DIY financial investing: The g


DIY financial investing: The game

This week, we investigate why you should buy shares.

DIY financial investing: The g


Why buy shares

A group of friends that gather in a pub for a few games of poker is involved in something called a zero-sum game. In such a game everyone can not be a winner. In fact, what the winners gain is exactly equal to what the others lose.

Fortunately, the stock exchange is not a zero-sum game. Since the first stock exchange in Amsterdam in the early 1600s, the concept has spread and these days most countries have stock exchanges,  some countries even have quite a few. And there is very good research that shows that, over the long run, shares outperform any other asset class. It makes a lot of sense to invest in shares.

As an example, we can look at the Dow Jones Industrial Average. It has, on average, grown by close to 10% annually for nearly a hundred years. This is phenomenal. And closer to home the JSE did much the same. If you invested R1 000 in the year 2000, then you will now have about  R12 000.

But why do share prices go up over the long term? The reason is that shares are parts of companies, and companies are part of the real economy of the world. For centuries the percentage of people that live from hand to mouth has been decreasing, while the middle-class has been expanding. The world is slowly becoming richer. Hunter-gatherers could have carried all their belongings on their backs, but modern man or woman probably does not know how many pairs of shoes he or she has.

It is a good idea to take a step back and to consider whether this endless creation of wealth can go on forever. From an environmental viewpoint, a levelling off in growth will definitely be a good thing, and surely there is a limit to the number of shoes we need, given the fact that we each only have two feet. But for now, with many still not part of the greater economy, growth is probably set to continue for many years to come.

Playing shares

Occasionally someone asks me about “playing shares” and how to do it. I hate this expression. These people have in mind the quick buying and selling of shares with the idea of making lots of money overnight. But this strategy is essentially a zero-sum game because you hope to outsmart your fellow investors by jumping into and out of the market at just the right time. Those who don’t get it right, pay for those who do, of course.

The correct and safe way to invest is to accumulate shares in good companies and to keep them for a long time. In this way, you are a co-owner of a company that provides some service to society, and for this, you should get well rewarded over the long term.

But for those who do want something more exciting, I suggest this: get some friends together and play some poker. And who knows, the one who wins might even offer to pay for everybody’s drinks.

Also read: The stock market