Editor's note: The following transcript has been lightly edited.
LONDON -- This is the first part of a two-part transcript in which Fool.co.uk's David Kuo chats withintern and novice investor Ben Golland about what he learned in his two weeks at The Motley Fool. They chat about his perception of investing before his internship and how this has changed in a fortnight. Ben explains the different investing styles he learned and reveals his preference. He also picks out the 10 shares that he now intends to buy for his first portfolio.
David Kuo: This is Money Talk, the weekly investing podcast from The Motley Fool. I am David Kuo, and here at The Motley Fool we not only want to help you invest better, but we also aim to educate, amuse, and enrich you in the process. So let's find out if we have been able to live up to our high ideals, by chatting with our intern, Ben Golland, who has been spending two weeks here at the Fool to learn about investing from scratch. So welcome to Money Talk, Ben.
Ben Golland: Hi.
David: I hope you've enjoyed your two weeks here.
Ben: I have indeed.
David: Well, it hasn't actually been two weeks yet.
Ben: Not yet.
David: It feels like an eternity, as far as I'm concerned. But anyway, tell me a little bit about yourself, Ben -- who are you, where are you from, and what do you do?
Ben: I'm a student. I'm from north London, but I go to university in Birmingham, where I'm studying biochemistry.
David: And that's it?
Ben: And that's it, yeah.
David: OK, and why are you interested in investing?
Ben: Because I think it's important. I think the problem we have is that, at the moment, a lot of money sits in the bank, and it doesn't really work for us when it could be, and I think investment is an opportunity where it can.
David: OK, so tell me about your perceptions about investing before you came to the Fool, and just to fill listeners in, Ben has been here for just over one week, and prior to that he contacted me to ask if he could learn something about investing over here. So tell me about what your perceptions about investing were before you set foot in the Fool, and in other words, what did you think investing was all about?
Ben: Well, I'd like to go back even further, say to about last year, when I first got in contact with you, when I really didn't know anything, and before I'd started reading about investing, and my perceptions were that it was only something really for professionals and that when I spoke to anybody about it generally, my parents or some of their friends, the idea was that you'd lose all your money, that it was playing on the stock market, and that it wasn't good.
David: So how good an investor are your parents, then?
Ben: Well, my parents have never invested in a share.
David: And yet they were able to tell you that it was like losing money in a casino?
Ben: Which seems bizarre, now I think about it, because they were giving me advice on actually something that they themselves had never done, but once I started reading about it, I realized it was something that you could grasp, and I realized people do very well, and they're not professional investors, and since being at the Fool, my suspicions have been confirmed.
David: And did you have any fears about investing before you came to the Fool, and learned about what it was really like?
Ben: I think the biggest fear is committing your own money, but I think it wasn't fear -- I think I was uncomfortable because I didn't have the knowledge yet, because I didn't feel like I had the knowledge to be able to look at a company, and decide whether they were worthy of my investment, whereas I think I do have that knowledge now, and I am comfortable and I am confident in investment.
David: But you said at the outset that you had done some reading about investing -- did you not find that reading the books was helpful in some way?
Ben: No, I think it was very helpful, but I think learning by example is even more helpful, and going through things using information of actual companies, and making decisions based on that, is far more beneficial.
David: It just feels more real, doesn't it?
Ben: Yeah, far more real.
David: It'll be even "realer," if there is such a word, when you start committing your own money to it -- that is when it really becomes real, and I can assure many listeners out there, when I first started investing in shares, the first trade I made, my hands were sweaty, my pulse was racing, and I was only putting on a few hundred pounds in shares, and yet it was the fear factor that you are now committing money to something which you believe in, and that can scare the living daylights out of lots of people, but as soon as you've done it, then you start to calm down a bit, and you think, OK -- it wasn't really that bad, and you've watched the performance of that share, and if you did pick a good share, then of course you get more and more confident as you go along. But anyway, enough about me -- this is really about you. So how has your perception about investing changed over the last two weeks?
Ben: I think I've realized that it's not really as difficult as I'd first imagined, that it is possible, and that I think the amount of information is really quite daunting, when you look at a company or you have to make a decision, but you've just got to take it bit by bit and break it down and know what's important, know what's important to you, depending on your investment style, and then make a decision and commit.
David: OK, now one of the first things you were set when you first set foot here in The Motley Fool, apart from showing you where the kitchen and the games room and everything else was, was that you were asked to have a look at how the FTSE 100 index performed over the last 10 years. So what did you learn from that very simple exercise?
