This morning I was thinking about children, and things that I was never told about investing when I was younger. There are many things that young or inexperienced investors simply cannot know, without the requisite experience or perspective.
Here are the three most important things I wish I'd learned as a child about investing:
You can achieve less than you think in 1 year, but more than you think in 10 years
Good life advice in general, but especially acute for investing. Unless you're highly skilled (or lucky), you can't reasonably expect to achieve much more than receiving a dividend in 1 year of holding shares. Yet if you own a growth business like TPG Telecom Ltd (ASX: TPM), you could be looking at very respectable growth over a decade.
Even if you just saved your money, bought companies like Commonwealth Bank of Australia (ASX: CBA), and earned 5% dividends per annum for a decade (and Commbank has done much better than that), you will be sitting on a very tidy sum after 10 years.
When you're young, if you can do that for 4 or 5 decades in a row, your retirement will be looking pretty darn good.
Why debt is the devil in disguise
Enough debt can make good businesses ordinary, ordinary businesses mediocre, and mediocre businesses terrifying. Take these two companies – Blackmores Limited (ASX: BKL) and Bellamy's Australia Ltd (ASX: BAL).
Both saw their sales crunched over the past 6 months for a variety of reasons. Both saw their working capital and inventory expenses explode (because they bought products from suppliers but could not sell those to customers) and generated very little cash. Neither company had any serious debt.
If either business had carried the ASX average amount of debt, they would have been perilously close to bankruptcy after these shocks. As it happens, Bellamy's could need to raise capital, while Blackmores continues to operate normally, because it was able to take on debt to avoid any trouble. Both have lived to see another day.
There's a tendency to disregard debt when you're younger, but it's a make-or-break factor when times get hard.
The importance of keeping a level head
In the timeless words of Peter Lynch, 'There is always something to worry about.' And there is! But fundamentally, there's never going to be a situation where Australian businesses do not sell products to people and make profits on those products. There will always be investments to be made that will generate attractive income streams for their holders, regardless of changes that will be made to regulation, the tax code, superannuation, and so on over time.
I'm not saying that businesses won't be affected, simply that in the vast majority of cases, they will be able to continue operating profitably – but see the message about debt, above. If you buy businesses where demand for the product is reliable and hold for the long term, you can grow your wealth.
