Don't play safe, play smart

I delivered a brief talk at a medical conference a few weeks ago. There are the odd exceptions, but generally doctors are the worst-informed stock market investors I know. It's understandable.

Looking down people's throats is far removed from the pulse that shapes the country's economy and what little leisure time they have, after shepherding hundreds of patients through their rooms daily, is seldom reserved for analysing financial pages in the newspaper.

My talk was warmly received, but it was easy to detect that few in the audience had the appetite to follow my advice. Most confessed that their money - and the specialists make mountains of it - was safely invested in the bank on deposit. This way, they professed, they didn't have to worry about the wild swings in the stock market. They felt sheltered and protected, like being wrapped in a Granny Goose duvet on a cold winter's night.

But with interest fully taxable, inflation high and rates at historically low levels, I would feel anything but secure.

You don't need a master's degree to understand that your capital is devaluing annually. And with the current financial crisis likely to persist, interest rates could remain lower for longer. Depreciating 2% or 3% a year doesn't appear alarming, but the compounding effect over five or 10 years is devastating.

Of course, the stock market is risky - but so is life. Life is a series of uncertain choices; the decision to commit to marriage, to buy a house, to change jobs and to have children. Imagine life without the ups and downs, without passion and without fire.

Investing in a portfolio of quality companies is the only hope you have of rising above the great unrich and - with confidence and knowledge of how the market works - you will learn to brush aside the noise and see it as an obvious smokescreen. With a little bit of experience, you will soon learn to follow the smart money and navigate to a prosperous future.

Over the past 10 years, the Johannesburg Stock Exchange All Share Index is up 270%, or 14% per annum. To that you can add another 2.5% per year for dividends. Of course, it hasn't been a smooth path upwards. September 2002 was a particularly difficult time. The market continued to head down in the wake of the insecurity that followed 9/11 and the unease that accompanied the invasion of Iraq. In 2008, the bursting of the housing bubble caused the collapse of giant investment banker Lehman Brothers, fuelling a financial crisis that almost drove the world economy into a 1930s-style depression.

Even as I write, the debt crisis in Europe remains unresolved. Yet despite these worrisome issues, if you had remained invested in the stock market over the past decade, the increase in your wealth would have substantially exceeded anything cash could offer.

While the gains in the overall market over the past decade are impressive, the wealth created by certain well-known companies during that time is staggering, testimony to the quality of business leaders in our country. To name a few, Shoprite is up 2400%, Mr Price 2500% and MTN 1575%.

What keeps most people from entering the market is a lack of knowledge of how it operates. Reading the market is not a science, it is about understanding human nature. Naturally, in all spheres of life there are the smart and the not-so-smart. In the market, the smart cannot hide their intentions all the time, so below I have listed a few pointers I have gathered over the years that will allow you to follow the smart money and guide you on your path to riches.

• Firstly, don't worry if you worry. Worry is a sign that you are aboard. Every mother worries about her children, even if they are healthy and prospering. So worrying about your investments is a natural state of mind.
• If you are not sure what you want out of your investments you can't expect other people to guide and advise you. If you know your destination, it is simple to map out an itinerary. If you decide to travel to Chicago, there are numerous options available. You can fly from Johannesburg via New York, London or even Amsterdam. But if you are not sure where you're heading, no matter how long you discuss your trip, you will madden yourself and the people around you.
• Never tell the market it is too high. It's always high and will go higher. I have never heard anyone say the market is low. Even when it is low, people will tell you it is still too high and will go lower. My motto is "buy when it's high, sell when it's higher".
• Take your losses fast, your profits slowly. If you make a wrong decision, acknowledge it. Ego brings down more people on the stock market than any other issue.

As George Soros says: "It's not whether you are right or wrong. It's how much you lose when you are wrong and how much you make when you are right."

• No one knows how the future will unfold. Be careful of anyone who makes bold claims about prospective returns on investment. no matter how convincing. You've heard it many times - if it's too good to be true, it probably is. Also be careful of long-term plans. They engender the belief that everything is under control. Don't throw away your freedom by defining a long-term strategy. Rather react to the market as it unfolds in front of you.

The only long-range target you need is the intention of increasing your wealth.

• Be careful of nostalgia and loyalty. Don't buy a share on emotions. Buy shares because of their inherent worth, not because your grandfather made his fortunes holding it. Shares are not priceless antiques or rare masterpieces; they are binary codes on a computer.
• And lastly, there is absolutely no evidence that G-d has the slightest interest in your bank account, so don't let hope and prayer lull you into a state of calm. Do your homework or seek expert advice before you buy a share.