Investors’ Dilemma: How to steer clear of common misconceptions.

In the previous issue we looked at common investing misconceptions at the Uganda Stock market. In this issue, we continue to unearth these misconceptions and know just how well investors can avoid them. We laid emphasis on the need to shop for an investment advisor. Understanding share price ramifications takes skill and experience. Currently in Uganda, all stock brokers are licensed by Capital Markets Authority to offer investment advice. However, just like any other type of advice, say marriage advice, investment advice can always be availed by who ever has the opportunity and the platform to do so, hence the term ‘cheap investment advice’. This cheap investment advice will however always come in handy to bite you in the long term. My take is that you look out for an experienced investment advisor who will be willing to pay close attention to your needs whether retail or institutional. Crested Stocks and Securities are by far the largest brokers in terms of retail clientele, the beauty is that they offer tailored investment advice at no cost.

Cheap doesn’t imply future value

I presume that at this stage of the debate, you have already secured yourself a Securities Central Depository (SCD) account. Well, I’m no exception. Not only have I signed up for one but I have gone a notch higher and purchased some 400 shares of ‘company XYZ’ that I prefer not to mention here.

 So what’s your stock pick? Many amateur investors subscribe to the notion that if you bought a cheap stock, probability is that the stock will appreciate in value over time. That is partly correct but it is never always the case. Robert Baldwin, Chairman Uganda stock brokers association, advises that you may never know how low a stock could decide to plummet. To mitigate the dire consequences of banking on such a proposition, he continues to advise that you should look into buying a stock when at the low end of its price cycle. Your preferred stock broker should be able to provide you with this information on request. You can also choose to be proactive by recording share prices at the end of each trading day on an excel worksheet and later generating a graphical illustration after a reasonable period of time.

Expensive does not imply quality

If you went shopping and the shopkeeper presented you with two similar types of ‘Butto’ (Cooking oil) same quantity with only a difference in price... Your guess should be as good as mine. The higher priced ‘Butto’ is perceived to be of a higher quality. Andrew Muhimbise, an investor at six of the seven primary listings on the Ugandan bourse, advises that the best indicator to a stock’s quality should be its price to earnings ratio. The price to earnings ratio in simple lay terms would be say if a listed company is reporting a profit per share of Ugsh 200 and the stock’s price on the trading floor is Ugsh.2000, this would imply that if you bought it you would be paying Ugsh.10 for every Ugsh 1 of it’s profit per share. A stock with a higher ratio would therefore seem more attractive.

Dividends do not speak the potential

Let’s be a little more pragmatic. Stanbic Bank Uganda (SBU) awarded its shareholders dividends amounting to Ugsh. 7.03 per each share held this year. SBU recently offered its shareholders a bonus issue (one where investors get additional shares at no cost) of one share for every share held. This implies that come next year if SBU performed as good as last year and decided to offer its shareholders the same pool of dividends, shareholders would be entitled to Ugsh. 3.52 Per share. Mr. Amateur investor would then view his investment in SBU as a debacle simply due to the sudden reduction in his return. The famous brick maker, Uganda Clays Ltd (UCL), has not rewarded its owners with dividends for the last two consecutive financial years. Does that mean the stock is a failure? Well, a good stock pick should obviously be paying its dividends before you invest in it (otherwise you would be speculating and not investing) but the exception here is that UCL’s situation is one that depicts future growth given that it has been linked with huge efforts in modernizing its manufacturing front.

Warren Buffet, the second richest man in the world once said, ‘I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day the next day not reopen it for five years.’ Remember, investing in the stock market should be a means to an end and not an end in itself.