Are you just getting started in share investing, or thinking about starting?
This is my advice to you:
Don't buy trendy, interesting, sexy, or seemingly ultra-attractive investments.
You don't have to avoid them forever, of course. Plenty of game-changers and high tech businesses are great investments, and can make a lot of money for shareholders. Yet when you are just getting started, you may lack the insight or experience to tell the difference.
A while after I started investing, I remember the Next Big Thing was Liquefied Natural Gas, or LNG. Sure enough, it was a big thing, but many companies invested in LNG and supply surged, crushing prices and profits for most in the sector. Companies like Origin Energy Ltd (ASX: ORG) and Santos Ltd (ASX: STO) that were in vogue at the time have proved disastrous long-term investments.
Nowadays the hot stocks are lithium miners and marijuana companies. And there are always plenty of hot tech stocks showing up and trying to wow investors, often with nothing to show except very few revenues and a weak financial position.
When you start investing, there are many ways to get tripped up by trying to outsmart the market, or do too much, too fast.
Do buy reliable, boring, and stable.
Instead, buy something stable, boring, and safe. Retail conglomerate Wesfarmers Ltd (ASX: WES) is an ideal example. Through its Officeworks, Coles, and Bunnings super-stores, this company's modest growth in earnings over time has delivered big rewards and attractive dividends for shareholders.
What's more, the retail business reliably generates cash and these brands have a strong market position, allowing Wesfarmers to maintain its dividends and comfortably pay its debts. Owning Wesfarmers also avoids the complexity and unpredictability inherent in industries like mining and finance. Commonwealth Bank of Australia (ASX: CBA) is the one dividend stock new investors usually turn to, but I haven't met many household investors that fully grasp the risks and rewards of the banking – or the airline – industry.
Another perfect example for newbies might be Bapcor Ltd (ASX: BAP), the automotive parts distributor with a growing store network. It's as boring as they come – and may even be a little expensive – but there's nothing boring about taking market share from competitors.
Once you've got a few stable companies in your portfolio, have read a few annual reports, and maybe been investing for a couple of years, then you can start looking at the smaller, riskier, and potentially more profitable companies. With any luck, and a little patience on your part, a slow-and-steady entrance to the stock market will keep you from getting swept up in excitement, and possibly losing a lot of money in the process.
