What to Consider When Investing in Shares (II)

The capital market is a crucial component of the economy, putting savings and investments in the hands of those in need of capital. The capital which is then used to generate economic output, thus supporting development and creating wealth. A humming capital market can elevate a country’s socioeconomic conditions, as it has done in many economies where financial infrastructure and its supporting institutions are fundamental to economic development agenda. When correctly harnessed and channeled, capital markets can prove to be transformative: not just for the economy, but for society too — by unlocking opportunity and giving citizens a greater stake in their nation’s success (in the democratization of finance and wealth), capital markets can strengthen both individual prospects and the bonds of community, when many people are engaged in financing their economic development and are economically empowered.
For this to happen, there has to be financing tools, and products that may be used to mobilize savings for productive investments. The economy needs a sizable investor base, made of by both individual households and institutions, not only by the quantity of their participation but also by the quality of their investment strategy and decisions based on the understanding and appreciation the fundamental workings of the capital markets. In the last week’s article I shared some of the factors, approaches and activities for one to undertake during the process of saving and investing in financial instruments that are issued by participants in the capital markets.
I said, anyone who is keen on investing in the capital markets should have a clearly informed personal investment plan, followed by an evaluation of his or her risk tolerance level for various asset class (or securities within the asset class). While on this, it is important for one to understand and appreciate a principle of investment that says: the higher the risk, the higher the return. I discourage the speculative mentality and “quick money” motives – it is not good for an investor, especially on value-based investments.
The element I emphasize on is for one to determine where he/she want to end up financially. In the thinking process towards achieving the outcome to such a determination, questions such as at what age one wants to retire, how much money s/he need in order to retire comfortably, how much time one have between retiring, how much money he/she need to work with and how much risks are comfortable and willing to take on – needs to be responded into in a careful manner.
Once you know the answers to these questions you will have a good idea of how much you need to invest to reach your goal. Remember the wise saying which says: “if you do not care where you end up, any road will get you there”. So, do not choose to take any road – because any road will not help you to get where you want, you need to be specific, for example, if you are 45 years old and you intend to retire at age 60 and your net income (after deducting your expenses and liability obligations, and without consideration for inflation and time value of value) is Tsh. 1 million a month. This means that for you to achieve the Financial Freedom during your retirement, your Financial Freedom Fund Target should be to generate about Tsh. 180 million by the year 2033. With careful planning, financial literacy, good investment selection and financial discipline – this can be achieved.
If you do not have necessary competences and skills for financial planning, or you are not as savvy and disciplined, how can you go about this? You need to start by a bit of researching on the idea, which should be followed by opening an investment account at the stock exchange via a stock brokerage firm. As it with the bank accounts, which you use for your savings and investment purposes relating to financial products and services provided by banks, for investing in shares and bonds which are listed on the stock market, requires you to open an investment account. In our local environment, there are two primary routes you can take when it comes to investing in the stock market, you may have to use the services of the stock broker who will make investment recommendations based on your needs, desires and risk appetite; or the other option is for use to invest via a unit trust/mutual funds, i.e. the Unit Trust of Tanzania, which provides both diversification and professional management, coupled with researches and analysis.
Once you have opened an investment account, either with the stock broker or a mutual fund, develop the discipline to invest a certain amount, like the Tsh. 1 million as above, on a constant/regular basis – this approach will give you the benefit of averaging, the average cost per unit share will be lower relatively. Along the lines of discipline on investing, you may need to note that stock have a tendency to go up and down, for you to create wealth in the stock market, do not be emotionally attached to a certain stock. Develop the discipline to always setting a stop-loss price – this being the amount you are willing to lose, but not beyond, and once reached get rid of the stock. We talked about the need for diversification in order to manage your investment risk, I would like to end up by re-emphasizing on it, remember that the bedrock of all the investment advice in large part of human history has been: “don’t put all your eggs in one basket”. There is not better long-term risk management strategy than the diversification of investments.

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The Relevance of Transparency and Accountability for Sustainable Enterprises Growth

One of the key business issues that impend business and enterprise growth in our society is, the sometimes preference for lack of transparency and good governance. And this is rather the broader issue challenging many markets in the region. And so our entrepreneurs and owners of local enterprises are constantly willing to sacrifice expansion of their enterprises via capital raising, either privately (through private equity, venture capital funds) or public (from stock market or crowd-funding) in favour of otherwise — we observed such trends again and again.

