Understanding Value vs Price of Shares

When contemplating to invest in shares, what factors determines how much you should be willing to pay for a share? What makes one company’s shares to be worth several times compared to another? How can you as investor be reasonably sure that you are not overpaying for an apparent promising future, which could as well turn out to be a nightmare? Benjamin Graham in his 1949 famous investment book, The Intelligent Investor mentions five aspects that he feels are key decisive elements in responding to some of the above questions: (i) the company’s “general long-term prospects”; (ii) the quality of its management; (iii) the financial strength and capital structure; (iv) its dividends payment records; and (v) its current dividend rate. In today’s article we will explore these five key investment aspects in light of our current market challenges, as investors are in a panic mode and markets are losing value significantly. What we are about to learn (and mostly from that book) is that even in trying times for economies ad financial markets, value investors (as opposed to speculators) can still maintain their safety, or even increase their worth from investment. Let’s elaborate:
The long-term prospects: in recent days, investors have been so keen in following up about movements of share, of course since January to-date the movement has been on the downward direction across all markets. For speculative or aggressive investors and stock traders perspective this isn’t good news at all. But for a “value and defensive investor” this should be the time to download at least five years’ worth of annual reports for some listed companies (which are obtainable in the DSE website). Then go through the financial statements gathering evidence that will help you answer the following two overriding questions: what makes the company grow? where do (and where will) its profits come from? As you study the sources of growth and profits, pay attention on the competitive advantage of the company as well, where is it relative to its short-versus-long term plans? whether the company invest in long-term development activities i.e. its people, brand, research and development, etc; or overly reliance in short term unsustainable plans.
The quality and conduct of management: one of the most important leadership traits is trustworthy, company leaders should state what they intend to do during a period of time, and then follow up on their commitments. To appreciate this, read the past annual reports, see what plans and forecasts company executives made, if they fulfilled them or if they fell short. And, if they fell short what were the reasons, did they externalize their short comings? are they seem responsible and accountable or do they rather blame things like “the economy”, or “the uncertainty”, or “weak demands”? These questions can help you to determine whether the people who runs the company are acting on the shareholders (and other stakeholders’) interest, or their own interests.
The Financial strength and capital structure: one of the basic possible ways of looking into a business which is well and sustainably run is in finding out if the business is making cash profits i.e. if cash generated revenues exceeds what the company consumes. Under normal circumstances good business managers keeps finding ways of putting that surplus cash into productive use which also helps the company to continue enhancing its value. But how would you know this?– read the statement of cash flow, which is part of the financial statements in the annual reports. See if cash from operating activities has grown steadily in the period under review, or not?. The other element to look into is the earnings or profits per shares, is it growing? As for the capital structure, this can be seen from the balance sheet. Draw your attention onto the amount of debts that the company is obliged to pay, under normal circumstances the amount of debts should not exceed 50 percent of total capital for the company. If it exceeds such levels, you should question, because the company could end up being owned by debt holders instead of shareholders. Also, on the notes to the financial statements, observe as to whether interest rates of debts are fixed or variable – this has an impact on the profitability of the business.
The last aspect that a “defensive investor” or “value investor” is expected to pay attention into is the historical dividend records as well as the current dividend rates. What is dividend? dividends are a form of cash flow to the investor. Dividends are an important reflection of a company’s value. It is important to note also that shares with dividends are less likely to reach unsustainable values. Investors have long known that dividends help companies from declining in value.
Despite of the above, there is an argument that, usually companies pay dividends because that could be the best use of their cash; that growth companies looking to capture more market share would not pay dividends instead they would invest their cash profits in innovation and looking to provide appreciation to their assets instead of giving money to shareholders. In either case, from the practical aspects of the investors and markets, companies that pay cash dividends are highly perceived to bring more value addition to investors and hence enhancing shareholders’ value compared to companies that do not pay dividends.
Based on the above, it can be said that in investing as with life in general, the ultimate victory goes to those who are willing to devote a considerable amount of efforts to their undertakings, those who does things and know where they are going. As Yogi Bela once said: “you’ve got to be careful if you don’t know where you’re going, because you might not get there”. During these times where markets are trading on the low, you better know where you are going with the actions you take. Either way, try not to speculate.