Ben: That it's moved by only really 1% in all that time, but in terms of total return for shareholders, it's more like 55%.
David: Why is that, then?
Ben: Well, at first I didn't really know. It didn't seem possible, it didn't seem plausible, but what I was previously unaware of is that it's the bulk of shareholder returns comes from the reinvestment of dividends, and that's not something that I realized beforehand.
David: And so even though if the index didn't move at all, the mere fact that some of the companies, or many of the companies, pay you dividends, and you reinvest those dividends and the dividends then go on to grow even more, your total return is actually not that shabby, is it?
Ben: No, annually it's been about 4.5%, which is pretty good -- much better than the money being in a bank.
David: OK, so what do you think is the biggest drag for shareholders, then? If a shareholder were to invest in the stock market through a fund, for instance, what would be his or her biggest drag on his or her return on the investment?
Ben: I think in a fund it would be the fees, because that takes away from the money that your money will be making for you.
David: The total shareholder return.
Ben: The total returns, but I think also people should be aware of, that if they do take out their dividends, if they do get spent, and they're not reinvested, then that will also mean that you will never reach the possible total return that you could do, if you reinvested those dividends.
David: So in your first day, you actually learnt how important total returns were, and how important dividends were, and how important it was to carry on reinvesting those dividends in order to grow that pot of money that you have?
David: OK -- that wasn't very difficult, was it?
Ben: No, but it's very important.
David: OK, now let's have a look at the various styles of investing that you have embarked on whilst you've been here. Tell us about those styles -- in other words, what the different investing styles that you were exposed to.
Ben: OK, so first of all we looked at income investing, and then we took a look at value investing, and lastly we looked at GARP investing.
David: OK, so tell me a little bit about income investing, then.
Ben: So income investors generally have a focus on the dividend yield -- that's the main indicator that they're interested in, and we're looking at companies generally that we believe are going to be around for 10, 20, 30 years' time, really big companies that are well established, and that we believe will still be around for years to come, because you want them to keep on paying that really good dividend that they are at the moment, and the thing about incoming investing, or building an income investment portfolio, is that you don't have to stir the pot all the time, that you don't have to give it constant attention -- you can leave it alone, let it do its compounding thing over time, and look at your returns.
David: It's what I call a low-maintenance garden -- you actually have all the shrubs in place, you put them there, and then every now and again, you just go around with your pair of secateurs or shears, and you just do a little bit of trimming, and the garden looks OK, and the garden just keeps on growing and growing over time, and all you have to do is to keep on pruning it, just to make sure that everything is in place. So income investing you consider to be relatively simple to understand?
Ben: Yeah, and quite safe, I'd say.
David: OK, so let's move onto the second type of investing that you were exposed to, which is, of course, value investing -- what do you understand by value investing, and what were the learning points for you as a novice investor?
Ben: I think the idea of value investing is that you use your research, and you come to the conclusion that Mr. Market hasn't placed ...
David: Considered or something, yeah?
Ben: Yeah, that he's undervalued the company that you've identified, and then you have to then wait for Mr. Market to re-evaluate that company, and decide -- oh, wait, I've got it wrong, and that's when you get your return -- it's the increase in share price that you're looking for.
David: So how does value investing differ from income investing in your mind, then? Is it more difficult for somebody to grasp that concept of value investing? Is it more difficult to identify the shares? What is it that is actually in your mind that is different between value investing and income investing?
Ben: Well, I think income investing, you're not as focused on the share price at the time. You're looking for that major jump as a value investor. You have the opportunity to see your money double or triple, if you think that the share is really quite undervalued; whereas income investment, you're probably more prepared to pay a reasonable price, as long as you keep on getting that dividend.
David: Did you see major differences between the two types of investment styles? Did you suddenly sort of say that value investing is completely different to income investing -- "I didn't realize investing was so different, depending upon how you perceive the shares to be"?
Ben: Yeah, I think they are quite different styles, and no doubt there's probably people out there who swear by one, and would never go near the other. But I think both have their place, but yeah, I think there are a lot more income shares out there, or they're easier to spot, whereas value investing, it takes a bit more digging, and you have to, I think, be a bit more confident and you have to trust your judgment a little bit more, maybe.
David: OK, so let's move onto the third type of investing, which is GARP investing. Tell me what GARP stands for -- that is your test for the day -- and what you actually learned about GARP investing.
