There is a great expectation about the year ahead, particularly in Auckland.

Housing and equity markets have entered 2013 with strong momentum, and upturns in these secondary markets usually lead to an increase in house building and corporate activity including IPOs, share sell-downs and mergers and acquisitions.

Real estate agents are looking forward to the year and an unusually large number of investment bankers were back at their desks this week expecting a much busier workload over the next 12 months.

If this momentum continues, 2013 could finally bring an end to the gloom and doom of the global financial crisis.

Figures from Barfoot & Thompson this week show the Auckland residential property market is as hot as the Australian summer.

The average Auckland house price, based on Barfoot & Thompson sales, was $624,000 in December, an 8.9 per cent increase over the December 2011 average of $573,100.

In the two years to December, the average Auckland house price rose 17.8 per cent, from $529,700.

Sales numbers have also picked up – Barfoot & Thompson sold 11,710 houses last year, a 25.3 per cent increase over the 9346 sold in 2011.

Increases in house prices and the number of sales usually lead to an increase in building activity and there are clear signs of this.

The number of residential building consents issued was up 24.5 per cent in the September to November period compared with the same three months in 2011 and the total value of building consents in November was more than $1 billion, the first time that figure has been achieved since September 2008.

Although the Reserve Bank will be concerned about the hot property market, it does create significant impetus for the construction industry, and the economy, in 2013.

The NZX has also started the year with great momentum after the NZX50 Gross Index rose 24.2 per cent last year.

The index rose 22.9 per cent in 2011 and 2012, compared with a 17.8 per cent rise in Auckland house prices over the same period.

NZX trading volume also increased. The number of trades was up 21.8 per cent in 2012 and the value of trades rose 6 per cent.

An upturn in the sharemarket usually leads to an increase in corporate activity, particularly IPOs, and this is expected in 2013. Mighty River Power is the most obvious IPO candidate, but many other new listings are being considered.

Many will be worth looking at, but some should probably be avoided.

The integrity of the market could be tested this year, as the Mighty River Power float will attract many new sharemarket investors and opportunistic promoters may try to entice these novice investors to participate in their questionable floats.

How can new investors learn about the sharemarket and how identify hyped up companies with limited prospects?

Some New Zealand commentators recommend Warren Buffett and his strategies, but I much prefer the writings of Peter Lynch, who managed the highly successful US Magellan Fund between 1977 and 1990.

Lynch’s two best-known books, One Up on Wall Street and Beating the Street were best-sellers in the United States. They are available in some New Zealand book stores, from New Zealand online book sellers for less than $20 each and instantly from New Zealand eBook providers for less than $15.

They are enjoyable and educational reads, particularly for those looking at the sharemarket for the first time.

Lynch believes investors should have most of their superannuation funds in equities because they give much higher returns than bonds or cash over the longer term.

He writes: “The retirement account is the perfect place for stocks, because the money can sit there and grow for 10 to 30 years.”

Lynch says the best approach is to invest a specific amount every week or month, which is one of the benefits of KiwiSaver.

He says sharemarket downturns are as inevitable as freezing weather during a Minnesotan winter, but disciplined investing on a regular basis gives investors the opportunity to buy their favourite stocks at lower prices during market weaknesses.

Investors should not get downbeat about global warming, budget deficits, possible bank failures, inflation, recessions, inept governments, money scandals, Muslim militancy, Middle East instability, excessive debt, an ageing society, the high cost of healthcare, crime or the brain drain because sharemarkets are usually more attractive when these concerns are at their highest.

Sharemarkets are more dangerous when the world has few, if any, apparent problems and share prices are high.

Lynch was a great stock picker and his writings on this subject are particularly helpful.

He points out that stock picking requires a strong dose of common sense and you should never invest in something you don’t understand.

He describes how he invested in Hanes, which produced the highly successful L’eggs panty hose, because his wife told him how good it was.

He described how one of his friends wouldn’t invest in The Limited, a women’s apparel store chain, at US90c, even though his wife told him it was doing extremely well. The husband’s argument was that it wasn’t recommended by brokers.

He finally bought into The Limited when it reached US$50 after it was placed on a brokers’ buy list. He disregarded his wife’s advice that The Limited was no longer popular with women.

The husband sold out well below his US$50 purchase price, happy to cut his losses.

Investors can easily assess the performance of many New Zealand listed companies including Auckland International Airport, Air New Zealand, Hallenstein Glasson, Kathmandu, Michael Hill, Pumpkin Patch, Restaurant Brands (KFC), SkyCity, Sky TV, Telecom, Trade Me and The Warehouse.

The main question they have to answer is whether the positive or poor consumer service of these companies is reflected in their share prices.

Lynch tells a wonderful story about a class of 12-to-14-year-olds at St Agnes School in Boston who invested in a portfolio of companies they mostly knew from personal experience.

Their portfolio, which included Disney, Kellogg, Topps (baseball cards), McDonald’s, National Pizza and two toy companies, Hasbro and Tyco, substantially outperformed the S&P 500 Index.

The class made a tape recording outlining their basic investment philosophies. They included:

*You should always have a diversified share portfolio.

*The stock market isn’t a gamble as long as you pick good companies that will do well over the longer term.

*Good companies usually increase their dividends every year.

*You have to research a company before you invest.

*Never fall in love with a company, always keep an open mind.

*You shouldn’t buy into a company because it is cheap.

*You should buy only companies you know and fully understand.

*If a share price goes down, that doesn’t mean it can’t go lower.

*Investors should look at small companies because as a group they tend to outperform the larger ones over the longer term.

*You can make a lot of money from the stock market but you can also lose money. That is why diversification is extremely important. Neither Peter Lynch nor Warren Buffett nor the seventh graders at St Agnes have all the answers, but Lynch is as good a place as any to start.

A basic understanding of the sharemarket is important because we can expect many tempting share offers, good and bad, this year.

Brian Gaynor

Portfolio Manager

Disclosure of interest: Milford Funds Limited holds Air New Zealand, Kathmandu, Pumpkin Patch, Restaurant Brands, SkyCity, Sky TV, Telecom and Trade Me shares on behalf of clients. Milford Funds Limited also holds Auckland International Airport and The Warehouse fixed interest securities on behalf of clients.