In today's Exponential Investor: - The race that stops a nation
- There is no such thing as a safe investment
- How cash at the bank is costing you money…
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Capital at risk.
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Around 4am this morning, most of Australia came to a halt, watching one of the most prestigious racehorses in the world.
Don't believe me? Check this out:
| Source: Commonwealth Bank of Australia; news.com.au |
The Commonwealth Bank of Australia showed in 2017 that bank transactions plunged for five minutes while the Melbourne Cup took place.
That's why it's called "the race that stops a nation". For around three minutes and 20 seconds, 23 thoroughbreds thunder some 3,200 metres (1.740 miles) for a shot at the total £4.4 million prize pool.
Sure, there are longer, faster, more prestigious richer races around, but few have as many starters and required handicaps as the Melbourne Cup.
Since 1882, five British horses have won the race, beating the US, which has had four wins. And there must be something in the grass over in New Zealand, as a Kiwi-bred thoroughbred has wonthe Melbourne Cup
40 times in the last 130 years.
Yet the race has been around for even longer, starting in 1861, though the cup was initially awarded in name only.
It wasn't until 1866 that the winner was awarded a trophy, then made of silver gilt with gold leaf. Made by British duo Daniel and Charles Houle, the prize very much reflected the Renaissance revival style common in England during the 19th century. The owner of the winning horse (The Barb for those who like trivia) is said to have called the English-made cup a "monstrosity".
| Melbourne Cup Trophy's 1866 compared to 2021 |
| Source: National Museum Australia; Shae's overloaded smartphone |
Few people in their lifetime will get up close and personal to the
Melbourne Cup trophy. I've been fortunate enough to have attended exclusive Melbourne Cup events where the trophy has been shown. (I also once worked for the company that refines the gold and makes the trophy, hence the VIP access.)
Frankly, the pictures of today's cup don't do it justice.
Rather than a perpetual trophy, a new trophy is replicated every year to match the exact measurements from a design first displayed in 1919. A little more understated, it's a three-handled piece, with each handle said to represent the owner, the jockey and the trainer. Today the Melbourne Cup is made of 1.65kg of 18 carat gold. It's value in gold is a cool £138,000...
What do a few bob on the gee gees and investing have in common?
Something very similar to horse racing and investing is the "hot tip".
When it comes to horse racing, most people will ask around for some tips on who they should bet on.
What's the favourite? Who's the long shot? What if it's a wet track, which horse then? Often these hot tips come from someone with extensive knowledge of the horse-racing industry. They know the pedigree of the horse, how many wins it's had, what it's like on a
fast or dead track (dry versus wet), who trained it, the experience of the jockey, the weight, the owner's history of success…
All this information is analysed by those in the racing industry. It gets around via word of mouth and the bookies will come up with the "favourite".
Hoping to back a winner based on something your friend mentioned is fine. Fun, even.
Not so with investing.
Yet, as Sam Volkering and I discussed in a
recent Exponential Investor podcast, too often people start investing based on a hot tip… and then don't know what to do next.
And herein lies the problem. If all you did was invest based on a hot tip, odds are you haven't learnt anything. This is why most people wonder what comes next after buying some shares for the first time.
Having chatted to a few of my friends who did invest in shares because someone recommended them, it seems that lack of knowledge meant they were too scared to make decisions on what to go for second time around.
This left some of them asking what safe investments they should look for… with most of them just assuming they should just stick to cash, especially with the stock market tanking.
But there's a problem with that. Cash is not necessarily safe... it just has the least amount of risk.
Everything comes with risk
No investment is safe.
Not shares, not houses, not bonds, not precious metals, not cash. All asset classes come with risk, including cash.
The difference is that the risk you take on is almost directly proportional to the reward you hope to receive.
Cash is indeed less risky than shares but isn't risk free.
Let me show you what I mean.
Imagine you put £10,000 in a Time Deposit Account in December last year. If you opted to fix the period for, say, two years (i.e. you couldn't access your cash for that whole time), you would have earned 1.60% in interest from the bank per year. After 24 months, you would have added an extra £644 to your wallet.
Not bad for money sitting there doing nothing.
Let's say you held off and waited until the Bank of England began raising rates.
If you put that same £10,000 into a time deposit account in September 2022, you'd be getting the much higher interest rate of 4.11% per annum, a cool £838 per annum in interest. At the end of two years, you'll be £1,676 better off 2024.
But…
Yes, you've earned more interest this year compared to last. However, you're actually worse off after inflation.
With inflation running at 13.2% in the UK, cash parked at the bank hasn't earned enough interest to keep pace with it.
Even with the better rate, inflation is significantly higher than any interest your bank is paying you.
In fact, using the Bank of England's own
inflation calculator, the same £10,000 from December 2021 is worth £8,094 today. That's a thousand quid lost to inflation, and you're not earning remotely enough interest at the bank to offset this shortfall.
That doesn't sound like a risk-free investment, does it?
Any cash invested in the bank at Christmas last year is has
cost you money.
What about gold… the very reward being handed out today for racing a horse really fast?
We'll compare the performance of that, plus more on Thursday.
Until next time,
Shae Russell
Co-editor,
Exponential Investor 
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