Opinion
Share tactics: How to take a punt on investing and avoid backing a dud
Dominic Powell
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In the world of personal finance, investing and just generally making money, you hear a lot about “good” investments. A blue-chip company like Telstra or BHP? A “good” investment. Whatever your uncle made $20,000 bucks from last year? A “good” investment. Bitcoin in 2009? A “good” investment (that might be an understatement but moving on).
More rarely, you hear about bad investments, such as outright scams, or about poorly run companies that go belly-up. The former is unfortunately very common – Australians lost a whopping $292 million to investment scams in 2023, according to the ACCC, with unsuspecting buyers often lured to invest in fake businesses that then fleece them for tens of thousands of dollars.
New to investing? Follow some simple tips to protect yourself against bad investments.Credit: Aresna Villanueva
While those sorts of scams are extremely damaging, perhaps more common are bad investments that looked good but ended up losing the investor money for any number of reasons. Maybe the business missed its profit targets for the year, or perhaps a key executive got poached by another business. Whatever the reason, what looks good on the surface can quickly unravel, with the share price unravelling along with it.
What’s the problem?
Investing in Australia has become increasingly popular among everyday punters, bolstered in part by the pandemic and a proliferation of easily accessible online trading platforms. According to the ASX, our main securities trading platform, more than half of the 20 million adults in the country own shares outside of super, driven by the younger generations.
What you can do about it
With this boom in investing novices comes a bit of tough love, as many will likely make bets on companies that don’t perform so well. While some might say backing a dud is a formative part of the investing process, there are some things to look out for to inoculate yourself as best you can against “bad” investments:
- First, the financials. One of the first things you should look at when considering investing in a company is its financials. Investors typically look for, and reward, revenue and profit growth, as these show a business that is increasing its market share and is financially healthy – two good things from an investor’s perspective. “An investment that cannot grow income will eventually reduce in value,” warns HLB Mann Judd partner Jonathan Philpott. “Growth in income does not need to occur every year, but after a few years you should see it occurring.” If the company pays dividends, it’s important to look at those too, as they can also be a sign of the health of a business. Look at the dividend payout ratio (the proportion of profit paid out as a dividend) and the company’s dividend history, to make sure it’s somewhat consistent and reliable.
- Who’s at the top? Just as a bad boss can make for an uninspired and unproductive workplace, bad management can stymie a business’ growth, or make it go backwards completely. John Winters, chief executive at investment platform Superhero, says the quality of management is often the first thing major investors – such as private equity or venture capitalists – look at, so newer investors should too. “Look at how much skin they have in the game – how much of the company’s stock they personally own,” he says. “When you look at someone like Elon Musk, he’s front and centre and owns many shares in his businesses. But when you look at some other companies, management has very little shareholding.” Management changes and a chief executive’s history can also be factors. For example, a business that’s changed leadership three times in the past 18 months might have broader underlying issues.
- The importance of industry. Winters also notes investors should assess what market, or industry, the company operates in, and any factors that might be affecting that industry. He uses the example of buy now, pay later firms such as Zip and Afterpay, where the companies may be growing on a fundamental level, but their share price isn’t as strong because investors are concerned about rising interest rates. Similarly, competition in a specific industry is a factor to look out for, he says, as a heavily competitive or monopolised industry can mean it’s harder for companies – especially newer ones – to grow and gain market share.
- Your circumstances. Finally, no investment can be considered “good” if it’s one that’s beyond your means, either financially or from a risk perspective. If you’re risk-averse, don’t bet the house on a volatile and unpredictable investment, such as cryptocurrency, and don’t spend more money than you’re comfortable with. It’s also important to determine the timeframe in which you want to invest, as different businesses will be more suited to shorter or longer investment periods.
Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.