Lots Of Lessons In Share 'Shopping Spree'

By Mary Holm

Saturday 14th April 2001

Students in a night school class I teach must have been surprised at an exercise we did on the first night.

I asked them to each choose a share that they thought might rise in price over the following four weeks.

Four weeks! That's ridiculous, given that I'm always going on about shares being a long-term investment.

Still, each of the 20 students dutifully chose a share. Then I past around a hat, and they each pulled out the name of another share.

Pretending to spend $1000 at a time, we worked out how many of each of the 20 selected shares and 20 randomly chosen shares the students could buy.

Then they divided into four teams, and put together their team portfolios.

Over the following weeks, we checked out both individual and team progress, adding dividends when they became payable.

A month later, the big chocolate fish prizes went to two students whose $1000s had turned into $1250. They wished they had used real money!

The booby prize went to a student whose $1000 purchase was now worth $638. She was only too happy she was just playing a game.

What did we learn from all this?:

- The randomly chosen shares did better than the selected ones. The value of the average random shares rose to $1017; the average selected ones fell to $951. People's share choices aren't necessarily good. As has been said before, we might do better choosing shares by throwing darts at a newspaper share table.

- Taking a high risk can be highly rewarding - if you're lucky.

- On the other hand, short-term share investment can be disastrous.

- The prices of small shares tend to be more volatile. The winning and losing shares were both in small companies, in the mining industry as it happened.

- Diversification lowers your risk.
Single shares rose by as much as 25 per cent or fell by as much as 36 per cent.

Just by moving from one share to two, the risk falls. The performances of the students' two-share portfolios ranged from a 16 per cent rise to a 28 per cent fall.

At the team level, with ten shares in each portfolio, the risk is much reduced. The biggest team gain was just 2.4 per cent, and the biggest loss 5.8 per cent.

I have to confess that I was lucky in the way the exercise worked out.

With such small numbers, the selected shares could just as easily have beaten the random ones.

Also, if we had happened to start at the beginning of a bull run in the sharemarket, the prices of almost all the shares might have risen over four weeks. Next thing, all the students might have got into short-term trading!

To guard against that, I warned the class at the beginning that using a single four-week period wasn't scientifically sound.

If the four weeks turned out to be particularly good - or for that matter, particularly bad - we would need to take note of how that affected our results.

Regardless of what happened in the markets, though, I knew the lesson about diversification would work out.

It's always true that, if you own a large number of shares - whether individually or through a share fund - your results will be less volatile.

Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached by E-mail at maryh@journalist.com or by mail care of this newspaper. Sorry, but she cannot respond directly to readers.

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