It’s the final stretch.
The market is down to the last 20 trading days of the year.
During that time, if the market is to get to our 6,000 point year-end target it will need to gain 12.8%.
It seems impossible. And maybe it is.
Yet, even if it does nothing from here, this market continues to prove there’s no better wealth-building investment than stocks…
It’s easy to look at stocks at the moment and take a negative view.
After all, since hitting a five-year high in October stocks have pretty much moved in one direction.
We’ve heard the same old tired stories about stocks being a dud investment. That’s especially so when the front pages tell wonderful stories about the housing market rebound…how house prices are so high that first home buyers just can’t afford to get into the market.
Oh, what short memories. We’ll just remind those folks that as great as the housing market rebound may be, there wouldn’t be a single property investor who has made a net gain of 14.4% this year.
By contrast there are thousands, perhaps even millions of stock investors who have done just that. Some have done even better.
Don’t Confuse Price With Value
It’s funny. Property investors always rush to say that investing in property is a great way to make money. And yet it seems to us that almost every day we read a story that says housing is unaffordable…that it’s too expensive for folks to get into the market.
Maybe we need to go back to investing school, but surely a key definition of a good investment is that you can actually buy the investment.
If it’s so expensive that you can’t afford to buy it, well, that’s not much of an investment at all.
Compare that to the stock market. There isn’t a single stock on the Australian market that someone with as little as $500 couldn’t buy.
Of course, there’s a difference between price and value. A stock may have a price of $10 per share but that doesn’t necessarily make it good value compared to a $20 stock.
That’s where you have to put in the analysis to find out which stock is better value. You need to dig around a company’s balance sheets and get inside the business.
That’s the task we’ve set for Diggers and Drillers resource analyst Jason Stevenson. We’ve asked him to analyse – among others – BHP Billiton [ASX: BHP] and Rio Tinto [ASX: RIO] to find out which is better value.
These two stocks are a great example of the need to look at more than price. BHP is $37 per share, while Rio is $66 per share. But that doesn’t mean BHP is the better value stock.
Naturally, there’s a chance that neither are good value at their current price. If so we’ll suggest investors look elsewhere. We’ll showcase Jason’s analysis in the December issue of Diggers and Drillers.
Although we have to be honest and say that even if BHP and Rio are overvalued at the current price, odds are investors will still do pretty well out of each stock over the next 10 years. Even so, who wouldn’t rather buy a great stock at a great price rather than a high price?
Buying and Selling Costs are Chicken Feed
That’s what makes the stock market so great, despite what the detractors say.
Unlike property investing, most stock investors don’t need to borrow money to invest. They can pay with straight cash. That’s how stock investors can achieve such high net investing returns (not including the tax liability of course).
That’s not always true for property investors. In fact, Australian Taxation Office figures show that most property investors lose money each year. Interest costs, maintenance costs and property management fees chew up any gains they make from renting out a property.
And that’s not even taking into account the buying and selling costs associated with property investing, which run into the tens of thousands of dollars.
By contrast, even if you bought $100,000-worth of stock your transactions fees wouldn’t add up to more than $100. For most investors who buy anything from $500 to $25,000-worth of stock they’ll pay anything up to $25.
In short, the cost to buy and sell shares is chicken feed. And that’s important, because the more money you can plough into an actual investment rather than paying the government or agent, the more money for you in retirement.
We’ll Take This ‘Small’ Return Any Time
So sure, it has been a disappointing six weeks for stocks, and there’s a good chance the market won’t hit our short term target of 6,000 points.
But does that mean stocks are a bad investment and that you should get the heck out of them?
No.
Even with the rebounding housing market and low interest rates, if you factor in the fees and costs to buy and hold property, most housing investors are well underwater for the year.
But not stock investors. The S&P/ASX 200 may only have gained 14.4% so far compared to a 65% gain for Japan’s Nikkei225 index, but you know what, that’s good enough for us.
If we could squeeze that kind of gain out of stocks every year we’d be more than happy. In short, whatever anyone says, stocks remain the best wealth builder bar none…and this is definitely a buyer’s market rather than a seller’s market.
Cheers,
Kris+
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