"Are you a bit of a gambler? Have you some spare cash lying around (bingo bucket) that you wouldn't miss if this all goes west???"
Should the retail investor consider putting some of their hard-earned cash into the upcoming AIB flotation?
Let’s consider this for a minute, let’s try not drag into the argument what the banks have done to the country. Or recite the countless stories of the man who retired and was advised by bank staff to put his life savings in bank shares because it “is as safe as houses and sure the dividend alone will earn you more than the interest you get on deposit.”
There is no point in thinking of all this because:
The one thing man learns from history is that man does not learn from history. #finance #AIB @enough_ireland
The other reason why we don’t bring this into or out of the discussion is because if we do we are bringing emotion into a financial decision. How you currently feel about a company has no place in a decision-making process about whether you should invest in that company or not.
How you feel is irrelevant. If you are going to make a decision to invest in any company that decision should be based on facts, nothing else. All too often I hear stories about people who invested in a stock because they had a good feeling about it. I get a good feeling when I eat ice cream it doesn’t mean I should buy shares in HB.
Let’s get this straight, I don’t think that the vast majority of people should buy AIB shares. But that is because I don’t believe the vast majority of people should buy ANY individual share.
We come across new clients from time to time who have done well with a few shares and believe this was investment genius. It wasn’t, it was luck. Believe me we come across just as many people who won’t invest in shares ever again because they have been burnt badly. Anybody who owns less than 5 shares in total is a gambler and not an investor.
Think about this for a minute. There are people out there called fund managers, they get paid ridiculous amounts of money to create and invest other people’s money in well-constructed portfolios.
These fund managers are professionals and 60% of them fail to beat the benchmark on an annual basis. This is their full-time job, they went to college to learn how to do what they do and they get it wrong. And they get it wrong 60% of the time. If you are a plumber, electrician, barrister, doctor, accountant or even a financial planner what chance do you think you have of being better at picking shares than they are.
But you don’t have to just be better than them you need to outguess the entire market.
There are 98.5 million transactions every day on stock markets to the tune of €415billion, what makes you think that you have any hope of making a better guess personally than the average guess made by the 98.5million transactions.
To stack the odds against you further, academic research has shown that on average people will be burnt by an IPO in the first 12 months.
The government are expected to announce that the retail investor will have to bid within a range, so you will have to say about two weeks in advance of the purchase how much you are willing to pay for a share in AIB.
Institutions however will buy them live.
How does that seem fair?
You have to guess two weeks in advance and you have to guess by setting up an account with a stockbroker. The institutions however can wait and buy them live and could adjust their decision based on market reaction. As an individual you won’t have that luxury, you have to play by different rules.
The government have also introduced a minimum investment of €10,000. Presumably this is to protect smaller investors from getting involved, to protect people who can’t afford to be involved maybe? Or maybe to protect people who don’t know what they are doing?
What puzzled me about this approach is either you are a professional investor or you are not. The central bank already has a professional investor defined as somebody who can afford to invest a minimum of €125,000 into certain products. That begs the questions what is the purpose of this €10,000 minimum?
You could say the €10,000 is there to ensure only people with money invest in AIB. Let’s remind ourselves, there is almost €100 billion sitting on retail bank deposit in Ireland. There has never been this much cash about, people do have money and interest rates are so low they will be tempted by this.
Overall even though the odds are stacked considerably against you there will be people who will buy into AIB.
Don’t get me wrong I am not saying AIB is going to plummet, but I am also not saying it will sky rocket either.
I am saying I don’t know what AIB will do and I suspect the vast majority of people don’t know either.
If you are going to invest in AIB, please follow these simple rules:
- Only invest from your bingo bucket. Your bingo bucket should not equate to more than 15% of your overall investable assets and is reserved for “gambles” like this
- Unless you have a vast portfolio of individual stocks already and AIB is providing some required diversification, treat this purchase as what it is i.e. speculative.
- Owning less than 5 stocks is a gamble not an investment
- Treat your investment like you would the cash in your pocket when you are heading to the races. You could do ridiculously well, or you could lose the lot.
- Be willing to accept you may end up having to hold this for the long term to get a return, what I mean is think in terms decades as opposed to months.
- It is possible investing in AIB could go well, however the odds would suggest it is not probable.