers were loaded down with purchases. "If I had sold out of M&S at that stage and bought Next I would have saved my clients and myself a lot of strife."

Saint reckons he'll start buying New Zealand stocks again later this year and foresees a time when as much as 50% of his portfolio might be New Zealand-based. "I believe there are a lot of companies in New Zealand that are good investment material now; Montana, Waste Management, The Warehouse, Cavalier Carpets and Michael Hill. Just sit outside Michael Hill jewellers and you realise people are going and buying from them."

Oliver Saint's email address is judenol@ihug.co.nz

THE DELEGATOR
ISOBEL GREGSON

Three years ago, Isobel Gregson's husband collapsed and died while out jogging in his lunch break. She was 35 and had two small children. The couple hadn't finalised their will, and part of his company insurance was invalid because he hadn't got around to having the necessary medical check. Mortgage insurance paid off the house, with a bit extra, and there was a widow's benefit. But Gregson hadn't worked since their first child was born and because there was no will, a good deal of the estate went into trust for the children, untouchable for day-to-day expenses.

Emotionally devastated, Gregson was also totally unsure what to do with her finances. The insurance money - both hers and the children's - had to be invested, but how and in what? Gregson had never been interested in investment; the couple hadn't had extra cash anyway. And left with two children to bring up alone and the need to get training so she could find a job, spending time construc-ting a personal portfolio wasn't high on her priority list.

In stepped her husband's company, putting Gregson in touch with PricewaterhouseCoopers financial planner Deborah Nicol. "Isobel was quite conservative. It's very hard for someone who hasn't ever had a lump sum to invest. They know they have to diversify [from money in the bank], but how do they do that, and how do they manage their portfolio?" Gregson couldn't afford much risk and needed some income from the investment, so Nicol put together a fairly low-risk portfolio: 65% "income assets" (bonds, mortgage funds, overseas fixed-interest instruments) and 35% "growth assets" (listed property stocks, international shares and a few Australasian stocks).

In return for not having to deal with any of the transactions, the documents or the taxable income report, Gregson pays Price-water-house-Coopers fees of between 1% and 1.25% of the funds -under management.

"I don't know that much about my investments," says Gregson honestly. "I don't have that much involvement in it, and I'm not really interested. I'd never done any investing, and this way I don't have to do all the worrying about my finances."

Three years later, in a teaching job, and with no need to take income from her capital, Gregson has moved to a 50:50 income:growth portfolio, and Nicol reckons she could take more risk. With a mode-rate risk portfolio, Nicol expects to produce an average 3-4% annual return after tax, inflation and fees over the long term (20 years or so), but she says a moderate to aggressive portfolio should produce 5-6%. That might not sound much, Nicol says, but remember it's a long-term average, and the bank's 7% interest rate is before tax and inflation.

So what does Nicol recommend for a moderately risky portfolio? Little exposure to New Zealand stocks, that's for sure. The majority of clients' "growth" assets are invested in global funds, often US-based through companies like Fidelity or Putnam. Only about 10% of the "growth" money goes into Australasian stocks, and of that, only about a third is in New Zealand companies.

"The New Zealand market is bound to get better," says Nicol, who was born in New Zealand but trained as a stockbroker in the US. "But often clients live or might want to live overseas one day, or at least travel. So you have to look on a global basis, including looking at the dollar. Maybe your New Zealand investments or your property seem to be doing well here, but they might actually be depreciating in terms of their value overseas ... People have their houses here and their jobs, so they do have exposure to the New Zealand economy. That's why we advise them to invest offshore."

To contact Nicol or Gregson email deborah.nicol@nz.pwcglobal.com

THE CONVERT
DENIS TROTMAN

Elizabeth Trotman is well on the way to her first million, at least according to her father, tech investor Denis Trotman. In four years, maybe five years at the most, Trotman says his daughter will be a millionaire. Okay, a million isn't that much in these days of $400,000-plus house prices, but Elizabeth is only 28 and earns a relatively modest salary as Asia marketing manager for the BBC in Sydney. The secret to her financial success? Following dad's stock market investment advice.