Ben: GARP investing, it stands for Growth At a Reasonable Price, and we're looking for growth shares, ones where the earnings can grow and the forecast for the earnings looks like it's going to increase, and we use the idea that it's not too ridiculous that the growth is reasonable, because by that we mean that it's sustainable.
David: OK, so that is why we look at something called the PEG ratio -- the price-to-earnings growth ratio, and we're actually looking for companies where the price to earnings growth is less than 1, and we say that that is just a handy way of saying that the earnings are not ridiculously out of line with the P/E ratio.
Ben: Yeah, and it gives us a crude filter to then take a look at the shares which are 1 or under; then we can do our fundamental analysis, and come to the conclusion whether they're growth shares or not.
David: OK, so we have three very different styles of investing: We have income investing, we have value investing, and we have GARP investing, or Growth At a Reasonable Price investing. What is your conclusion about the different styles of investing? In other words, which one do you lean toward yourself, and why?
Ben: I think they're all graspable, but maybe some are better for different people.
David: Why do you think that, then?
Ben: OK, I'll give you an example: Income investing, I think, is both the friend of the lazy Fool and the busy Fool, because if you don't have a lot of time, or if maybe you don't want to spend a lot of time going through companies, or looking at the market, or things like that, you can create your income portfolio in one go probably, and then leave it alone, and then let it compound and let your returns, and reinvest your returns; whereas I think value and GARP, you have to first of all find those individual companies which are harder to spot, and require a bit more digging, and then you have to keep a constant eye on them, because you are waiting for the share price to increase, you're waiting for the growth, and you've got to keep an eye that, with growth shares, that it's not tailing off, or that with value, that it's reached the value that you think it's at, and once it has done, then that's when you sell.
David: So how much, do you think, knowledge and experience play in the style of investing that you are choosing? In other words, do you think that an investor who is more knowledgeable and more experienced would say that, "Do you know what -- I think I prefer value investing, because I know more about investing, I know how to spot these undervalued shares," whereas the less experienced investor would say, "Income is actually enough for me"?
Ben: I'd agree with that to some extent, but I think it's quite good to maybe have a go at it all, especially at my age, where I think I've got the opportunity to take a look at a lot of different things, and then maybe make a decision after a while and say, "Yeah -- I'm more comfortable with a particular type," but I think you have to give it a go in order to find that out.
David: So how much do you think personality plays in choosing the investment style that you like?
Ben: I think it does play a big role, like I said about the busy people or the lazy people.
David: That's not a personality -- that's just a trait, isn't it?
Ben: Yeah, but ... I don't know, some people, I'd say, lean toward that.
David: But "busy people" is not a personality.
Ben: So give me an example.
David: OK, no, what I'm saying is that you do think that somebody who is very risk-averse toward investing might say that "I'm actually happier with income investing, because I can see those dividends coming in," whereas somebody who is slightly more risk-tolerant might say that "Value investing is the one I want, because I'm quite happy to buy these value shares in the knowledge that I'm just going to sit and wait, because I know my valuation is correct, so therefore why don't I just sit and wait, and then wait for that valuation to be outed by the market?"
Ben: I'd agree with that, but then I'd say that, to be a value investor you might have to be quite patient, because you don't know when your return is going to happen, whereas income investors -- it's not guaranteed, but I think you're more aware that "I am going to get a dividend" or the company will come out and say, "This is what our dividend's going to be," whereas a value investor, you are waiting, and you don't really know how long that wait's going to be.
David: OK, so before you came to the Fool, you said you were very hesitant, and not at all confident about investing. Now you've been here for two weeks -- how confident are you that you could build a portfolio from scratch, if I asked you to do one today?
Ben: Very confident.
David: Very confident?
Ben: Very confident.
David: OK, impressive to hear!
Ben: Whether it would work, whether it would be right, is completely different, but I'm confident now that I could look at companies, and make a decision as to whether I would want to put them in a portfolio. If you'd asked me that two weeks ago, a week ago, I probably would have said no. If you'd asked me that a year ago, I would have asked you what a portfolio is. But yeah, I'm much more confident now.
That was the first part of a two-part transcript in which Fool.co.uk's David Kuo chats withintern and novice investor Ben Golland about what he learned in his two weeks at The Motley Fool. In the second part of the transcript, Ben reveals 10 shares he would consider putting in his beginner's portfolio.Keep reading.
David Kuo challenged his Motley Fool analysts to pinpoint the attractive sectors of 2012 -- and they delivered! Discover the industries they selected in this new Motley Fool guide -- "Top Sectors of 2012" -- while it's still free!
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