As it is, transparency and accountability are the two key words that have acquired uncanny ability to strike fear into the hearts of operatives in both private and public sector alike. Contrary to popular opinion or possibly correctness of opinion – that the public sector is the centre for fraud, mismanagement of funds and corruption – however, sometimes the truth is, private sector carry a fair share of such economic crimes as well. The difference is that public sector scandals attract more publicity, possibly because there are more interested parties, and well — as it should be, public funds invite public scrutiny – (for private sector most of these issues remains private, unless a private entity turns into a public entity (by way of ownership). But is also a fact that, taxes are by far the most hotly contested funds in terms of appropriation or, in many cases, misappropriation — so it is fair to expect much scrutiny.

Transparency, efficiency, accountability, responsibility along with integrity, ethical practices and equality, comprise important tenets of good governance, which is one of the key requirement for raising funds or capital from the public and listing into the stock exchange, as well as for the continuous listing obligations. Unfortunately though, good governance in our country elicits fraud, economic crimes, corruption, and a determined less preference for transparency (especially in the private sector space): the list goes on. And so, lack of good governance is not just a concern for the public sector, but in the private sector as well. The recent PWC survey on the subject indicates that economic crimes erode an organization’s reputation and bottom line (profits). And, as it is in the case of business enterprises practice, if the threat to the bottom line is not enough to worry shareholders and other key stakeholders alike, then probably nothing is.

Can the company deliver value to shareholders with transparency, accountability and integrity? – yes they can. We, at the stock markets have seen, experimented and experienced how compliance to good governance, transparency and accountability have resulted into the increase in enterprises efficiency and in extension this outcome has improved profitability and shareholders value. Listed companies, which by nature are more transparency and accountable are some of the best performing enterprises in our economy and do feature in the large taxpayers category..

One of the criteria for a companies to raise public money and for such companies to continue be listed in the stock market is that they need to develop and embed cultures and values that are aligned to good governance, more transparency and accountability.

We have also seen the experience of companies and business enterprises that have changed from small or mid-sized to great companies whose social and economic contributions to the society are qualitatively and quantitatively significant because of the tough but good decisions that were made to turn the company from a mid-sized private company to a larger public company where efficiently priced capital is relatively easily accessed.

This is also to say Government policies and actions that propels some commercially-run government parastatals through creation of a wider share ownership, democratisation of wealth through equitable wealth distribution or legislative actions that are meant to create wider ownership of key sectors or assets in our economy through listing into the exchange are also meant to provide leadership and example by the government in creating a society that values not only the necessity of democratisation of wealth and finance but also the culture of good governance, transparency and accountability. These are good policies and decisions made by policy makers – it is for those entrusted to implement such policies, legislative actions and decisions to implement timely.

So, when the government puts up policies, make decisions and enacts legislative actions that are meant to broadly empower its citizens through ownership of economic entities/factors of production or enable a broader financial and economic inclusion or any other form of economic empowerment that can be achieved through a wider ownership of economic entities – that is good leadership — not only to the implications on socio-economic policies, but also in propelling a society that values and embraces transparency, accountability, rule of law and good governance.

Why am I relating this to good leadership, what is good leadership in this context? I will explain: I will see good leadership, when I see a sense of selfless as it relates to matters explained above, i.e. in this context, when there is good leadership there is sense of accountability and transparency. There is also courage to progress, even when progress seems impossible. Transparency, accountability, and the courage to pursue these aspects of managing and governing businesses are some of the key ingredients of how corporates and parastatals are to be governed; implementation of these is an indication that such companies or parastatals are destined into being well governed. Good leaders are supposed to create accountability mechanisms for themselves and their teams.
As it usually has been, we — human beings, no matter how good our intents, one must be aware of the consequences of bad decisions that can be made or actions that may be taken. It is on such basis that I see the relevance and importance of creating systems that guard against any form of negative temptations. Listing companies in the stock market and complying to continuous listing obligations (disclosures, sustainability reporting and transparency), apart from affording enterprises with efficient capital to finance their growth, is meant to encourage discipline, against bad decisions or inappropriate temptations that may then erode the potential for significant prosperity or bigger ambitions. Now, experience tells me that these may be a difficult choices to make, but in most cases, it is worth a pursuit, most of the large global and regional companies making with significant brand names that we use, see or talk or relate with on our daily doings, chose this path.
One may therefore ask, can a private company deliver value to its shareholders while exercising such leadership ingredients as: transparency, accountability and good governance? – the answer may be yes; because compliance to good governance, exercising transparency and accountability in many cases increase enterprises efficiency and improves profitability and shareholders value.