"The strategy is to invest in information technology global leaders and monopolies of today and tomorrow," says Trotman senior. By which he means companies like Cisco, Intel, Microsoft, EMC and Nokia (today's monopolies) and, much more risky, companies you've never heard of like Rambus, the UK's Arm Holdings, Insignia and Echelon that might, or might not, occupy similar places tomorrow. Trotman himself has been following this technology-focused investment philosophy only since 1995. But if his own hints - and a large historic home in Takapuna and bach in Northland - are anything to go by, he's doing very nicely, thank you. In 1998 he and wife Gillian founded an investment consultancy business, Techstocks Portfolios, to spread the word.

In retrospect it's easy to wonder why Trotman, with 40 years in the computing business (first with IBM and then as founder of New Zealand's first independent computer servicing bureau, Computer Services) didn't think of IT-related stocks before. But, like most people, he contented himself with investing excess cash in NZSE40 leaders and, during the late 1960s and 1970s, big Australian mining companies.

His road to Damascus occurred in 1995 when, aged 55, he looked at his portfolio and realised if he wanted a decent retirement, his stocks were going to have to perform better. "I sensed the lack of confidence in a future for New Zealand. Anything of value was being sold off, beginning with the sale of Watties to Heinz. I looked at the performance of our leading [share market] companies and thought that if this is what our leaders are doing, where's the country going to go? So I said, 'Right, Denis, invest in something you know about - computers'."

In five years, Trotman's scheme has become a mission, almost a fervour. A religious fanatic could not be more passionate about the potential of IT stocks or more persuasive in his efforts to gain recruits for the cause. There are three main parts of his philosophy. First: buy (and hold) monopolies or potential monopolies. And that includes seriously-out-of-favour companies like Microsoft. "Microsoft is 60% off its peak because of the US Department of Justice threat of breaking up the company and a temporary earnings lull. Anyone who sells because of that must have rocks in their head. Any great company, even Microsoft, will have a poor year or two. But the bubble has not burst. There will be double-digit growth in the PC sector and, as the PC matures, the innovation will shift to the digital cellphone or digital TV. Anyway, is there any alternative to Microsoft?" Today's monopolies, Trotman says, will preserve the value of your investment; tomorrow's monopolies will make you rich. Luckily for Trotman, there are lots of potential monopolies in every sector, and there are lots of technology sectors.

"In the IT sector, there is Applied Materials making chip--making machines, Intel making PC microprocessors, Microsoft's opera-ting systems, IBM in the mainframe sector. Then there is the cellphone industry where there is hardware, software, networks, -content providers."

Second: buy technologies that will be essential to the products you will be using tomorrow (with a bit of management nous from the bosses). As people demand ever-quicker information, buy companies with technology that make things go faster. Trotman likes Rambus, a US company with a chip interface technology to speed up memory access. Rambus went from $US17 (ex-split) in November 1999 to $US150 pre-tech wreck, and is now trading around $US40. Trotman predicts it will reach $US200 this year. His hottest pick at the moment is a UK company called Insignia Solutions. "They are losing 50 cents in the dollar in sales, and conventional wisdom would say they are a very high-risk investment. But if you are focusing on the monopolies of tomorrow and believe, as I do, that the internet is here to stay and the future of the internet is tying everything together with the web language Java, then you have to look at a company like Insignia Solutions. Insignia has developed a Java six times faster than anything else." There are obvious risks however, like someone coming along with a better Java product than Insignia.

In such a volatile sector, Trotman's advice is to pick companies you know yourself (look at all the Nokia phones around or the number of your friends using Windows) or get advice from someone who understands the technology side of tech companies.

Trotman set up his consultancy business in 1998, he says, as a way to put across an alternative view from the New Zealand brokers who, at that time, "were selling the story that buying Telecom at $8.50 was a great way to buy technology stocks. I told my first client to sell Telecom shares, which I believed would fall 20% per annum for the foreseeable future, and invest in technology."

Third: don't put all your eggs in one basket. When Trotman first bought Microsoft five years ago, the price doubled in the first six months. "It was hard not to buy a lot of Microsoft. I got too heavily into Microsoft." Fortunately, Trotman re-weighted his personal portfolio before the March 2000 crash, and although Microsoft is still his number one holding, it stands alongside 30 other technology stocks, almost all from the US or Europe. The overall net income from his portfolio grew 117% in the July to September 2000 quarter over the previous year, Trotman boasts. "Of that list of 30, I believe you could throw six darts and still come up with a portfolio that will do much much better than the NZSE40."

