If you’ve decided to take the step and invest your money in the share market; congratulations are in order.
It’s easily, by far, without a doubt, the simplest way to make your money become more money with very little effort on your part.
And if you’re a woman, that’s even more helpful, because you are biologically less likely to check your portfolios every day. Meaning, you are less likely to fiddle.
If you’re a man, maybe just for this thing, be a bit like a woman.
Set and forget. Just get the damn money into the shares and that big, surging market will do the heavy lifting for you.
I’ve decided to write this rundown because some people are happier dealing with words than they are with numbers.
- I’m going to go through how the market works and how to leverage your own brain to decide what you'd like to invest in.
- Then I’m going to give you Spaceship's pitch: a way of giving you exposure to the share market, without your having to pick individual companies.
So here’s the story of investing.
First thing to know is, when you are buying shares, you are buying bits of a company. When a business needs money, it asks the general public and offers bits of itself in return for your cash.
When you buy shares, you’re becoming part owner. Doesn’t matter if you have one share or one million shares, you’re a part owner.
So invest in businesses you want to own.
Don’t bother with the mess of trying to select which share price is about to explode, ignore your brother’s mate who reckons he’s got the inside word, just buy companies that you reckon have a future.
Ask yourself some general questions about what you know and where you live. What is your industry? Is it retail? Is it construction? Is it media? Is it software? Is it social work?
If it’s retail, do you reckon people are going to be buying from shops like David Jones and Myer in 10 years? Or will they be buying online?
Do you work in IT? Have you noticed you and your colleagues are installing a lot of DIY accounting software? Or more Adobe than ever before?
If you work in mining or construction, do you know of any big projects that are about to kick off? Who is supplying the iron ore or the planning?
Maybe you’ve noticed some huge office towers are going up and property managers like look like they’ll be making money for a while.
If you work in media, where do you think people are going to be getting their content from in ten years? What are your friends all watching? What are they paying for?
🚨 IMPORTANT: When you travel, apply this thinking to different cities and places you go. Have you gone to China recently? Did you notice the payment systems? Have you been to Spain? Did you see the countryside covered in wind turbines?
This kind of thinking helps make companies real.
They are not just numbers on a screen, they are businesses operating in the real world and they are all hoping to make profits, generate revenue and grow.
I remember once going sky diving down near Wollongong. I had a fantastic afternoon and got talking to the guys who ran the shop. They told me they were planning to open some more skydiving centres all around Australia.
They had bought some more planes, were in the middle of hiring people and had scouted out some tourist spots where customers were keen to skydive.
At $350 a jump, after all the costs, they told me they made a tidy profit.
When I got home, I looked up the company and saw it was listed on the Australian Stock Exchange. I also saw they had announced they were going to open those new shops. (So they weren’t lying).
And now I own a tiny bit of a profitable skydiving company.
If you pick a company that is good at generating profits, you’ll make some money. You’re a part owner after all! And those profits get distributed back to shareholders because you lent them your money to begin with.
Now, of course there are risks. Not all companies are profitable, and some that start out profitable become less so.
Companies are run by people and sometimes the people are hopeless, liars or unlucky (or a mix of all three).
Sometimes things change in the market really quickly and the company doesn’t do enough to adapt.
Kodak is a good example here. That company did absolutely nothing to change its business model as the digital camera revolutionised that industry. If you didn’t read the signs as an investor, you would have been left being part owner of a company that’s main business was selling film. To no one.
Some businesses try to change and fail, some businesses just aren’t that great and get beaten by more efficient competition and some try and wriggle their way out of trouble by falsifying their documents.
All of that is possible and as an investor it’s up to you to think about the kind of risk you’re okay with.
Here is a post on understanding risk.
If you notice a company you own has decided on a strategy you think is weird or you’ve found another business you like more, it’s totally up to you to sell your shares.
The entire market is made up of people deciding whether they want to buy or sell bits of companies. That’s why prices move up and down; sometimes everyone agrees with each other and sometimes they don’t.
But please don’t let the idea of risk freak you out!
Shares have a reputation as being perilous and it scares people away from entering the market. Which means there are only a small group of (generall) dudes who get to take advantage of the money that companies make.
There are plenty of companies humming along nicely, growing, profiting, distributing the money back to the people who have given them a bit of theirs.
(This is a personal peeve of mine. Investing itself is not a difficult past time, but it's just become extremely competitive.
Everyone is trying to outperform each other! But really it's just a pattern of behaviour that has been gamified.
You don't have to play the game if you don't want to.
We all work hard for our money, we should all get a chance to make it grow.
