The Melbourne Cup is the one day of the year when even the most furious of nay-sayers will drop a crisp tenner on the fastest of neigh-sayers without feeling too guilty – more often than not without even the foggiest understanding of how the horse racing racket works.
Sometimes you’ll win. Mostly, you won’t. And that’s not the way to make money.
Which makes it completely wild that, for some Australian investors, that’s the same strategy they employ when it comes to picking a stock.
Luckily, Datt Capital CIO Emanuel Datt and Global X’s head of distribution Kanish Chugh chatted with Stockhead about share market investing to help out the stock newbies in the way everyone who’s ever lost a dollar on the ponies wished they’d been spoken to before having a flutter on Flemington’s raciest of days.
Winners
So, which stocks can parade proudly around the winners’ arena with a shiny sash, big prize money and trophy?
“Large-cap companies that have demonstrated the ability to achieve consistent profitability and shareholder returns throughout economic cycles and market conditions,” Datt said.
“The winners are the rarest of all.”
Losers
For every winner, there are the losers or the ones falling behind.
“Large-cap companies are facing structural declines in their sector or from poor management that has been detrimental to shareholder returns,” Datt said.
“More common than envisaged.”
Bolters
In horse racing, a bolter is a winning horse at very long odds. So who are the bolters on the ASX?
“Mid-cap companies are valued highly by investors over a short period of time, before crashing back to being out of fashion and perhaps back to small-cap status,” Datt said.
Stayers
A stayer is a horse that can run very long distances, well suited to a race like the Melbourne Cup which is 3.2km.
In ASX terms, “mid-cap companies that are conservatively valued relative to bolters but prove to be more sustainable businesses over time,” Datt said.
Fillies
In horse talk, a filly is a female horse that is three years or younger.
“These are the small-cap companies that operate within established industry niches which may grow to become acquisition targets for larger companies,” Datt said.
He said they have more residual value than a colt in the case of little success.
Colts
A colt by definition is an ungelded male three years and younger.
Datt said you can think of colts as small-cap companies that are the riskiest proposition out of all.
“They could possess disruptive technology or opening new market niches,” he said.
“Colts have the highest risk of failure with the least residual value but with a big upside in the case of success.”
Picking a winning formula on the stock market
Datt said share market investing should involve diversity with holdings amongst the winners, stayers, and fillies, whilst avoiding the losers and bolters.
“The inclusion of colts into a portfolio depends on risk appetite,” he said.
“Risky bets can be avoided by backing companies or horses with good odds or trading on reasonable earnings multiples.”
Do your research
Chugh said whether stocks, managed funds or ETFs stock market investing is all about research.
“Some people may choose a horse for a Melbourne Cup based on the jockey wearing red so thinking they will be the fastest or by their name, even counting the number of eggs in the fridge and choosing that barrier number,” Chugh said.
He said some investors might also just take tips from their friends or even pick a stock based on a ticker code they like.
“Some of our ETF tickers are quite good, like ACDC, but an investor who just chooses an ETF or stock based on a ticker code may not be making the best decision,” he said.
“It’s not about closing your eyes and putting your finger on a piece of paper.”
Understand your risk profile
Chugh said with long-term investing understanding your risk profile is also important.
“In the same way as when you are betting you need to look at how much risk you want to take,” he said.
“Are you more on the conservative, high-growth, or aggressive side? How old are you? What are you looking for in terms of outcomes?”
“Some investors want long-term growth while others want dividends and income and so targetting different outcomes is important.”
Chugh said aligning your portfolios to your views and values is also important when playing the stock market.
“Especially now as we get more conscious of the environment and look towards net zero globally a lot of investors are looking towards more of the carbon-orientated or clean technology thematics,” he said.
Chugh said in horse racing punters may look at the form, but diversity is the key to reducing risk.
“There’s always the disclaimer put out by fund managers that past performance is not an indicator of future performance so we need to be cautious about diversifying a portfolio,” he said.
“You can’t be diversified unless you do a box bet in horse racing but with your investment portfolio you can be diversified across different asset classes, regions, sectors, themes etc.”