I think the share market should ultimately be judged against the returns of cash in the bank. If the long-term returns of shares beat cash, then ultimately that's a win for shares.
However, it's still possible for an investor to pick poor shares, even if they beat cash returns. If those shares underperform the market average then investors may as well have invested in an index fund.
Here are two popular shares I think investors need to be careful of:
Telstra Corporation Ltd (ASX: TLS)
Telstra is a self-managed superannuation fund (SMSF) favourite. Its generous dividends have gathered an income-hungry army.
The dividend was too good to be true. The business was paying out more than 100% of its profit as a dividend, which doesn't help re-investing for future growth at all.
Telstra finally pulled the plug and will be reducing the dividend in future years to a sustainable percentage of profits.
However, the profit may be heading even lower in future years because of the NBN and competitors. It's no secret that the change of Telstra's broadband customers to the NBN will lower profit margins.
Low-cost operators like Amaysim Australia Ltd (ASX: AYS) and ALDImobile are the fastest growing mobile operators and are growing their total subscribers. TPG Telecom Ltd (ASX: TPM) will launch a mobile network in the future once it has built its mobile infrastructure.
I think investors need to wait until the dust has settled before buying Telstra shares. It's currently trading at 10x FY17's earnings.
BHP Billiton Limited (ASX: BHP)
BHP has unlocked a lot of wealth for individuals and governments, but I think investors shouldn't invest today.
One of the best traits of a market-beating business is having pricing power or an economic moat with its products. Xero FPO NZX (ASX: XRO), CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH) can all set their prices and have wonderful products.
BHP is entirely reliant on the global price for its resources. If there isn't demand for its resources then it will either have to lower prices or not sell at all.
The best time to buy cyclical shares like resource businesses is at the bottom of the cycle. This was when BHP shares were trading at $15 per share at the start of 2016, not at today's price of $27.
I think investors need to wait until BHP shares hit another low before considering buying.
Foolish takeaway
Investors always need to be mindful of the price they pay for shares, particularly ones going through a rough patch.