You might lose yours if you buy shares in a really crap company, run by a bunch of con artists, but it's worth teaching yourself how to think about investing.
You are not a moron.)
Now, the cool thing about the share market is you can take your money out at any time. Unlike a property, where there are a lot of steps to go through to your money back in your hand, selling shares is just an online transaction.
This means your share portfolio is still always your money. If you’re going through a rough patch and need some dosh, you can sell a portion of your shares. It might not be at the top of the market, but your life is your life, and you need your money to run parts of it!
If you used to work in mining and you could see mining projects drying up everywhere, you can sell your shares.
If you work in a bank or you think a new payments technology is going to wipe out the existing one, then you can sell your shares.
So, pick out the sectors of the market you kind of know a bit about and identify some companies you might be interested in.
But before we look at those businesses themselves and decide whether they are likely to smash those profits out for us, let’s zoom out.
Don’t be scared of international markets.
The world is enormous and it’s connected. You and your friends are probably using ten different products created, distributed and maintained by foreign companies.
That’s cool. You’re a global customer. You can also be a global investor.
Companies in different countries use their local markets - usually - to raise money. If you wanted to buy shares in those companies, you used to need an account in that place. That used to take a fair bit of wrangling.
When I first set up an account to buy some shares on the London Stock Exchange, it took three months of collecting documents and bank statements and signing things and verifying who I was.
But once I was in, I had access to thousands more companies, all trying to generate profits to return to me.
I reckon that’s a good way to go, generally. You can jump on massive global themes without having to wait for them to spring up in Australia.
Not that there’s anything wrong with Australian companies - a great many of them are spectacular and are wonderful investments. But think of it like your meal choices: you don’t have to have steak and three veg for dinner every time; you can choose from Italian, French, Mexican...it’s all about choice.
What we’ve done at Spaceship is develop a few funds that offer you exposure to these big global companies, without the hassle of opening up your own offshore account.
(But I'll give you the full pitch a little further down.)
Sorting the crap from the good ones.
An old journalism trick is to ask yourself; can I describe what this company does in one line? Not a tagline, exactly, but a summary of what the company gets paid to do.
Lots of businesses are in “mobile apps”: but do they program and develop the software? Do they design and focus on user-experience? Do they measure the data analytics of other company's apps?
All are valid businesses, but they are all different and might affect how you see their future. If you can’t explain what the company does in one sentence, maybe leave it alone.
Rio Tinto? It digs up iron ore, refines it and then sells it to its customers.
Woolworths? It’s a grocery store that buys products from other suppliers - and makes some of its own - and then sells them at scale around the country.
Facebook? It’s a targeted ads business, selling real estate on a free social website.
Xero? It sells accounting software to small to medium sized businesses.
Prada makes clothes. (And dreams).
There are so many types of businesses in the world, it’s actually kind of fun to read about how they’re going and then decide if you think they’re going to succeed.
I suppose investing is, after all, just judging whether business is going to succeed or fail.
So how are they going?
(Please don’t let some of the terminology freak you out. Keep reading.)
What’s the cash flow? Are they making any money?
Cash flow is the big ticket reading. It’s the revenue left over after all the sales are made and the costs are paid for.
Shareholders all get a slice of the cash flow, so the steadier and bigger the cash flow, the bigger your slice.
When the costs are higher than the revenue, that’s called a loss.
This information is usually available from the company website in the Annual Report. But it’s worth remembering that some companies dress up their financials to make them look better than they really are.
Some main questions are:
- Has the business been making money or losing money in recent years?
- Is it making money or investing wisely in its future?
- If the company is losing money, are there signs of a better future ahead? Will it borrow money to drive growth? Will it issue new shares to the market?
- Important! Does the balance sheet show that it has enough current assets to cover any short-term debts (or current liabilities)? (I.e. If it goes broke, will there be enough to sell to pay you back for your shares).
- How does the company plan to repay any debt it has?
If numbers freak you out a bit, it’s worth talking to other people about a company’s performance.
Friends, family members and of course accountant-type people.
Your one mathsy mate might read the balance sheet really quickly and can immediately tell you if these guys are spending more money than they’re making. Maybe shout them a beer. Or write them a poem. Whatever you can swap for some knowledge.
Of course, learning what the main things on a balance sheet are is a useful skill for anyone.
Here are some posts if you're in the mood for a read-a-thon:
- What are assets?
- What is revenue?
- What are liabilities?
- What is equity?
- Some ways of thinking about your money.
👀 Who are the company’s competitors?
Companies don’t operate in vacuum. For every Coke, there’s a Pepsi.
