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Conversations with my son

The art of stock picking, from a 19-year-old’s perspective.
Long-term investing requires a patience that many impatient 19-year olds are unfamiliar with. Picture: Shutterstock

As a first year B.Comm student, not only is my son learning about the allocation of scarce resources on a theoretical level, but on an immensely practical level too. He is sharing a small flatlet with a friend and they are responsible for their own budget, which must cover groceries, WiFi, cleaning, laundry, bike maintenance, entertainment and other sundries.

As you can imagine, opportunity cost is another economic term he is coming to appreciate through lived experience. A rather too raucous party on a Monday night post the Varsity Cup cost him a full morning that could have been spent on the economics assignment due two days later. But perhaps that is only a cost when viewed through a mother’s lens.

But nothing focuses the mind like balancing a monthly budget and you can probably picture the late night conversations about how to make a little extra income. Some of the ideas made my hair stand on end. The most legitimate, but worst paying involves delivering pizza and pasta for a local eatery. But a job is a job and his meagre earnings will add to the monthly pot. Sensibly he has also decided that a portion of these earnings should be invested for future prosperity.

I was impressed. Until he told me he planned to buy cryptocurrencies and investigate binary and forex trading. I went paler than I am already. Anyone after those kinds of quick profits may as well go straight to the casino.

Long-term investing requires a patience that impatient 19-year olds are unfamiliar with. But it’s less stressful than trading and while there are ups and downs, history has shown us that ultimately equity markets go up. Which is immensely satisfying.

Okay, he says, buying into the logic. So which are the best cheap shares to buy? At R2.22 surely Steinhoff is a bargain? Living in Stellenbosch, as he does, Steinhoff is a favourite subject with many of his lecturers.

If rule number one is invest for the long term, then rule number two has to be buy low, sell high; but for goodness sake in the process pick quality stocks and avoid the dogs.

He rolls his eyes, exasperated. I can tell he thinks that’s a contradiction.

I know it’s easier said than done. For one buying ‘cheap’ or rather ‘low’ means having the courage to buy when everyone else is selling. It also means being able to tell the difference between a good but ‘uncool’ company – such as Clover, Hudaco, Italtile or Rhodes Food Group (remember rand hedges were all the rage last year, leaving SA Inc stocks rather unloved); and a value trap like ArcelorMittal, which is cheap for a good reason. This requires Warren Buffet-like legwork. Read the annual reports and management updates, I say.

Look for companies with strong management teams, strong cash flows, leading market positions or trusted consumer brands that earn high margins. Trusted brands, he snorts. What like Enterprise Polony and KPMG are trusted brands?

Now I roll my eyes at my teenage know-it- all and quote Sir John Templeton, who some say was the greatest global stock picker of the century: “Determining quality in a stock is like reviewing a restaurant,” he once said. “You don’t expect it to be 100% perfect, but before it gets three or four stars you want it to be superior.”

I start warming to my theme. Templeton was an inspirational human being. Aside from being a superb investor, he was also a deeply spiritual individual who once said that if you begin your investment decision-making with a prayer you will think more clearly and make fewer mistakes.

He made a fortune, gave away a fortune, wrote or edited more than a dozen books, but throughout it all, remained modest and humble. One of his favourite pieces of investment advice echoes this: There’s no such thing as a free lunch.

Now, if I had been paying attention I would have noticed that my teen’s eyes glazed over at this point. After all, every hungry teen I know is looking for a free lunch. But I was so caught up in my investment 101 that I carried on regardless: don’t invest on a tip and don’t invest on sentiment. The company that gave you your first job, or built the first car you ever owned, or sponsored a favourite television show of long ago may be a fine company, but that doesn’t mean its shares are a good investment.

In addition, I say, quoting Templeton, you have to keep an eye on your investments – no investment is forever. But, at the same time – don’t panic and sell out when markets move wildly. That is the best way to lock in losses.

And learn from your mistakes. The only way to avoid mistakes is not to invest — which is the biggest mistake of all. So forgive yourself for your errors and try to determine exactly what went wrong and….

I’m about to get into the technicalities of investing for maximum real return, when he stops me. You have your way mom, and I have my way. I’m going to invest in companies that I think are cool. For starters those are Nike, Apple, Tesla, Facebook and Tencent via Naspers.

Well blow me down with a feather. I couldn’t really fault his selection, despite the
sketchy methodology. At this point all I can suggest is that he puts his head down
and earns the means to do so.

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