20 years – a journey of growth and challenges for the DSE

DSE started operations in 1998 which was the period of active privatization of state-owned entities/enterprises, somehow it has grown (in relative terms) to become the among the few stock markets in the region to achieve significant milestones, as measured by stock markets indicators and context, i.e. achieving the self-listed status (being the third and only three among 27 Stock Exchanges in Africa – after Johannesburg Stock Exchange and Nairobi Securities Exchange), having a market segment that focuses into enabling Small and Medium Enterprises (SMES) as well as new ventures [and loss making enterprises but with concrete plans and strategies for turnaround] to access long term efficiently priced capital, and a significantly growing market –pace-wise, for debt securities listings and trading.
Since beginning, political authorities and policy makers wanted DSE to be one of tools for privatization of state-owned entities (SOEs), targeting dispersing wealth and economic empowerment among many; in the process making DSE an official capital raising market for domestic securities, especially those emanating from private sector, which was to be the engine for propelling our economic growth as well as a listing platform for multi-national companies (MNCs) operating in the market but which are listed abroad—local users and consumers/market of goods and services produced by these MNCs loses the benefits of financing or enjoying ownership, profitability and other such benefits enjoyed by such companies. Or else, these MNCs prefer to take advantage of external political, economic, cultural and legislative situations that attract international issuers and investors, which rightly for us – it is difficult to compete.
The official number of current listings is 28 equity securities, 5 corporate debt securities (though 15 entities have issued bonds and listed) and about 140 Government (Treasury) bonds. DSE’s [sometimes] innovative tendencies has created one of the region’s exchange platform that is aligned to the best international standards and practices as they relate to delivery and settlement (DvP) of cash and securities, using automated trading system that is linked to national payments system and central depositories both at the DSE and Bank of Tanzania, ATS which can be accessed via their mobile phones, and fiscal incentives applying equally to investors and issuers without segregating local investors from foreign investors.
The equity market size as at 30 June 2018 was Tsh. 22 trillion (of which Tsh. 11 Trillion emanates from Domestic Listed Companies and the rest from cross-listed companies); while the debt/bonds market size is Tsh. 9.4 trillion – largely Government bonds, which makes up about 99 per cent of the bonds listed. Average annual turnover is about Tsh. 500 billion for equity instruments and about Tsh. 700 billion for bonds. Investor base for listed equity instruments is about 550,000 and about 2,000 investors for bonds instruments. Relatively, the stats above says – the domestic market Cap is only 10 per cent of the Gross Domestic Product (GDP) while bonds market size is only 9 per cent of the GDP, while the investor base is only 1 per cent of the population – under such a situation one should not feel good because arguably the GDP growth of 7 per cent is not largely shared partly because it is not widely dispersed in the form of formal ownership.
We may wish to know that one pillar of success story for any stock exchange, in any country is its strategic alignment with the particular country’s political agenda – whether it relates with supporting the particular socio-economic agenda, or democratization of wealth and finances, or the local content, or economic empowerment, or deepening the financial inclusion, or market integration and harmonization of legal/regulatory environment to facilitate easy of doing business and trading, etc – whatever it is, our experience have been different — the DSE is not being treated as the primary national engine for financing of economic development. Instead of creating efficient structure, monetary and fiscal, that will encourage companies to access public money, expand businesses, create employment, pay taxes, etc, or using it as a savings mobilization tool and intermediary for access to finance and economic growth, different or alternative policies have been chosen. The consequences of such alternative policies are an economically weak exchange, with a vastly inadequate supply of securities in the market place. This is a big lost opportunity for democratization of wealth and finances, financial inclusion, financial literacy and economic development
As for DSE operatives and stakeholders, we must appreciate that financial markets currently operating in an extremely complex environment, influenced by diverse factors and technologies. Big data, Artificial Intelligent, Climate change, Crypto-currencies, Smart grids, and Shifting geopolitical powers, are becoming our day-to-day reality, and we cannot afford to entertain an idea that we can do otherwise, or we are far from being impacted.
So, as we celebrate the past 20-years, we need to appreciate that in this globalized environment where information travels at the speed of light and manual tasks are automated, technology is increasing the flow of information, and reduces operating and transaction costs for everyone, including the experts. Yes, this phenomenon will not eliminate intermediaries, in fact the value of their advice keeps on increasing as the world becomes more connected; but yet, we need a significant reorientation of our entire operating system: a transition to a system that focuses on the long-term promotion of sustainable social-economic development, instead of short-term profit maximization; inequality and exclusion; and sustainable environmental development rather than ongoing environmental degradation. If we don’t want to drown, literally, we need to balance these perspectives well.