Andrew Muhimbise, is a stock market retail investor with over 10 years of corporate governance experience. He is also a general manager for a small but steadily-growing fund – Rats Network Investments Group. below he shares his views on the psychology of investing in the market, staying on top of investment decisions.
How do you earn money investing in shares?
You can make money from shares in two basic ways — dividends and price appreciation.
Typically, the dividend payment is pretty small compared to the price that you pay for a share. It’s 6% of the share’s current price improvement from 3% due to the depressed share prices.
But if the company is growing and profitable, the amount of the dividend will increase steadily with each passing year.
However, not all companies pay dividends. Some young companies decide to use all of their extra cash to grow and expand. Other companies are forced to reduce their dividend or stop paying it altogether if they fall on hard times like for Uganda Clays Limited did for 4 years and New Vision and NIC. So, dividends are never a sure thing.
Price Appreciation: The other big reason to invest in shares is because of their potential to increase in value over time.
Share prices rise and fall from trading day to trading day. They are determined by the lowest price that any one shareholder is willing to sell his or her shares for. If a company is doing very well or if its future looks promising, its share price will tend to rise. Conversely, if the company’s performance is poor or if it encounters a big obstacle to growth, its share price will tend to fall.
But, like dividends, there are no guarantees that a share’s price will rise. A share that’s that was IPO at 1,000/= in 2000 went to 300/= then to 30,000/= and is 15,000/= that is British American Tobacco Uganda’s story over past 22 years.
Cipla from 256/= IPO in 2018 to 88/= today. It all depends on the performance and the market’s expectations about the prospects of the business.
Initial Public Offers (IPOs) don’t guarantee a sure gain case in point all IPO in recent past are trading below price:
Cipla Quality Chemical Industry Limited listed last year at 256/= a share and under t88/=
UMEME listed at 275/= and is now 242/= touched 160/= NSSF bought its stake from Actis at 488/=
As an investor, the key is to buy shares of a good company at a fair price. Do this and there’s a very good chance that the value of your shares will rise over the long-term. Comprehend how the companies you want to invest in work. Then, at some point in the future, you can sell them for a healthy profit.
What types of companies can one invest in on the stock market? Growth vs Value investing?
Your choice based on your investment goals; Value stocks are usually trading below value and growth stocks are expected to grow. Our listed companies are mostly mature and therefore either undervalued or overvalued, we don’t have growth companies which scale at rapid speeds largely due to limited innovation within companies. I would say we have Value and Dividend Stocks
How long have you been investing in the stock market? How did you come about it?
15 years. I learned that Big companies don’t necessary give good deal and that also small companies don’t, you have to know better it is the brutality of capitalism so if you want thrive simply know better- your broker, your investment advisor will have a vested interest in you losing, see the PR machinery that goes into overdrive like at recent MTN IPO and I push back ironically to restore a level of sanity and balance in the market
What are key considerations when you are stock picking? What makes a good business/stock to you?
The stock market for me is like a bank account, I invest when I have excess money and sale shares when I need money, overtime I have had the ability to reinvest dividends. I therefore don’t fall in the stereotype of the romantic day trader seated on screens with graphs all day and all-night making money by the second- for me I approach investing in a slow mechanical boring process, if what I discover is good I will intensify and I usually commission private market overview research to fill my own knowledge gaps
Board and Management, are they responsive to minority shareholders, how big are their egos (the bigger the ego the smaller the profit simply big egos don’t work with people smarter than them so they are usually the smartest guys in the room: Ken Lay of ENRON is poster boy of ego business leaders- in an online course at Harvard business school on corporate governance they should that CEOs who wore red ties (standard projection of power) and had full page pictures in the annual report underperformed their peers) Baroda (Hindu Capitalism) and UMEME (board has significant minority shareholding and external pressure), BATU (external pressure means you cater to your stakeholders). When I cannot dialogue with a board I don’t invest to avoid future friction.
Economic MOAT look at the Business Ability to maintain competitive advantage over its competitors (stuff you study at business schools is relevant you see it at the top echelons of company governance) and to protect its long-term profits and market share. A moat is difficult to mimic and thus creates an effective barrier.. small banks are going close
Dividend yield, I need an equivalent of risk free Treasury bills rate of 8%
Look at the company expense lines especially the extent of related parties, look out for Transfer pricing: management fees, franchise fees. It is the modern way of legal profit repatriation- good for the majority holder but undermines minority holdings
What was the biggest success and the biggest failure on the local stock exchanges, what lessons can we learn from them?
Stanbic Bank IPO is the bellwether of Uganda’s listings, well executed: discounted, huge numbers, Kitili Mbathi and Dr Martin Aliker were stellar; we learn that inclusiveness is good for growth
New Vision rights issue meant to usher in the digital age of radio and TV of 2008, Uganda Clays rights issue of Kamonkoli of 2007 and Cipla IPO of 2018, learn that companies can actually scam you for real I mean New vision sales would shoot from 30 bn under Pike to 90 bn under Kabushenga but Pike Porfit of 10% on revenue was never matched new vision price has moved from 2,800/= in 2009 to 154/= todate. Cipla we know from 256 IPO 2018 to 88 todate
What is the psychology of investing in the market? How do you prepare and stay on top of investment decisions?
In investing you basically lose some and get some like is for many things in life, at the moment I have gained more than I have lost so am afloat; It is a knowledge heavy undertaking if you don’t like reading or thinking invest through a 3rd party
A Mechanical Boring Slow Process, you will be served better in the long term just
Knowledge and Risk correlate, lesser know how the higher risk. No one really knows the market as it’s a collection of thoughts and actions. Brokers are not your friend they earn from your activity don’t forget that, in capitalism its your choice to be on the menu to be eaten or sit at the table and feast on the menu, when this sinks in you are ready to invest.
Temperament, your ability to do nothing in the market, Warren Buffet says temperament is more important than intelligence- sit out a storm not panicking we could see that with the UMEME stock at time of concession end.