The Commonwealth Government is about to embark on a $20 million advertising campaign to encourage retail investors to pick up Telstra shares in the “T3″ third tranche of its privatization.
It is generally accepted that the best investment strategy for retail investors is to pick a widely diversified basket of investments and hold them for a long time.
I wonder if the T3 advertising campaign will explain to the mum and dad investors who are the targets of the campaign how investing in a single stock (Telstra) in one of the riskiest sectors (telecommunications) of the stock market forms part of a diversified investment portfolio? Considering John Howard’s record of not leveling with the Australian people about Telstra, I think it’s unlikely that retail investors will be able to rely on the federal government’s advertising campaign for responsible or reliable advice.
Let me be blunt. Buying individual stocks as opposed to investing in a diversified bundle of stocks and other investments is a mug’s game. Investing anything more than a small proportion of one’s investment assets in a single stock is a bad idea, unless you know enough about that stock and the business it operates to be able to explain why that stock will perform better than the market as a whole. If you can’t give that explanation, then consider investing in an index fund that tracks the market as a whole.
Anybody who is thinking of buying T3 should ask themselves (at least) the following questions:
“¢ Do I understand how Telstra makes money?
“¢ Do I understand how it’s going to make money in two/five/ten years’ time?
“¢ Have I read Telstra’s financial statements, and did they make sense to me?
“¢ Do I understand the difference between Telstra’s wholesale and retail business?
“¢ Do I understand the costs and risks involved in fibre rollout?
“¢ Do I understand how competition from wireless and voice/video over internet will affect Telstra’s business?
“¢ Do I understand the regulatory burden on Telstra?
“¢ Do I understand Telstra’s dividend policy, and am I confident the policy is sustainable?
“¢ Do I understand Telstra’s governance and am I confident that the relationship between management and the federal government won’t act as a drag on its operations and financial performance?
If you can answer those questions, and if on the basis of those answers you are confident that Telstra will outperform the market as a whole, then and only then should you consider investing in T3. Otherwise, put your hard-earned in a low fee diversified fund and let it grow.