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WITH DIY investing, having your fundamental strategy in place is important, particularly when it comes to choosing which shares to keep and which to sell.
If you’re investing for the long term, you want to make sure that the shares you’re investing in will do well for you in the future.
But if you do not have an accounting background, basing your investment decisions on the company’s financial information might prove challenging.
When you’re examining companies and their performance, do not make the mistake of viewing them in isolation. Consider overall market performance, focusing on how well peer companies — and the industry or sector as a whole — have done.
You’ll find there are times when market movements influence the price of a company’s shares. Usually, more than one company will be affected.
An example is the effect “Nenegate” had on the markets, as well as China’s market shutdown in the first week of the year. Both had a significant impact on the local market, and many stocks fell.
If you look at South Africa’s retail industry, you’ll see that some companies are doing exceptionally well, while others are struggling. Ask yourself why this is happening.
Expansion, differentiation and partnerships add to a company’s performance profile. If the company is planning to expand outside its traditional market, this could result in long-term growth.
But keep in mind that expansion does not always work out.
Many companies have found it difficult to gain traction in new markets — the reasons range from market saturation and economic decline to regulatory backlashes that make doing business difficult.
Old Mutual expanded into the UK in 1999 and it seemed like a good idea at the time. But high operational costs have forced it to break the company up, sell off some of the components and move back to South Africa
You also need to consider the possible implications should the company in which you have decided to invest be hit by scandal.
Locally and internationally, we have witnessed companies going through rough times because of bad management decisions.
The motoring industry has recently faced several scandals, including the falsification of emissions claims by Mitsubishi and Volkswagen.
The impact has been immense, and the consequences for top management have been severe.
Depending on the consequences of the scandal, some companies are able to resolve their problems and move on. Others don’t make it.
For the average investor, what is the next move? Do you sell or buy more? Well, one thing to consider is the remedial action taken by the company.
Has it restructured its management team? If so, how much do we know about the people coming in, their record and their performance in previous roles? Again, contextualise your research.
But, more than that, think about the value of the company and the effect of its “mistake”. Is it environmental? How long will it take for the company to remedy? What are the chances that this will happen again?
As the world becomes more concerned about the environment, investors are placing greater focus on the ethical effect of their investment, and you need to decide where you stand.
A moral approach to investing might not always make you tons of money, but if it matters, best you follow your heart, especially if the risk that the same blunder may be repeated is high.
When you have a long-term investment outlook, it’s easier to take your time and get to understand a company before you invest in it. There are great shares in the market that you may overlook because they have suffered a temporary hardship.
Considering the operational environment and evaluating the entire sector, factoring in economic conditions and scrutinising a company’s management structure will help you make an informed decision.