I wouldn't buy G8 Education Ltd (ASX: GEM) shares or Challenger Ltd (ASX: CGF) shares in 2017, even though they are included in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
'Sell' or 'avoid'?
Even if I wanted to, I couldn't 'sell' these two companies because I don't own the shares — I'm just avoiding them.
I think avoiding investments is the best way to grow your wealth over time.
Huh?
When it comes to investing, everyone seems hell-bent on buying and selling right now. People spend a small amount of time (e.g. five to 10 hours) researching a business and hit the 'buy' button without really understanding what's going on.
We've all done it before.
I did it with Challenger and G8 Education shares. I bought Challenger shares many years ago and made a mint. Then I bought G8 Education shares and took a bath.
In both cases, I bought in without really thinking about it.
Why am I buying this?
Is the question I didn't ask enough.
You should probably do that 20 times before you make any investment.
And it doesn't matter how small.
'It's only a punt.'
'It's not much money.'
Do your homework and treat every dollar like it's your last.
They say dogs look like their owners. The same thing could be said about your investment portfolio.
So before you buy, think about your overall portfolio — what does this company and my portfolio say about me?
Is it a cigar butt? Meaning, am I picking up shares in a 'cheap' business and hoping to get one more puff before it's entirely worthless. Maybe it pays a great dividend.
Am I investing in a 'theme'? Lithium. Gold. Weed. OMG, baby boomers are retiring!
In my opinion, shares are part ownership of real businesses. Themes — also called 'tailwinds' and 'rising tides' — are good when they are popular. But speculators are too often seen swimming naked when the tide goes out.
After all, investing is not rocket science.
Just find good businesses that you understand, make sure the businesses products or services are better than their competitors, look for long-serving management teams — founders and family businesses are a bonus — who own lots of shares, and don't rush to buy or sell — wait for a good price.
If you don't know how to value businesses, make an oath to yourself: "I'll never buy when the share price jumps 10% in a day, and I'll never sell when it falls 5% or more in a day".
Alternatively, you can dollar-cost average, by buying a company's shares in blocks of, say, ⅓ of what you would like to buy, spaced out every three months. That might stop you doing something (stupid?) impulsive and regrettable.
Valuation is important, but it's not everything.
But why avoid G8 and Challenger?
Back to G8 Education, the childcare centre owner and operator.
Its shares are down again today. This time, an investor from China that promised to invest $149 million pulled out of the deal. Now the company is searching for other big investors to buy at a steep discount to last week's share prices.
That's burned small shareholders, who have watched their shares plummet.
Worryingly, the company's occupancy levels had fallen sharply to 77.4% from over 80% last year.
G8 Education has long used a 'roll up' strategy. Buying private businesses using ASX shareholders' money and debt.
I think it is a very low-quality business.
Challenger is the opposite kind of business, selling annuities (read: guaranteed pensions) to retirees. You have probably seen or heard the television commercials: 'Challenger annuities are protected against market volatility', or something like that.
I think annuities are great products, providing peace of mind to the retirees. But let's think about what is happening underneath the hood. You, a retiree, give Challenger your money and they pay you an income stream. That means they take all the market risk. Not the retirees, whose funds are likely protected with capital overlays, derivatives and other instruments.
I get it. They have actuaries who spent too long at university, and it's just like an insurance policy. But I can't shake the itch that many companies have come and gone trying to do the same thing.
This is my opinion only. And maybe I'm a bit twisted because Challenger shares have shot higher since I sold them. Indeed, like G8 Education they could go on to shoot the lights out.
But with over 2,100 companies on the ASX and around 99% of the world's companies outside Australia, I'm not going to bother buying a company I don't fully understand.
