Chapter 5
Handling your portfolio yourself is a
lot more work then mutual funding. You may not triple your money in a stock
very often but you need a few triples to make a fortune. Before you get started
in portfolio management, ensure that you have details of what you want to
achieve for yourself. So many people just jump into investments without any
idea on the subject matter they are handling. Before they know what is
happening to them, they have lost loads of money. It’s very disastrous to put yourself
into portfolio management without knowing the subject, it is better to always
educate yourself first before you take any risk on your cash. Before going in
to play the real game, experiment with imaginary portfolios, so that when the
money comes in you will not be engaged in what you are not acquainted with.
Your imaginary portfolio may a company’s profit after tax (PAT). This is
because, supposing the company issued additional shares or some convertible
debenture stocks have changed into equity, resulting in increase in shares, you
dividend per share would decrease. Some people buy shares from tips from
people. When people tell them that a particular share is on the rise. This is
acting on what I call outsides report. Others act based on information gotten
from experts who appear on television or are quoted in the journals. Carrying
out your own research is best suited for portfolio management. You choose a
company based on your own analysis. The more you take interest in studying
companies, the less you depend on opinion. You can firmly decide on your own
what stocks to have in your portfolio. You can specialize in your portfolio.
You can specialize in a certain industry, small or large companies, new or old
ones. No matter how much you know about a company, you can never know its
future. Your task is to guess what tomorrow would be like from your analysis.
The major reason people do not invest is because they feel they’ve not got the
money. But we’ll return to this in subsequent pages. Now let’s look at good
companies and bad companies. A bad company is such that I wouldn’t advise any
investor to put his hard earned money into. Such companies could be identified
via:
-
Competition,
some companies are locked into a competitive structure, which is difficult to
change. A competitor has an edge in terms of market share, brand, technology
etc.
-
Culture
some companies have a particular may of trading that distinct it from others.
Bad companies tend to have low efficiency, poor management and as such find it
difficult to recruit best tactics in doing business successfully.
-
Low
liquidity and high gearing: Gearing is a compansion between the long term
liabilities of a company to its long term assets. Any business with huge debts
profile is certainly not good and I do not think any investor will like to
throw away his cash on such companies.
-
Poor
managerial team: The managerial team makes up the bulk of the company. They
support the company. In cases where the managerial team make poor decisions
concerning the welfare of the company.
To know a good company, a
good business will always produce a high return for the investor. Good
companies go about their business in a way that leaves them unnoticed by most
investors.
They possess such
characteristics as follows:
-
High
return on capital. This is mostly achieveable by the company with the highest
market share in any competitive system.
-
Stability
of profits: Mismanagement may result in occasional dips or it could be a result
of economic trends. Before going into be a shareholder of a company, check the
stability of profits for the previous financial years.
-
Business
franchise and high market share. This is building a good brand, physical
proximity or emotional appeal to the customers as their first choice
irrespective of prices. Such companies include limited African company of
Nigeria Plc. (UAC PCC) which has so many franchise around Nigeria hence
increasing its scope of trade. If there is high relative market share in its
important markets, and if you can define a barrier to entry, it would make a
good company to invest in. if you have the available resources for portfolio
investment the stock broker is your entrance into the stock markets. You cannot
buy or sell shares in the stock exchange without the services of a broker. In
doing this, you don’t have to only pick your stocks but you have to analyse all
the brokerage houses available before choosing any one. Once you’ve settled in
the house, you must have an account.
When you’ve opened the account and
signed all necessary papers. You hand over the money for the investment and
inform the broker on what company you’re interested in. he will give you a
research report concerning such company based on the house analysis. When
dealing with a stock brokerage firm, always ensure to take absolute care if not
you run into serious trouble.
The stock market has always been a
veritable profit making tool attracting many investors in recent times.
However, the increased flow of investments and commission doesn’t seem enough,
as dubious fraudsters in the industry look for quicker ways to bolster their
pockets. Adamu had just received a sum of N10,000,000.00 for his role in the
capture of a dangerous criminal. Not long after he received his check, he
called his stock broker ordering him to buy 20,000 units of Nestle Food Plc
shares at N80.00 per share. After a period of ten months, learning that Nestle
Food Plc’s shares have appreciated to N200.00 he calls his broker to find out
the worth of his 250,000 units of Nestle Food Plc shares at the current market
rate, only to be told that there was an error his shares had been sold.
Basically, securities fraud is a
crime that occurs when deception of a material kind occurs in the trading or
dealing of stocks, bonds, or any security. Instances abound where some
operators have been found wanting in the discharge of their responsibilities
which has led to charges and accusations of fraud and deceptive practices being
leveled against them. Over the years, several of such cases have been reported
to SEC for investigation. Now let us look at one of the biggest stock seam in
the history of the Nigeria Stock Market.
