{"id":41051,"date":"2013-08-15T22:04:29","date_gmt":"2013-08-16T02:04:29","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=41051"},"modified":"2013-08-15T22:04:29","modified_gmt":"2013-08-16T02:04:29","slug":"chapter-8-individual-stocks-v-the-index","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/08\/15\/chapter-8-individual-stocks-v-the-index\/","title":{"rendered":"Chapter 8: Individual Stocks v The Index"},"content":{"rendered":"<p>By <a href=\"http:\/\/www.MoneyMorning.com.au\" target=\"_blank\"><u>MoneyMorning.com.au<\/u><\/a> <\/p>\n<p>[<strong>Ed Note:<\/strong>The following is an edited extract from a book Vern Gowdie wrote to his three  daughters. The book&#8217;s title is <em>A Parent&#8217;s  Gift of Knowledge<\/em>.]<\/p>\n<p>The <a href=\"http:\/\/www.moneymorning.com.au\/category\/stock-market\/australian-share-market-stocks\" title=\"more on the Australian share market\">Australian share market<\/a> has two major  indices:&nbsp;<\/p>\n<ul>\n<li>The All  Ordinaries Index&nbsp;<\/li>\n<li>The ASX 200  index&nbsp;<\/li>\n<\/ul>\n<p>The All Ordinaries reflects the share price movements  of a larger number of shares.<\/p>\n<p>The <strong>ASX 200 index<\/strong> reflects the movement of the top 200  companies in Australia.<\/p>\n<p>The way an index works is relatively simple. The following is an example only and the values I have attributed to each company bear no resemblance to reality.<\/p>\n<div align=\"center\">\n<table border=\"1\" cellspacing=\"0\" cellpadding=\"0\">\n<tr>\n<td width=\"193\">\n<p><strong>Company<\/strong>&nbsp;<\/p>\n<\/td>\n<td width=\"139\">\n<p><strong>Value<\/strong>&nbsp;<\/p>\n<\/td>\n<td width=\"113\">\n<p><strong>% of index<\/strong>&nbsp;<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td width=\"193\">\n<p>CBA&nbsp;<\/p>\n<\/td>\n<td width=\"139\">\n<p>$50 Billion&nbsp;<\/p>\n<\/td>\n<td width=\"113\">\n<p>14%&nbsp;<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td width=\"193\">\n<p>NAB&nbsp;<\/p>\n<\/td>\n<td width=\"139\">\n<p>$30 Billion&nbsp;<\/p>\n<\/td>\n<td width=\"113\">\n<p>&nbsp; 8%&nbsp;<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td width=\"193\">\n<p>ANZ&nbsp;<\/p>\n<\/td>\n<td width=\"139\">\n<p>$35 Billion&nbsp;<\/p>\n<\/td>\n<td width=\"113\">\n<p>10%&nbsp;<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td width=\"193\">\n<p>Westpac&nbsp;<\/p>\n<\/td>\n<td width=\"139\">\n<p>$40 Billion&nbsp;<\/p>\n<\/td>\n<td width=\"113\">\n<p>11%&nbsp;<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td width=\"193\">\n<p>BHP&nbsp;<\/p>\n<\/td>\n<td width=\"139\">\n<p>$60 Billion&nbsp;<\/p>\n<\/td>\n<td width=\"113\">\n<p>17%&nbsp;<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td width=\"193\">\n<p>Rio Tinto&nbsp;<\/p>\n<\/td>\n<td width=\"139\">\n<p>$40 Billion&nbsp;<\/p>\n<\/td>\n<td width=\"113\">\n<p>11%&nbsp;<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td width=\"193\">\n<p>Telstra&nbsp;<\/p>\n<\/td>\n<td width=\"139\">\n<p>$25 Billion&nbsp;<\/p>\n<\/td>\n<td width=\"113\">\n<p>&nbsp; 7%&nbsp;<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td width=\"193\">\n<p>Woolworths&nbsp;<\/p>\n<\/td>\n<td width=\"139\">\n<p>$25 Billion&nbsp;<\/p>\n<\/td>\n<td width=\"113\">\n<p>&nbsp; 7%&nbsp;<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td width=\"193\">\n<p>Wesfarmers&nbsp;<\/p>\n<\/td>\n<td width=\"139\">\n<p>$30 Billion&nbsp;<\/p>\n<\/td>\n<td width=\"113\">\n<p>&nbsp; 8%&nbsp;<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td width=\"193\">\n<p>Harvey Norman&nbsp;<\/p>\n<\/td>\n<td width=\"139\">\n<p>$25 Billion&nbsp;<\/p>\n<\/td>\n<td width=\"113\">\n<p>&nbsp; 7% &nbsp;<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td width=\"193\">\n<p>TOTAL&nbsp;<\/p>\n<\/td>\n<td width=\"139\">\n<p>$360 Billion&nbsp;<\/p>\n<\/td>\n<td width=\"113\">\n<p>100%&nbsp;<\/p>\n<\/td>\n<\/tr>\n<\/table>\n<\/div>\n<p>In the above example, if BHP (17%) and CBA (14%) share  prices move up or down, the movement influences 31% of the index.