Stock mar­ket not an ideal in­vest­ment

Chronicle (Zimbabwe) - - Business Chronicle - Mor­ris Mpala

WE have talked about sexy in­vest­ments be­fore and how they help us in­crease our fi­nan­cial free­dom. Re­mem­ber at the very be­gin­ning the col­umn was en­ti­tled “Are in­vest­ments Sexy’’ be­fore it changed to Ex­plore. Dream. Dis­cover. Fi­nan­cial Free­dom. These sexy in­vest­ments help us im­prove our pas­sive in­come streams.

Due to stocks be­ing con­sid­ered hot or not we de­cided to be naughty and mea­sure these in­vest­ments on the scale of how sexy they can be.

In our quest to be prac­ti­cal and rel­e­vant we have de­cided to crit­i­cally look at the Zim­babwe Stock Ex­change as at cur­rent with­out be­ing emo­tional and the­o­ris­ing this in­vest­ment ve­hi­cle.

We know you have been told “us learned peo­ple we don’t be­lieve in keep­ing our wealth in cat­tle/inkomo/mombe but on the vir­tual mar­kets like stock mar­kets”. Guess what, as at cur­rent prob­a­bly your herd of cat­tle (if in­sured and well fed) is the source of your wealth and peace of mind. Learned and knowl­edge­able could be dif­fer­ent. This fi­nan­cial ig­no­rance or lack of fi­nan­cial knowl­edge is costly.

Why is stock mar­ket bad for you as a small in­vestor or small lo­cal player?

You in­vest for share ap­pre­ci­a­tion Due to the low cap­i­tal in­flows, lack of for­eign buy­ers, lack of in­dus­try ca­pac­ity util­i­sa­tion (ex­cess in­comes) de­mand for shares has dwin­dled. This has caused share prizes to be on the down­hill for a while.

And due to these chal­lenges the prices of re­spec­tive shares on the lo­cal bourse doesn’t seem to be on a pos­i­tive tra­jec­tory in a long time. Thus in­vest­ment there will take longer for the prices to start go­ing up. For smaller play­ers that is ty­ing up your cap­i­tal too long and you miss out on op­por­tu­ni­ties. Such dead cap­i­tal to in­di­vid­u­als or small play­ers is dan­ger­ous to their op­er­a­tions. It is not sus­tain­able as re­sources are al­ways min­i­mal for small play­ers. So the stock mar­ket isn’t ap­peal­ing in the least.

You in­vest for div­i­dend pay­ments Due to nu­mer­ous chal­lenges as listed above com­pa­nies are not mak­ing any sig­nif­i­cant prof­its thus can’t pay out div­i­dends to share­hold­ers. Those that are mak­ing lit­tle prof­its it’s go­ing to­wards re­cap­i­tal­i­sa­tion as it is cost ef­fec­tive or just putting into re­serves for the rainy day .

Both ways div­i­dend pay­ments are be­ing fore­gone and that isn’t good news to a smaller player who needs that in­come to sus­tain their per­sonal needs or busi­ness re­quire­ments of their con­cerns.

You in­vest for some form of in­come but if that isn’t com­ing your way then why get into that in­vest­ment. Those that are pay­ing min­i­mal div­i­dends to share­hold­ers when you com­pare to share­hold­ing that small play­ers hold it be­comes a mea­gre pay­out of no con­se­quence at all.

You in­vest for fu­ture cash flows The idea is such that com­pa­nies will gen­er­ate cash flows and then that trans­lates into share ap­pre­ci­a­tion for the re­spec­tive stock. If in the im­me­di­ate and mid­dle hori­zon it doesn’t look like such com­pa­nies will gen­er­ate any cash flows then you can’t in­vest in such com­pa­nies and it would be dif­fi­cult to re­alise a re­turn on your funds in­vested. The time it will take to break even and re­alise a re­turn on share ap­pre­ci­a­tion from per­for­mance looks like it’s go­ing to take ages. If it takes longer then for a smaller player that isn’t healthy at all.

You in­vest for power Some play­ers in­vest for strate­gic power for their re­spec­tive in­ter­ests.

For a smaller player to seek that it will be non­sen­si­cal as their share­hold­ing is in­signif­i­cant to wield any power in favour of their con­cerns. Min­i­mal in­vest­ment doesn’t give that smaller player the power to safe­guard their in­ter­ests in what­ever av­enue that could be.

You in­vest for con­trol & in­flu­ence The con­cept of con­trol and in­flu­ence is ap­peal­ing to stock mar­ket play­ers. It is this ap­peal that at times has pushed prices up and sus­tained them. This ap­peal isn’t what a smaller player is look­ing for as she/he hasn’t self ac­tu­alised in his per­sonal or busi­ness life. It would not ap­peal to smaller play­ers who are still chas­ing liq­uid­ity and sur­vival and park­ing their cap­i­tal to stroke their ego could be sui­ci­dal.

In any case con­trol and in­flu­ence is about ma­jor share­hold­ing, which our dear smaller play­ers will be ill ad­vised to pur­sue.

From pre­vi­ous per­for­mance given a per­fect 20/20 vi­sion of hind­sight we hy­po­thet­i­cally com­pare the per­for­mance since dol­lar­i­sa­tion in 2009.

Ex­am­ple. If, for in­stance, you had in­vested $1 000 000,00 at the on­set of dol­lar­i­sa­tion (with a rep­utable solid bank) at 10 -25 per­cent per an­num you would have dou­bled your money by now. That is im­pres­sive. Thus hot and sexy. This money would still be avail­able to you when­ever the need arise. What more would one want.

If you had in­vested in a good sound busi­ness by now it would have given you a cou­ple of mil­lions in cash and as­sets.

The same amount of money if it had been put on the stock mar­ket in 2009 it could be worth $150 000,00 on some coun­ters ex­clud­ing trans­ac­tion costs. The big­gest chal­lenge would be you will still re­main illiq­uid and liq­ui­dat­ing/ ex­it­ing will be costly. That is so un­sexy. Not hot stocks.

As at cur­rent the individual or small com­pany has no busi­ness on the stock mar­ket, get in­volved in other in­vest­ment ve­hi­cles. As a ref­er­ence for fu­ture mar­ket en­thu­si­asts who would like to ex­plore this av­enue it’s ad­vis­able for them to read about War­ren Buffet’s rise in this game as it is an in­ter­est­ing and cal­cu­la­tive ap­proach to stock man­age­ment. It is play­ing mo­nop­oly with real cash.

If you live in Bu­l­awayo please con­serve wa­ter. If you live in Zim­babwe please use elec­tric­ity spar­ingly: SOS (switch off switches). If you live on planet earth please pre­serve the en­vi­ron­ment.

Mor­ris Mpala is the man­ag­ing di­rec­tor of MoB Cap­i­tal, a Bu­l­awayo head­quar­tered mi­cro-fi­nance in­sti­tu­tion with foot­print across the coun­try.

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