Be Wary of What You Read

Submitted by Share Trading on 9 February, 2008 - 15:15

Take this as a lesson of being wary of what you read: the accuracy of the facts. I was reading an old investing article on news.com.au about the top 20 stocks on the Australian Sharemarket are a "rock solid investment". Something caught my eye:

HOW would you like a blue chip investment, with minimal risk, that could have some worrying moments but stands the test of time?

A few weeks back this investment had returned 130 per cent over a 10-year period or 13 per cent per annum.

I wasn't alone, glancing upon the comments only two other people saw the possible error. No the error isn't in taking 130 percent divided by 10 and getting an average return of 13 percent per annum. This is what one of the comments said:

Also brush up on your maths. If you don't understand compounding interest, you shouldn't be writing financial articles. I guess if you did know your stuff you would have a good job in the financial industry instead.

The error is in compounding interest. $1 invested one year would yield 13 cents and that $1.13 reinvested the second year would yield a return of 14.69 cents and so on... assuming a consistent yearly 13 percent return (which we all know isn't the case with stocks). I think what may have happened was the writer, Peter Switzer, probably took the current figure and compared it with the stock price ten years ago and found the percentage increase. Dividing that percent increase (130%) by the number of years just doesn't compute mathematically.

I especially loved what "Scott" of Brisbane had to say:

What a simplistic and moronic article. (i) The top twenty constantly changes and requires constant upgrading, research and monitoring, (ii) some of the companies of the future aren't in the top 20 and this was true 10 years ago (ii) Only one company has been in the ASX 200, that's 200 not 20 since inception and that is RIO, (iii) The top twenty has included companies like Bond Corp, Pasminco, HIH etc (iv) 130% isn't 13% year on year, it is closer to 10% cumulative (v) the tech wreck barely touched the top 20, but closer to 5 shares have made up closer to 80% of the last 5 years gains. As for Warren Buffet, he is a professional investment/fund manager. I'm sure that his investors are glad they stuck with him rather than invest in the top 20 back then featuring such luminaries as WorldCom and Enron. I am not an investment manager or expert but I do remember my University statistics and finance 101. This writer should either brush up on his financial facts and basis maths or stick to gossip reporting.

Remember to be wary of what you're reading.

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