<\/p>\n<p>Sometimes when they give the share market news on TV  you&#8217;ll hear things like, &#8216;the mining <strong>stocks<\/strong> helped lift the index today,&#8217; or  &#8216;banking shares drove the market lower.&#8217; The sheer size of these stocks and  their weighting in the index casts a huge shadow over the movement of the share  index.<\/p>\n<p>In my opinion the best and most economical way to  invest (as opposed to speculate) in the <strong>Australian share market<\/strong> is to buy into  an index ETF. An index ETF gives investors exposure to a broad range of <a href=\"http:\/\/www.moneymorning.com.au\/category\/stock-market\/stocks-and-bonds\" title=\"more on stocks\">stocks<\/a>.<\/p>\n<p>Why invest in the index (Beta investing) and not  individual shares (Alpha investing)? With individual shares (buying shares in  Telstra, NAB, Woolworths etc.) there are stock-specific risks and rewards.  Telstra is a classic example of this.<\/p>\n<p>Telecommunication usage (mobile phones, wireless  internet etc.) has grown exponentially over the past decade, yet Telstra&#8217;s  share price has fallen nearly 50% over the past fourteen years. <\/p>\n<p>The combination of the bursting in the <a href=\"http:\/\/www.moneymorning.com.au\/category\/technology-and-innovation\" title=\"more on technology\">tech bubble<\/a>  euphoria and Government interference to reduce Telstra&#8217;s monopoly in the  telecommunications sector created uncertainty over the company&#8217;s future  profitability. And so investors re-priced Telstra&#8217;s business.<\/p>\n<p>The banking sector has performed strongly over the  past decade. However NAB has been relatively weak due to some poor management  decisions. In Jan 2000 the NAB share price was $21.80 and is currently around  $30. This is a compound growth return of 2.5% per annum.<\/p>\n<p>Yet BHP, CBA and a handful of other quality companies  have performed exceptionally well over the past decade. BHP was around $8 in  2000 and is currently at $37. This is an outstanding 362% return over 13 years.  Not bad compared to Telstra losing 50% in value.<\/p>\n<p>Individual shares can be rewarding but picking the  right one is difficult and requires painstaking research. For instance, will  BHP continue its stellar run for the next ten years or will Telstra be the  stand out performer?<\/p>\n<p>History shows this process of consistently  anticipating the direction of companies is difficult over the longer term.<\/p>\n<p>Therefore it&#8217;s my conclusion that over the longer term  you&#8217;re better off tracking the index.<\/p>\n<p>The <a href=\"http:\/\/www.moneymorning.com.au\/category\/stock-market\/australian-share-market-stocks\/asx-market-update\" title=\"ASX 200 Market Update\">ASX 200 index<\/a> over the past thirteen years has  returned approximately 65%. This isn&#8217;t particularly great when compared to BHP  or CBA, but significantly better than how Telstra shareholders fared. Investing  in the index reduces your reliance on an individual company to perform (alpha)  and enables you to participate in the general movement of the market (beta).<\/p>\n<p>The question for stock pickers is, &#8216;What will be the  outstanding companies over the next decade?&#8217; Foresight is a much harder task  and it&#8217;s for this reason that sticking with the index enables you to  participate in the general market movement.<\/p>\n<p>Investing in an index still requires you to do your  homework to determine whether the market is over-priced or not. Anyone who  invested in the index in late 2007 at 6,700 points has lost 25% of their  investment.<\/p>\n<p>In 2007 the market had been in the ascendency for four  straight years (2003 to 2007). Common sense and history dictated this  trajectory couldn&#8217;t possibly last yet the majority of people were lured in by  the fact that it had run for that long and believed it would continue.<\/p>\n<p>Using past performance as a future guide is a very  poor substitute for detailed analysis. This was another hard lesson to learn  for market participants.