Investment lessons from Melbourne Cup
Prince of Penzance looked like a good bet on Melbourne Cup day. It was nicely suited to a high-risk investor, paying a handsome $65.90 for a win.
Melbourne's classy races mean you can behave completely out of character and for me that involves taking a risky punt.
The TAB account contained a princely sum of $45, so a tenner went on Penzance. You may wonder if a highly-tuned method of technical analysis unlocked the winner and gave me my eventual win of $659. Afraid not.
The name was nice. Penzance is a beautiful spot in the Marlborough Sounds.
To balance out this frivolity it also seemed wise to take some advice.
One Aussie newspaper seemed to have it sussed, suggesting a research-based selection of "preferment". On closer inspection the research was nothing short of witchery pokery, otherwise known as past performance.
The dark arts deemed the race would be won by a 4 to 5-year-old stallion, stationed in barriers nine to 12, ridden by a 54 kilogram jockey in black silks with odds of 10/1. Another tenner fluttered away on lucky numbers and colours, with an unsurprising bottom-quartile finish.
After a bit of inner reflection it dawns that this is how the average investor might feel about the investment industry: Advised by the dark arts and secretly taking the odd silly risk on a mad stock hoping for a quick win.
A good financial adviser or fund manager will hopefully make far more sense than a bet at the TAB. For a start they'd have shares in the horses, rather than gamble away their capital.
Reading the names of the mounts in the 2015 Melbourne Cup field, it was interesting to see how many good investment lessons could be derived.
In finishing order, after the Prince of Penzance:
Max Dynamite: High-risk high-return shares and funds are prone to exploding in your face. Do not be ashamed of being boring and avoiding the dynamite.
Criterion: Judge investment performance by the right benchmarks.
Trip to Paris: Global funds involve foreign currency. Ensure you know if those euros are hedged or exposed to movements. It all adds to risk.
Big Orange: Wait, wait and more waiting. The orange light says it all. It's all about time in the market not market timing.
Gust of Wind: The markets tend to move in unison, which means a well-balanced portfolio must contain a host of asset classes for diversification. They will pay you back when the wind changes.
Excess Knowledge: Investors don't have it and neither do professional fund managers. Never believe you know something that others don't.
The Offer: Selling when the market wobbles or plunges is tempting, but tends to be a mistake long-term. Don't sit on the offer, buy into the dips.
Quest for More: Everyone knows a person who seems to make bigger gains and be in the right asset class. It's all hot air from DIY investors. They parade their gains and bury their falls. Don't be tempted to follow.
Fame Game: A star fund manager might be a great addition to your portfolio, but spread your risk. Celebrities can implode.
The United States: When the US sneezes the world can catch a cold. Keep one eye on them and the other on China.
Hartnell: The term Hartnell Down comes from ice hockey and a skater taking a tumble. The investment world is full of tumbles, but good players shake themselves off and don't leave the rink.
Bondi Beach: Investing in Australia doesn't count as international diversification. We must look beyond the end of our neighbours' noses for a true spread.
Grand Marshal: The US Federal Reserve referees the world's largest economy. Watch and listen.
Sky Hunter: Buying the shares or funds that are soaring in value is a basic behavioral error. Bottom-fishing is more worthwhile, but you need to be a professional manager to do it well.
Cadeaux: Stop looking for free gifts in the investment world. However, cadeaux fiscaux (tax breaks) do exist. Arrange your investments with tax efficiency and you might finish the race in better shape.
Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.