Democratization of Companies is for the greater good

The role of corporate entities in our lives has become greatly intertwined — companies, as it is for human are treated as legal persons, and are proportionally engaged in determining some key aspects of our lives – from where we sleep, to what we eat, what and how we wear, how and where we work, how we commune and communicate, sometimes to how we decide and govern ourselves, the list goes on and on. As it is for humans, companies have their own rights and obligations, and armed with these “rights,” corporations have increased control over resources, jobs, commerce, political engagements, and even in the making of laws. And the fact that companies have limited liability – this has somehow decreased citizens authority over them.
Given this situation, that’s why the debate and movements related to the spirit and culture of distinguishing between a society oriented towards capital versus the one oriented towards people gets the necessary policy and political attention, especially ever since the idea of corporations operating as legal persons came into being. Because of this, many within societies would prefer to see the relevance of companies within societies are judged based on principles of democracy, which include accountability, integrity, and transparency.
Let me draw our attention to statement that was issued sometime in 1981 and then later in 1997 — by the Business Roundtable, a group comprising the CEOs of most of the largest corporations in the USA.
This “Statement on Corporate Responsibility” reads: a group of the CEOs of the largest US firms, recognizes six constituencies – customers, employees, communities, society at large, suppliers, and shareholders – as forming the ‘web of complex, often competing relationships’ within which corporations operate. It accepts the idea that ‘shareholders have a special relationship to the corporation’ but doesn’t allow their interests to trump all others.”
Here is an excerpt from the Business Roundtable statement: “Balancing the shareholder’s expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management. The shareholders must receive a good return, but the legitimate concerns of other constituencies also must have appropriate attention. Striking the appropriate balance, some leading managers have come to believe that the primary role of corporations is to help meet society’s legitimate needs for goods and services and to earn a reasonable return for the shareholders in the process. They are aware that this must be done in a socially acceptable manner. They believe that by giving enlightened consideration to balancing the legitimate claims of all its constituents, a corporation will best serve the interest of the shareholders.”
As it reads, this statement is anchored on the need for rebalancing the share of income and wealth in favor of other interested stakeholders in the manner companies are governed, and hence the need to expand democracy in companies’ ownership and eventually finance and the economy. That is, if left unchecked — corporate greed and interests can destroy the social and economic fabric of communities, where a small group of people owning and running corporations make decisions that increasingly determine overall societies’ economic, social, environmental, governance, policy and political future.
As matters stands, it’s a fact that today, the richest 10 percent own an estimated over 90 percent of global capital income – including capital gains, corporate dividends, and interest payments. And almost 50 percent of all new income generated goes to the top 1 percent individuals, who owns or manages global corporations. In the US, for example, the three wealthiest people own more wealth than the bottom 160 million Americans. And the richest family in America – the Walton family, is more wealth than the bottom 42 percent of American citizens. Much data and information are difficult to come by in our local context – but the same can be said for us.
While corporate profits that presently go to a small number of ultra-wealthy families are at or near an all-time high, returns on other corporate stakeholders – employees, governments, and other operatives within companies’ eco-systems as a percentage of economies do not match up.
And yes, it is also a fact that those who control these corporations have strong allegiance to profits, executive bonuses and the value of shares of companies. What happens to employees, what happens to the environment, what happens to the community in which their corporations’ function, what happens to government tax revenue income matters very little.
This type of corporate entities operations, governance and ownership is not an economic model that is sustainable for the long end. Societies can do much better and cohesively while encouraging enterprising spirits and business success at the same time encouraging more transparency, accountability, payment of fair share of tax revenue to the government, etc.
The truth is, we can grow and develop in an economic model that create jobs, increases productivity while corporate are democratized by sharing part of their ownership stake with other stakeholders – employees, customers, suppliers, communities, governments, etc. and all have a say in the decision-making process that impacts their lives, and a fair share of returns to their involvement.
In our local context – I was asked recently by participants in the DSE Enterprises Acceleration Program, a program designed to build capacity to owners and managers of our SMEs so they can be more suitable to access various forms of capital; the question was, why is that Tanzania corporate entities which have much to do with what we consume and the lives we live, etc are almost all owned by either families or few foreign investors and are not publicly listed? Much as I didn’t have a response, but I know this – for sustainability, good corporate citizenship is fundamental. But also, I know some countries that mandates companies with certain thresholds such as levels of turnover, number of employees, size of balance sheets, operating in some key sectors, become publicly traded companies.