THE BONKOLAN’S CASE
In April 2002, it was learnt that a
seam had been perpetuated on the floor of the stock exchange involving the
illegal sale of Nestle Foods Plc and Unilever Plc shares and certain other
securities. The seam was alleged to be perpetuated by a gyndicate which worked
through certain stock-broking firms. The major firm that was indicted was the
Bonkolan’s invested limited. The SEC went into investigation and confirmed the
involvement of a number of other stock broking firms and certain individuals
consequently, twenty corporate organizations and another twenty individual
respondents, were invited before the Administrative proceedings Committee (APC)
of SEC to give further explanations of their roles in the alleged seam.
After its investigations, the APC
recommended punishments ranging from withdrawal of licenses of such stock
broking forms and individuals to the outright ban of firms and individuals from
the capital market. Monetary penalties, warning and reprimand of firms, as well
as individuals were also meted out to the individual parties. The Nigerian
Police Force and Nigerian Stock Exchange also cited some for further investigations.
After the storm had set, about 17
individuals were blacklisted and banned from operating in the capital market.
Bonkolans Investment lost its trading license and six other stock broking firms
were suspended for a period ranging from 3-6 months. Gossard Securities got an
indefinite suspension. Seven stock brokers were suspended for a period ranging
from 3-6months. All the suspended operators were required to undergo fresh
registration, with an under taking of good conduct as a condition for re-admission.
Furthermore, SEC also ordered the
restoration of all affected shareholders in either cash of share, to their
original position before the seam-provided that all restorations by shares
shall include bonuses and dividends while restoration by cash shall be 2% above
CBN MRR. It also stipulated that all payments/restoration shall be made into a
designated account to be maintained by the CSCS and Union Bank registers.
Seventeen other implicated persons suspected of dubious dealings were referred
to the Nigerian Police for further investigations).
This is to imply that showing a lack
a diasical attitude towards your portfolio management because you think you
have a good broker may leave you vulnerable to being scammed. Here is a few
ways the seamers may go about their plots.
-
Churning
This is excessive trading
by a broker on a customer’s account in order to charge more fees for himself
rather than improve the investment strategy of a customer. This is very common.
If you notice any form of trading on your portfolio without giving any
instruction for such trades to take place, you better do yourself good by
reporting such brokers to the Security & Exchange Commission (SEC).
-
Fraudulent
practices: As share prices tumble, some brokers may decide to take laws into
their hands by resorting to outright fraud. Investors should ensure they
monitor their portfolios closely even though other people manage them. Follow
the companies you’ve invested in closely by reading their financial reports.
Keep yourself informed at all times.
-
Unlicensed
Individuals: Some brokers and brokerage firms also trade securities whenever
you want to do business with an independent agent, you’ve got to ensure that
the sale person is licensed. You do this by contacting the nearest SEC office
and ask if such an individuals is licensed and whether the investment he is
trading is registered or a scam. If the answers are yes, the investor should be
more comfortable with the product although you can never be too careful.
-
Ponzi
Scams: These are schemes that offer products and pitches that may sound too
tempting to be true. It is a bid to love you into inexisting investment
schemes, with a promise of huge returns beyond market rates. There have been
repeated calls from the investing public to stock brokerage firms and financial
houses to deal decisively with their employees who cheat investors over share
transaction.
SEC has also assured
investors of the commissions readiness to sanction any operator who is not
willing to play by the rules and regulation of the market. There are several
ways of protecting yourself against share seam by brokers.
-
The
Trade Alert: This is a recent computer innovation which is targeted at
detecting and frustrating share seam, which was launches of recent by the NSE.
This service enables a subscriber to be immediately notified of transaction
involving his shares via his mobile phone. The alert will also, as value added
services, provide subscribers with notices of market activities, Annual General
Meetings, Quarterly Financial highlights of quoted companies, weekly balances
and price movements of stocks.
-
The
Stock Police: The securities and Exchange Commission is primarily responsible
for detecting and investigating a variety of potential violations and enforcing
compliance with the investments and securities Act. As the apex regulatory
institution of the Nigerian Capital Market, it has the responsibility of
eradicating security fraud and issuing out required punishment to the
fraudsters. SEC is prepared to come down hard on anyone forward breaking the
rules of the game. Any broker found guilty would be handed to any of the
Economic and Financial Crimes Commission (EFFC) or the Nigerian Police for
Prosecution, for the investor, the need to be vigilant cannot and should not be
over emphasized and more than ever, discretion must be a key component when
making investment decisions. In case you have been defrauded, do not hesitate
to report such a person or group of persons to the SEC. It might be too late
for you but you might just help someone else from having such an experience
remember thieves are not living for stealing goats but that goats may not be
stolen.
After you buy your stocks
in let’s say Nestle Plc, you rushed to buy the papers the next day to see how
your stocks performed that day. Now let’s analyse carefully the headings on the
papers before you get yourself confused.