<\/p>\n<p>When it comes to markets, common sense isn&#8217;t so common  when greed clouds your judgment.<\/p>\n<p><strong>Vern Gowdie<br \/>\n  Editor, <em>Gowdie Family Wealth<\/em><\/strong><\/p>\n<\/p>\n<p><strong><a href=\"https:\/\/plus.google.com\/106516983215198267222\/about\" title=\"Join Money Morning on Google Plus -- and read about the things we can't always fit into our regular essays\"><u>Join Money Morning on Google+ <\/u><\/a><\/strong>\n<\/p>\n<p><strong><em>From the Archives&#8230;<\/em><\/strong><\/p>\n<p><a href=\"http:\/\/www.moneymorning.com.au\/20130809\/should-you-still-buy-stocks-here-yes-but.html\" title=\"Permanent Link to Is This the Spark to Send Australian Property Crashing?\" target=\"_blank\">Should You Still Buy  Stocks Here? Yes, but&#8230;<\/a> <br \/>\n09-08-2013 &#8211; Kris Sayce <\/p>\n<p><a href=\"http:\/\/www.moneymorning.com.au\/20130808\/the-secret-to-chinas-7-billion-milk-market.html\" title=\"Permanent Link to Why it&rsquo;s Deflation&hellip;Not Inflation, that&rsquo;s Heading Our Way\" target=\"_blank\">The Secret to  China&#8217;s $7 Billi on Milk Market<\/a> <br \/>\n08-08-2013 &#8211; Nick Hubble <\/p>\n<p><a href=\"http:\/\/www.moneymorning.com.au\/20130807\/rba-retirees-below-average.html\" title=\"Permanent Link to Why You Must Avoid This Big Investing Mistake&hellip;\" target=\"_blank\">RBA (Retirees Below  Average)<\/a><br \/>\n07-08-2013 &#8211; Vern Gowdie <\/p>\n<p><a href=\"http:\/\/www.moneymorning.com.au\/20130806\/have-australian-stocks-broken-free-from-china.html\" title=\"Permanent Link to The Dark Side of Technology: Part 2\" target=\"_blank\">Have Australian  Stocks Broken Free from China?<\/a> <br \/>\n06-08-2013 &#8211; Kris Sayce<\/p>\n<p><a href=\"http:\/\/www.moneymorning.com.au\/20130805\/when-should-you-sell-your-loser-stocks.html\" title=\"Permanent Link to The Dark Side of Technology: Part 1\" target=\"_blank\">When Should You  Sell Your &#8216;Loser&#8217; Stocks?<\/a> <br \/>\n05-08-2013 &#8211; Kris Sayce<\/p>\n<div class=\"feedflare\">\n<a href=\"http:\/\/feeds.feedburner.com\/~ff\/MoneyMorningAustralia?a=9toLQVoWMuo:8CM7xD6ec_0:yIl2AUoC8zA\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/MoneyMorningAustralia?d=yIl2AUoC8zA\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/MoneyMorningAustralia?a=9toLQVoWMuo:8CM7xD6ec_0:V_sGLiPBpWU\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/MoneyMorningAustralia?i=9toLQVoWMuo:8CM7xD6ec_0:V_sGLiPBpWU\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/MoneyMorningAustralia?a=9toLQVoWMuo:8CM7xD6ec_0:gIN9vFwOqvQ\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/MoneyMorningAustralia?i=9toLQVoWMuo:8CM7xD6ec_0:gIN9vFwOqvQ\" border=\"0\"><\/img><\/a>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~r\/MoneyMorningAustralia\/~4\/9toLQVoWMuo\" height=\"1\" width=\"1\" \/><\/p>\n","protected":false},"excerpt":{"rendered":"<p>By MoneyMorning.com.au [Ed Note:The following is an edited extract from a book Vern Gowdie wrote to his three daughters. The book&#8217;s title is A Parent&#8217;s Gift of Knowledge.] The Australian share market has two major indices:&nbsp; The All Ordinaries Index&nbsp; The ASX 200 index&nbsp; The All Ordinaries reflects the share price movements of a larger &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/www.investmacro.com\/forex-news\/2013\/08\/15\/chapter-8-individual-stocks-v-the-index\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Chapter 8: Individual Stocks v The Index&#8221;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-41051","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/41051","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=41051"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/41051\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=41051"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=41051"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=41051"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}