Think about whether this company has the biggest market share in its industry. If it doesn’t, is it growing quickly? Does it do something better than the established guy?
You don’t always need to buy the biggest guy on the block. If one of the smaller players has a new way of doing things that you think is going to stand the test of time, then maybe look at them.
Who runs the business?
A quick Google search of the management team is extremely helpful when picking a company that’s less well known.
If they’ve been in the news, in a positive way, then it’s likely they are aware of their reputation and will work hard to make their business a success.
If they’ve been in the news negatively, that’s a tremendous warning flag.
Now, all of the above is a lesson in how to approach share investing. By using the knowledge you have in your own head, you can look around you and notice profitable themes.
And through the mechanism of the share market you can lend your money to those businesses and get a return.
Data centres are springing up around the place. Solar panels are becoming more affordable so more people are using them. Computer chips are in, like everything.
But it takes some research to settle on which companies you want to own.
And I get that you might not be overly interested in that kind of homework.
Instead, there are ways to invest in the share market without having to go through the whole rigamarole of researching the companies.
(I know, I could have saved a bunch of words at the start of this letter and just skipped to this part...but I reckon the above thinking is a good way to approach this investing caper).
It’s called passive investing. And it’s kind of what Spaceship does, though we have a separate active component also. 🚨
Passive investing is basically where you lend your money to a whole basket of companies, and then you get the average return of those companies.
An 'average' is a way of finding the 'middle' of a set of data. Do you remember studying the mean, median and mode average returns at school? I'm talking about finding the median average of how much profit a bunch of companies make, rather than just one company.
For example, if you’ve noticed that China has heaps of massive tech companies but you don’t know which one is going to be the best performer, you can buy a “unit” that owns tiny bits of all of them. These units sit on the stock exchange and function just like regular shares.
That unit absorbs all of Chinese tech company share price movements, averages them out and reflects that average (or the 'middle' performance of those businesses) in its price. People buy and sell the units based on the performance of that whole group of companies, rather than just one.
So if Alibaba has a corking year, Tencent does alright and Baidu has a total flop, rather than enjoy the total success of Alibaba or suffer losing some of your money on Baidu, you are going to be returned the average (the middle performance) of all of them.
I hope that makes sense because it’s a nifty invention.
You can also buy a share that owns a tiny portion of the whole Index (which is the market itself).
So you could get the average return of all the companies on the stock exchange, if you wanted.
Or you could get the average return for the top 10 biggest. Or the top biggest banks. Or only nickel companies. Or a collection of cyber security firms. Or the bottom 50 property stocks (if for some reason you thought that was a good idea…).
It’s a way of keeping the risk to a minimum but also gives you access to where all the businesses are returning their money.
Now this passive investing strategy is getting more and more popular, meaning you can buy the exposure to a basket of energy companies, or solar companies, or tech companies.
But again, usually you’ve got to do this is via the share market and buy specific exchange-traded-funds (ETFs) that trade there.
🚀 The Spaceship pitch!
What Spaceship has done has simplified that process just one step further.
They have created two accounts (or funds) that are invested in a bunch of companies that return the average performance to you.
Your money is invested a tiny bit in all of those companies, then the average performance of them all, is returned to you.
But the funds aren't listed on the stock exchange, they’re just in an app.
The first fund is called Voyager, which is a selection of 100 global and Australian technology companies.
You can invest as much or as little as you like or set up a recurring payment, and we’ll return the average (the middle) performance of those 100 companies to you.
In Voyager, you have exposure to the likes of Amazon, Softbank, Alibaba and Tesla, which are growing at a phenomenal rate and are solidifying themselves in the global economy.
We figure, if you’re going to try and not spend your money, you can at least hook it onto the growth of the massive tech giants.
But, if you have some reservations about tech companies in general or just aren’t sure where your risk profile sits, we’ve also built an Index fund.
This is a fund where we’ve selected 100 of the largest Australian companies and 100 of the largest global companies.
This includes the likes of Australia’s big four banks, the big miners as well as Coca-Cola, General Electric and McDonald’s.
Rather than hope one company performs well, you are leveraging the overall performance of the entire lot.
We’ve managed to make these funds operate automatically so they are really cheap to run, hence the low fees.
One of the reasons people avoid investing in shares, is they don’t know which shares to pick.
So Spaceship built a way for you to get exposure to shares without having to select them individually.
In the meantime, hopefully this post has given you a bit of an introduction into how shares operate and a fairly clear way to think about them.
The more information flows freely between people, the more they can leverage and progress through the markets.
It doesn’t have to just be the dudes in suits hoovering up the returns anymore.