For the past couple of issues we have been looking at the basic
workings of the Dar es Salaam Stock Exchange (DSE). Last month we found
that the Exchange manages deals between companies and the public in
which companies accept our money in order to accelerate their growth.
In return for our investment, the companies attempt to reward us with a
return ‘proportionate to their growth’. In other words, if the
companies we invest in do well, we stand to make some money but if they
falter, we will probably lose some money on the deal. So the critical
question for the investor is, “How do I determine whether the company I
am considering investing in is in trouble (and therefore will likely
shrink) or is healthy and getting set to grow?”
To answer this question, we need to know two primary things about the
company: (a) its financial health and stability and (b) the business
climate in which the company operates. For the next few issues we’ll
stick with the numbers and deal with the business climate after that.
First, a confession: I am not a ‘numbers’ guy, so – if you’re like me –
it is good to go and look for help. Personally, I turn to my friend Dr.
Bruce Bjornson, a professor of economics at a US university who is now
living in Dar, but you may find it more convenient to walk through the
numbers with your stock broker as it is their job to stay very well
informed.
The table below – convenient for this example but somewhat out of date
- shows an annual summary of the daily stock table you can find in most
any newspaper any day. Because the Closing Prices are the numbers we
come across most often, they are the best place for us to start.
[Market
Statistics From April 2003 to March 2004 Source: Dar es Salaam Stock
Exchange (www.darstockexchange.com/ms.asp)
]
 One Year DSE Returns
By looking at the table above we can see that Tanzania Breweries (TBL)
traded for 1,600 TShs per share in April of 2003 and for 300 TShs less
than that in April 2004. Also, we can see that a share of SIMBA cement
increased a whopping 50% during that same year. But what does that
really mean?
On the face of it, the numbers might suggest that SIMBA
had a great year and TBL didn’t do so well. But wait a minute here – is
that really the story that the numbers tell? Unfortunately, it isn’t
quite as simple as that. I’ll use an example to explain: let’s say one
year ago you bought 100 shares in Company A for 1000 TShs apiece
(100,000 TShs investment) and you also bought 100 shares in Company B
which - by chance - was trading for exactly the same amount.
Yesterday,
a year after you bought your shares, you read in the newspaper that
Company A’s shares are now trading for only 500 TShs apiece (so they
lost half of their original value during the course of the past year).
Fortunately for you, during the same period Company B’s stock climbed
to 2,500 TShs a share (your original investment in Company B has grown
by 150% and is now worth 250,000).
Okay, I know this is getting a
little complicated, but just bear with me here: today you read in the
paper that the shares for Company A have climbed from 500 to 650 TShs a
share, up 150 points in one day. Now that’s good news for anyone who
bought it yesterday, but you are still a long way from the 1,000 TShs
share price you paid last year. At the same time, Company B’s shares
fell from 2,500 to 2,300 yesterday, not good - but certainly not bad –
since it is still up 130% from the price you paid for it last year.
The
point I am trying to make here is that simply watching the change in
Closing Price doesn’t really tell us very much without having a
starting point in mind, and the starting point reflects the price at
which you buy. So the real question is, how do you figure out if it is
a good time to buy? And that’s the very question we’ll begin with when
we pick up again next month. Until then, remember the key to the market
remains unchanged: buy low, sell high!
Michael Gehron
|