Value Opportunities during Markets Turmoil

In recent weeks, global equity markets have experienced the worst performance in recent history. Investor sentiment and market psychology are currently on the negative, volatilities are more than doubling, and many markets are down by more than 20 percent since the beginning of the year — without certainly on the possibility of correction territory in the horizon. As we know these are results of one: the impact and fears emanating from the COVID-19 disease (commonly known as Coronavirus) pandemic; and two: the significant drop in oil prices. Because of these two major global events and the uncertainties related them, investors are selling off (exiting) their investments in shares, as a result sending markets in turmoil all across.
However, in the world of business, investment, financing and trade, they say whenever there are crisis and chaotic situations as well as the downside that accompany it, there is also an opportunity of the upside. And so, as financial markets are in the panic mode, the pullback from it may set the stage for increased opportunities for the so called “value investors”. Remember: Value investing is an investment strategy that involves selecting stocks that appear to be trading for less than their intrinsic or book value, as reported in the books of accounts.
Economic slowdown forecasts and oil’s plunge rattle global markets
Economic slowdown and the continued plunge of oil prices coupled with uncertainty of reactions towards a possibility of stability all play a role in the current and potential downturn. Unfortunately, this time around it seems a little different as safe-haven investment instruments such as governments’ bonds and gold doesn’t seem to command much traction as well.
Fears of a continued slowdown in global economy and its implications on global demand, investment, trade and finance have intensified recently. Oil prices plunged to unthinkable levels per barrel last week, which markets view as a harbinger of a dramatic slowing economic activity in developed nations and lower revenues and economic activities for emerging and developing markets.
Many economist and analysts hold a view that many economies, in the short to medium term will experience hard landing, which will then require deliberate, albeit painful, transition back to both production-driven and consumption-driven economic growth, and one can safely say, these fears are not exaggerated. But, one can also hold the opinion that China and other major economies has enough policy ammunition to stimulate their economies, once the current pandemic is dealt with and senses have been brought back particularly on the issue of global oil prices.
Opportunity for value investors
Despite of the above, there’s absolutely no need to begin dumping stocks when prices goes down, because by doing so can cost you in the long run. If you already have a good position in your stock portfolio, hold it tight. Of course, you may also consider redirecting fresh cash into underpriced stocks and the cash equivalent instruments as well. But the message here is by holding most of your current stock positions, you’ll benefit from a market upturn, and you can be sure there will be an upturn.
Additionally, one of the bets places to take cover in the volatile stock market is in the high dividend stocks. The dividends themselves provide something of a cushion. Even though the price of the underlying stock may fall, you’re still earning steady dividend income. The good thing is that even the income itself also helps to stabilize the price. After all, in a market where capital appreciation is less certain, income becomes more important. Investors are naturally drawn to the reliability of dividend income, which can serve to minimize stock price declines.
Furthermore, pick value stocks. These have historically been considered as one of the most successful ways to invest in the market. It’s an investment strategy followed closely by Warren Buffett, and it helped make him one of the wealthiest people in the world.
The basic concept is to identify stocks that represent bargains. This is usually because such companies are out-of-favor with the general investing public during turmoil, like the one we currently have. They’re considered to be undervalued based on certain metrics that can include a price-to-earnings ratio lower than their industry-standard, below average price-to-book ratio, or an above average dividend yield.
Beneath the market headlines, a careful observation on what is happening (even in our local context) will tell the curious observer that value assert itself in many aspects, as a market that had previously priced stocks with a great deal of parity is now seeing a significant dispersion. We view these conditions as an opportunity that can reward value investing, active investing, and patient investing. One has to choose investment grade stocks and consider the possibilities of profiting from ongoing pendulum swing. Two possible ways by which one may try to do this are: by way of timing and by way of pricing. It just requires a bit of good analysis to identify underpriced stocks and the buy/accumulate them while still in lower prices.
Let me finish by quoting the Bible book of Ecclesiastes 1:9-10 which says: What has been will be again, what has been done will be done again; there is nothing new under the sun. Is there anything whereof it may be said, See this is new? It has already been here long time ago before us.

