How Far Should You Cast Your Net When Buying Stocks?

Run through a list of all the stocks on the ASX and it will come to over 2,000. For a country whose population has only just hit 24 million, that seems like a pretty big number to me.

If you then consider the value of our entire market barely represents 2% of the global pool, you can start to fathom just how large markets are worldwide. Alternatively, it might just show how small the Australian market really is. I suppose everything is relative.

If you do think about the other 98% of the pool, though, there must be tens, possibly hundreds, of thousands of companies that you probably don’t know anything about. Sure, we all know about Apple and Toyota, Coca-Cola and IBM.

But what about all the rest?

Can you think of all the thousands of opportunities you’re going to miss out on because you just don’t know of their existence? Not to mention the hassle of trying to set up a trading account in another country, plus all the different tax laws. And even if you could find a way to trade them, finding some reliable research is going to be a challenge.

Of course, if you do want to allocate some of your funds internationally, there’s an ever growing list of ETFs that will do this for you. You can readily invest in a range of markets and sectors, including emerging markets or US consumer staples, to name just two of the 100-plus ETFs and LICs listed on the ASX.

Outside of these specialised products, though, it quickly becomes obvious that no one is capable of keeping tabs on all of these companies. You’d be lucky if you could closely follow more than a handful of the biggest companies from each of the major exchanges worldwide.

Just as there’s no way of following all these listed companies worldwide, there’s little chance that anybody could keep a close eye on all of the 2,000-plus companies listed on the ASX. Yet, sometimes, you feel as though you ought to…

Day after day, you find yourself watching on the sidelines as yet another stock goes through the roof. It might be a stock you’ve never heard of. Or perhaps it’s one that you used to follow but it somehow fell off your radar. ‘How did I miss that?’ You kick yourself as it goes for a runaway gain.

This is where frustration easily creeps in. You start thinking about all the opportunities you’ve missed, wondering why you didn’t keep a closer eye on things. The problem is that thinking like this makes it easy to lose your focus. You start worrying about all the stuff you’ve missed, rather than on something you can control.

This is where fund managers perhaps have an advantage. You’ll often hear it referred to as their ‘investment universe’. Typically, they will have minimum market caps on anything they trade — that alone gets rid of about two-thirds of the possible selections on the ASX.

They’ll also have minimum daily turnover thresholds. They have hundreds of millions to invest. They’re not going to bother trying to put $1 million into some hot tip. Even if it comes off, it will make a negligible difference to their funds overall performance. And how do they get $1 million out of the trade when the daily volume runs at a trickle?

Unless these guys run a specialised service, like a small cap fund, chances are you won’t see them buying anything out of the ASX 300. More likely than not, most of their weighting will be in the ASX 50. It’s also a structural thing — their performance is assessed against a benchmark, so they’ll match their weightings pretty closely.

Where the private investor has an advantage is by getting to choose where they specialise. Guess what? If you don’t know anything about biotech stocks, why would you invest in them? If the workings of the small cap mining sector is foreign to you, you’d leave it alone, right?

It’s better to start on stocks that you do know something about — on companies where you understand what they do, and where you can easily find decent research on them. And if you want to invest in small caps, but don’t know what to do, start researching funds that specialise in this area. Most of them have been at it a long time, so you’ll be able to track their performance over an extended period.

Reducing your investment universe gives you the opportunity to focus. You might decide to start with the ASX 20 and work your way through them — thoroughly. Then the ASX 50, and so on. You might never venture outside the ASX 300.

One place to start is by grabbing a copy of the Weekend Australian. Tear out the page that lists the top 150 stocks and start working your way through them. If a stock doesn’t make sense, then just put a line through it.

Chip away and you’ll soon condense your list. Even if you whittle the number down to 20 or 30 stocks, they’re all going to give you opportunities throughout the year. And, if you want to get active, pick one or two stocks and try finding a trade every month or two.

Sure, you’re going to miss out on lots of opportunities this way. But you’re also not going to spend all your time focusing on hundreds of stocks which may never do anything. You might also find that it takes a lot of the frustration out of investing.


Matt Hibbard,

Editor, Total Income

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