Grab your fascinators and shine your shoes – the Melbourne Cup has come again.
There’s an ironic certainty to the Cup, given the pony-picking premise. We know that it’ll happen every year on the first Tuesday of November (not even COVID could stop it, though it did keep the fans at home last year). Beyond that there are so many variables for the punters – weights, age, barrier draws, recent form, the race distance, the weather and the state of the track.
If you’re trying to pick stocks, the options are just as bewildering. You can look at fundamentals such as earnings growth or momentum, price-earnings ratios, cash flow, return on equity, margins, or the stock’s record of earnings surprises.
Hot tip? Not likely.
Horse racing and stock investing are ventures in which someone ‘in the know’ is eager to provide you with a tip on the next ‘sure thing’. A better tip would be to avoid these people at all costs. If they really knew, they wouldn’t be telling you at the racetrack.
For racing punters or stock pickers, there are also qualitative factors to consider. On the track, gamblers can look at the record of the trainer, the expertise of the jockey, or the bloodline and temperament of the horse.
On the stock market, stock pickers can take into account industry fundamentals, management’s track record, the relative quality of the firm’s product or service and its ability to innovate and deal with change.
Of course, if all this is too hard, you can always seek outside help. For the investor, there are broker recommendations. For the punter, there is advice from tipsters, bookmakers, journalists and the ranks of self-appointed experts.
And there is plenty of advice. In the Melbourne Cup in 2020, for instance, you could have taken direction from some confident sounding calls.
On the day of the race, one racing editor described the Caulfield Cup-winning ‘Verry Eleegant” as the nation’s premier horse. The first and second favourites for the big race were Irish pair ‘Anthony Van Dyck’ (an English derby winner) and ‘Tiger Moth’, with two wins and two placings in its four career starts.
As it turned out, however, the little fancied ‘Twilight Payment’, another Irish horse, overcame middling recent form and an underwhelming write-up by the tipsters to win the gruelling 3,200-metre race at odds of 26 to one.
Tragically, ‘Anthony Van Dyck’, a pre-race favourite, broke down with a leg injury and had to be euthanised. ‘Tiger Moth’ came second, while ‘Verry Eleegant’ was seventh. After the race, ‘Twilight Payment’s victory was depicted in the media as quite logical. It was, after all, owned by the multiple-Melbourne Cup winner Lloyd Williams.
So why wasn’t this all self-evident beforehand?
For the frustrated stock picker, it’s a familiar story. Year after year, brokers line up their top tips for the coming 12 months. Some turn out to be winners. Others turn out to be losers. There is very little pattern in which calls come in. You don’t have to look very far to find examples of these in New Zealand:
A2 Milk
The former top broker pick and sacred cow is a shadow of its former self having shed 70% of the capitalisation in under 15 months.
My Food Bag
With the private equity and founding shareholders having for the most part exited, new investors have seen a steady decline in the stock price since listing.
The instant satisfaction of delivered ingredients to the doorstep hasn’t translated into investor satisfaction.
Pumpkin Patch
Once an institution, now a memory. At its peak Pumpkin Patch had 250 stores across New Zealand, Australia, Ireland, the UK and US. By early 2017 all Pumpkin Patch stores were closed, overseas and in NZ, following a long, slow demise that can be tracked back to 2007.
Wynyard Group
The Christchurch based company was listed on the NZX in 2013 and in liquidation by 2017. The stock closed as high as $3.12 in March 2014 but shares were worth just 21.5 cents when the company eventually went under.
Windflow Technology
Perhaps somewhat before its time… but it certainly was a stormy ride for stockholders, including a Green Party co-leader, were left licking their wounds after the company went into liquidation.
SkyTV
Another must have in many historical broker pick sheets – unfortunately, the viewing hasn't been fair, with investors suffering some whooping loses in recent years including those by the NZ Rugby Union.
Do your research
The fact is there’s no guaranteed way of picking winning stocks, or horses. And a lot of what is dressed up as science is mere speculation. Gamblers may boast about their big wins, but betting agencies wouldn’t stay in business if the odds were not stacked against the punter in the long-term.
Equally, speculators who say they can outguess the market rarely do so over long periods. The random nature of returns from stock picking means that any short-term success is invariably due more to luck than skill.
The good news is you don’t have to speculate to be a successful long-term investor. Indeed, if you start with the assumption that markets work, and structure a diversified portfolio around the known long-term sources of higher expected return, keep costs low, and stay disciplined you are much more likely to have a successful experience.
After you thoroughly research stocks and horses, the percentage of companies and horses that you'd like to bet on will greatly reduce. Being patient and disciplined while waiting on promising opportunities is a mark of a smart investor or bettor. Do your own delving into the details and if things seem overwhelming, call on a trusted financial adviser.
And for those who still have the gambling bug… you can always take a flutter on the horses. Just don’t take it too seriously!
•Nick Stewart is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
•The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
