Thursday, May 3, 2018

Build your knowledge of investing in shares


By Moremi Marwa

As an outsider, investing for your own account on stocks of companies listed in the stock exchange can be an absolutely daunting task. To start with, stock exchanges (markets) are full of jargon – being called a stock exchange or a securities market, by itself is a jargon. Why would ordinary share or preference share issued by companies to raise capital be called stock or securities? Why would bonds, issued by government for the purpose of raising funds for development projects, be called securities – why are they sometimes called government papers.

So, stock exchanges have all these kinds of jargons, but also levels of volatility and risk in often cases scares off the average person, resulting in most of the people doing very little investing in financial instruments beyond what is invested by pension funds based on employment-provided retirement or pension option as well as the usual savings and deposits we keep in banks. However, in truth, investing in stock markets is actually relatively simple, especially after one gets rid and dispels a few common myths surrounding the idea of investing in stock markets.

But, before I proceed any further with addressing those easily disapproved myths, let me try to answer the real questions of why we invest in companies listed in the stock markets?

Forget about getting rich quickly and in a hurry, or the speculation and gambling and gaming the market -- that isn’t the fundamental idea of investing in companies listed in the stock market, besides, it is simply not feasible. Why? Because, even if one is taking the highest possible risk available and it somehow pays off (which in itself is very unlikely), you will be richer, but would that be enough so that you can immediately retire? Probably not. The profit from a massive risk may be a return of many percent but in reality we wouldn’t have had a large enough pile of money to invest anyway. And of course, the fact of the matter is that massive risk appetite pretty much always leads to total loss – that is what is happening in betting, gambling and gaming.

The beauty of investing on companies listed in the stock market like the Dar es Salaam Stock Exchange, or any other stock exchange for that matter, is that wealth is created overt time. Remember these cases I shared with you few weeks ago? That If you invested about Sh1 million in Berkshire Hathaway’s (Warren Buffet Investment Vehicle) 53 years ago — that investment is now worth Sh11 billion (that is over 10,000 times the initial investment) with a compounded annual growth rate of 19 per cent per annum for a period of 53 years. Or, if you had invested the equivalent of Sh1 million in the listing of Westfield Holdings (an Australian shopping centre group undertaking ownership, development, design, construction, funds/asset management, property management, leasing, and marketing activities, in September 1960 (when Westfield listed in the Australian Stock Exchange), that amount of Sh1 million that inflation has turned into today’s about Sh12 million, and reinvested every dividend and bonus that Westfield paid, your investment would have been valued at about Sh152 billion today!

Shares of companies listed in the stock markets are some of the best-performing assets class over many decades, this is how history teaches us. While they also carry risk like any other companies that are in business, but that risk is limited in the sense that a share can go to zero, resulting to 100 percent loss on that share. But the upside is unlimited and there are many cases, like the two above where prices and valuation of shares increasing many times, in some instances, more than 100 times over decades.

Despite noting the benefits of investing in listed shares, still some people would hesitate to invest, usually the three myths that stop many people from investing are: you need to be rich to start investing is shares, you need to know the right people with the rights connections; and it is for professionals only.

These myths may be true in the past, but that is no longer the case. Dispensing with these concerns is easy enough. Let us start with the misconception that you have to be rich. You don’t actually have to wait until you get Sh100,000 for you to start investing in listed shares. Our rules require that you have to intend to buy at least 10 shares – now with the prices as provided in the first table above. In some shares you need as little as Sh5,000 for you to get started in investing in shares and become a shareholder i.e. the case of CRDB, DSE, DCB, etc.

Knowing the right people – in the stock market business, it is what you know that matters not who you know. The good thing is that stock market information is publicly available for everyone to get acquitted with performance of shares and fundamentals of listed companies. Sure, you may require to seek interpretation and clarification on the information that you see on TV, newspapers, annual reports, etc – but one thing to note is that, we may each interpret differently the information available in front of us but that is exactly what a market is all about – different views on the same information. Just be a little careful on the interpretation you make out of these data and information.

Lastly, while professionals may have an upper hand because they spend their days focusing on investing and which shares to buy and sell, retail individual investors also enjoy the advantages. As a retail investor – we typically deal with small amounts of money and investments, which means we are a lot more able to buy and sell with ease with less risk, we are also able to be more focused, investing in just a few high-quality shares, while professional investors such as portfolio managers have to invest much wider, again due to size of their funds and also their risks.