In understanding the stock table,
First column; shows current stock
prices for a particular day
Second column; show the previous days
stock prices
Third column; show change in stock
prices between the current and previous
day. A number in bracket represents a fall in price.
Fourth column; shows the percentage
change in stock price in a day. If the number is in bracket, it shows a drop in
price.
Fifty column; (mark down price);
shows the price of a stock after its marked down for cash dividend and /or
bonus share issue sixth column; (Today low); shows the lowest price a stock was
traded on a particular day seventh column (Today high) shows the highest price
a stock was traded on a particular date Eight Column (yr low); shows the lowest
price a stock was traded in the last 12 months
ninth column yr high); shows the highest price a stock was traded in the
last twelve months.
Tenth column year todate (YTD); shows
the percentage capital or price gain made by a stock from January to its
current price (Figures in brackets represents percentage drop in share price of
the stock since the beginning of the year.
Eleventh column (earnings per share)
(EPS); stands for what each issued shares of the company earns if the company’s
profit after tax is shared among all its issued shares
Twelfth column (P/E Ratio); stands
fior price earning ratio. It is the market price of a stock divided by its
earnings per share (EPS). It indicates the premium investors are paying for
acompany’s earnings, or how long an investor will have to wait to recover their
investments in stocks based on current earning
Thirteenth column (F/Yr); shows the
month the company closes its financial year. In previous pages, we discussed
the difference between a good and bad company. Stocks do not move up linearly
but on the contrary they have gone via stretches of decline over time. Now that
you know which is bad for you’re got to know the profitability of a good
company to you. Here is an easy guide
–
Get
Acquainted with the company. Buying stocks summarily is taking ownership of
part of the company, it is very important to know how a company makes money
before investing in it you do this by reading such company’s financial books
some companies invest in other spheres of the
economy.
–
Do
a financial checkup. A good defence
against unpleasant future events is financial strength. The numbers you
need can be found in the cash flow statement which is always included in such
company’s financial account.
The key is to focus on cash flow
generated from continuous operations. Companies with positive cash flow has
money to invest in the business, settle their debts and pay dividend to
investors. Moreover, such company does not have to generate capital all the
time from the capital markets to fund its growth unless such is absolutely
necessary.
Also, the operating income (listed on
the income statement) operating income reveals more than the broader net income
and excludes one – time gains or losses as well as interest earned from
investments and other items that can distort net income. A third place to
measure a company’s pulse is on its revenue line. Companies can make profits
over the short term by cutting costs or taking – one time gains. Revenue,
although not fool-proof, is much tougher to inflate. Also in the long run, the
only thing that is going to drive increase in profits is rising sales after
determining the revenue trend, check gross profit margin. You can calculate
them by dividing gross profit by revenue. Falling margins are often a sign of
impending trouble. They cold be because such company is threatened by
competition, or demand is slowing or its overheads are too high.
- Know
the indebtedness of such company.
Debt is an important tool for
companies to achieve certain goals. Wise borrowing could increase earnings. You
must look at the debt – to – equity ratio as measure of debt a company holds in
contrast with its shareholders equity. Analyze the company’s interest coverage
– a number that compares a company’s pretax profits with its interest
obligations. Interest coverage is the (prefase profits + interest paid):- the
interest paid you have to take absolute care if the ratio is less than five.
- Know
the difference between a good company and good stock some people go for stocks
that are at their highest prices the best company in the stock market can be
your worst investment if you pay too much for its stocks. The stock market is a
system that quickly accepts everything known of a company and awards the
company stock an appropriate value. Sometimes, there is a system
failure-investors may overact to a hit of bad news or are over enthusiastic
about a bit of good news but fail to recognize the value of some assets. To
know a company with a good stock check the markets capitalization by
multiplying the number of shares outstanding by the share price and measure the
value the stock market places on the whole company. A much higher outstanding
share constitutes a problem given the level of profitability required to
service such a large shareholders base. You also have to serotinise where the
shares are coming in from in terms of may be 52-week range. If the stock you
are intending to buy has been hitting 52-weeks high, find out why before
jumping in.
One of the best ways to know if a
stock is trading at a reasonable price is to take a closer look at its P/E
(Price/Earning ralio) not the profit after tan because such profits may be used
to settle debts. If a company trades at discount to the market, the industry
average or its competitors current PE ralio are generally considered under
valued and depending on your outlook for the finuis future, could signal a
bargain. The company’s historical range could also determine if your stock’s
P/E is too high. A stock can be underived for several reasons. –Investors may
lose confidence in the company’s management or competitors may be eating deep
into the firms market shares. These stocks are no bargain and there are quite a
few quoted on the Nigerian Stock exchange,
A few things to guide you in knowing
the profitability of a company are
-
Brand
name products
-
Increased
Earnings per share
-
Low
debts
-
Huge
cash flow
-
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of prices with inflation
-
Does
profitability depend on large capital sums.
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