“If investing was easy we’d all be millionaires.”
Have you heard that one before? It’s a nice throwaway line… everyone knows what it means… and we all nod wisely when we hear it.
Trouble is if you think about it, it’s actually not true.
If investing were easy, everyone would be poor, not rich. We’ll explain what we mean in a moment. First…
Remember to register for the Gold Symposium 2011. It’s taking place in Sydney on 14 and 15 November at Luna Park.
Keynote speakers include fund managers Eric Sprott (more from Sprott later), Egon von Greyerz and Ben Davies… plus Australian Wealth Gameplan editor, Dan Denning. Your editor will chair day two of the event, including a one-hour panel discussion at the end of the day.
You can register by clicking here.
Anyway, back to our point on the ease – or not – of investing…
There’s a reason shares have different prices and values. On any given day different investors have different views on where they think a share price should be and what it will do.
That’s a long way of saying no-one knows for certain what will happen next.
So you get different valuations… some shares are priced at a discount compared to other shares. While some are priced at a premium… and others are priced at a fair value.
That’s a long way of saying some companies are liked by investors more than others.
That’s why investing is hard…
It’s impossible to tell the true value of a company just based on its price. Simply because the price is driven by the amount buyers are prepared to pay and the amount sellers are prepared to receive. All you can do is use your experience, analysis and investing skills to make as educated a decision as possible.
But because investors have different views on what makes a company good value, share prices rise and fall.
And here’s the thing. If investing was easy all investors would know exactly what will happen to a share price. In that case a share would always trade at its “correct” value. In short, share prices would hardly ever move.
And so, with little opportunity for anyone to profit, few people would bother taking risks – such as starting a business or investing in a business. Bottom line: without risks there’s no progress (more on that in a moment).
So even though it may seem like easy-investing would be great, it would be terrible. The reason investing is attractive to investors is that it isn’t easy. It’s hard.
And the fact it’s hard is what makes the returns from investing worthwhile…
The point we’re making is that because investing is difficult it makes big returns possible. And some of the biggest returns you can get are with small-cap stocks. In fact, we liken investing in small-caps to the decision entrepreneurs make.
An entrepreneur has a choice. They could take the easy route of getting a regular 9-to-5 job… cashing a paycheque each week and – depending on the job – things would be pretty easy for them. Or…
They could pour other people’s capital (investors) into a high-risk business venture that only has a 20% chance of making it to year five (according to the National Business Incubator Association).
And that’s the success rate for ideas that get as far as going into business. Take into account the ideas that don’t make it that far and you’re probably looking at a success rate below 2%.
Yet that doesn’t stop entrepreneurs trying. And it doesn’t stop us looking for small-cap stocks. Like the entrepreneur, we could take the easy route and tip big blue-chip stocks. But we don’t. Because we know we want big returns.
Entrepreneurs and small-cap investors know it only takes one idea to hit the big time and the payoff could be huge.
Everyone wants to invest in the next Apple, Microsoft or Fortescue Metals. But finding them takes patience and analysis… and a lot of bottle to invest in a stock no-one has ever heard of.
But get it right and it’s worth it. Because that’s when you get the reward for taking the risk.
If investing was easy one thing is for certain: you wouldn’t lose much. But we can guarantee, you wouldn’t make much either… and you most certainly wouldn’t be a millionaire.