Denis Trotman's email address is info@techstocks.co.nz

THE FARMER
BOB POWELL

When Bob Powell sold his Taumarunui farm in 1993 to concentrate on developing his Possumdown Knitwear business, he had enough money left over for three other investments - a building in Tauranga, some forestry land on his old farm and some stocks. Eight years later, the business is flourishing, and the portfolio's doing okay too, but the other investments have been sold and that money all put into shares. Forestry, particularly his rural block, began to look risky, and Powell felt more comfortable with the flexibility of the share market than his property investment.

"The aim of our portfolio is to have a good amount of capital when we retire. We aren't looking for income off it at this stage," Powell says. He used to rely heavily on his broker, he says, but over the past 18 months he's started concentrating on his portfolio himself, researching the market through the New Zealand business weekly newspapers, magazines and the internet, and keeping a relatively close eye on his 26 stocks. "With the business, I can't spend too much time on it, though I probably take between 30 minutes and a couple of hours most evenings getting information." But Powell wouldn't like working without a broker. He uses Tauranga-based Steve Napier to bounce ideas off. Although he's read you can pay as little as $16 per trade, instead of the $75 you pay through a broker, Powell says that by heeding a broker's advice you don't have to avoid much of a mistake to recoup the difference.

Initially weighted almost 100% towards New Zealand stocks, Powell now has about 40% at home, 35% in Australia and the rest elsewhere. He's also "following the rules carefully", with a balance between larger companies and smaller, more speculative shares. His best performer has been TrustPower; his biggest mistake, Tranz Rail. ("I've no idea why I bought them at over $8. It was an expensive mistake, but you learn from your mistakes. I hope I wouldn't do that now.")

And his advice? Be very careful about giving tips, especially about stocks that are doing well - you'll just get blamed when you are wrong. And don't rush into buying a stock on the basis of a tip. "One time I did get a hot tip I spent about three weeks looking at the stock before I did anything about it. I bought it in the end, but I knew why."

Contact Powell at bob@possumdown.co.nz; Napier at snapier@ihug.co.nz

Tip sheet

Pssst, wanna tip? Here are 10 from the experts

Don't buy newly listed stocks. It's easy to fiddle the figures on a prospectus and the first year of accounts, says professional investor Oliver Saint. And if you must, then restrict it to your "gambling fund". Part-time investor Chris Slater keeps 10% of his funds for risky tech stocks.

Don't bank on New Zealand stocks alone. "Maybe your New Zealand investments or your property seem to be doing well here, but they might actually be depreciating in terms of their value overseas," says financial adviser Deborah Nicol. Moreover, people have their houses here and their jobs, "so they already have exposure to the New Zealand economy".

But do buy New Zealand-made this year. "I believe there are a lot of companies in New Zealand that are good investment material now," says Saint. His picks: Montana, Waste Management, The Warehouse, Cavalier Carpets and Michael Hill.

Know thy companies. "I tend to look at companies for three or four years before I invest in them," says Saint. As a former accountant, he spends a lot of time scrutinising companies' annual reports, comparing the numbers with previous years.

Use appropriate professional help. Former computer expert Dennis Trotman felt confident about ignoring the professionals - and made a successful foray into the tech sector. Part-time investor Bob Powell uses a personal broker for bouncing ideas off - and now makes better trades. School teacher Isobel Gregson relies -totally on adviser Deborah Nicol - and doesn't have to bother with learning to invest. The point is, control your professional. It's your money.

Don't trust tips. Never buy on a tip. And don't give tips. You'll just get blamed when you are wrong, says Powell.

Buy on trends. Slater is convinced that what the baby boomers do over the next two decades will be the key driver in stock markets around the world. Trotman looks at the tech trends, such as mobile information and chip requirements. Saint watches where people are shopping. "Just sit outside Michael Hill and you realise people are going and buying from them."

Buy monopolies. For technology stocks, Trotman recommends investing in IT's global leaders, particulary monopolies of today and tomorrow. Buy technologies that will be essential to the products you will be using tomorrow.

Don't assume you're okay. Slater radically changed his strategy when realising that all his property investments were in earthquake-prone Wellington. Gregson was forced to invest -after her husband (and income earner) died when she was aged just 35. At age 55, Trotman looked at his portfolio and realised if he wanted a decent retirement, his stocks were going to have to perform better: he got out of New Zealand.

Just do it. All five came to one conclusion before investing: man cannot live on salary alone. Get thee to the broking house!

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