The Necessity of Financial Literacy

Not long ago, hard cash used to be the main means of payment for our purchase of goods and services. Online, mobile, credit card payments, etc were not so much in the radar. This is changing, especially as technological changes happen in that space and as many financial products and services consumers keeps on enhancing their understanding of finances.
As it were, lack of financial understanding is singled out as the main reason behind savings, savings mobilization, financial intermediation and investing challenges in many economies. So, what is financial literacy? financial literacy is the education and understanding of various financial areas including topics such as managing money and personal finances, managing money, managing debts and borrowings and managing investments.
Financial literacy is important in almost every aspect of life, from managing retirement funds; to the choice of asset classes where you invest your savings; to debt and borrowing management; to management of risks and bad lucks; etc. Financial literacy remains necessary into various decisions we make everyday as far as they involve our personal economy and finances. These decisions are integral to our everyday lives. With financial literacy, chances for responsible decisions are increased.
To be clear, the challenges of lack of financial literacy is not a challenge for developing or emerging countries. Consumers in developed countries in often cases fails to demonstrate a strong grasp and understanding of financial principles either, making it hard to negotiate and manage their financial affairs and related risks. Of course, challenges from individual to induvial and community to community differs depending on the context, exposure to education, income levels, etc. However, there is strong evidence showing that even highly educated individuals can be just as ignorant about financial issues as the less-educated and lower-income people.
And it seems that we are all the same in being hesitant to learn about these issues. For instance, a recent OECD (Organization for Economic Cooperation and Development) survey conducted in Canada found that, for many, choosing the right investment for retirement savings was more stressful that a visit to a dentist – can you imagine that! Yes, I can imagine that – in my personal and career experience first working in the banking sector, then as corporate transactions advisor, and then as a stock broker and investment advisor and now at the Stock Exchange, I’ve met many a people who are either unwilling to learn about financial issues or fail to take any action once learned.
But there comes a moment when financial literacy becomes a matter of necessity, and I see that moment is now. Current lifestyle, trends and decisions-making all points towards the direction where financial literacy seem even more important, I will explain:
In retirement planning and pensions for example – in the past generation(s) people depended on public pensions plans to fund a significant part of their retirement lives. Excluding our case, in many societies pension funds, managed by professional independent fund managers do not significantly rely on companies and governments to sponsor their upcoming obligations, they instead rely both on contributions and largely on clear investment decisions and the expected investment returns from those investment decisions. Under such circumstances, pensions consumers are also involved in decision making as to the contribution amounts and the fund manager who will be engaged to manage contribution funds.
Even furthermore, in the past a major source of retirement income was social security, but as it turns out the amount paid by social security are not enough, and in some cases may be delayed, while in worst of circumstances may not be available at all – tell me, what will become for a financial consumer safety net which could barely provide enough for basic survival?
In the savings, finance and investment space options are becoming complex, and financial consumers are being asked to choose among various investment and savings products. Sometimes these products are more sophisticated for us, but we are being asked to choose among different options offering varying rates of returns, maturities, payments intervals, etc – such decisions require an adequate financial understanding.
As it were, deciding on complex financial instruments with a large range of options can impact the financial consumer’s ability to finance a home, education for children, savings during retirement, access to health care when sick, recovery from circumstances when undesirable event occurs, etc. under these life necessity situations what happens if an individual is not financially educated?
Additionally, the financial landscape is becoming very dynamic by the day – in the global marketplace, there are many participants and many factors at play, added to this is the changing technological advancement in the financial markets. Taken together, these factors can cause conflicting views which may sometimes make it difficult for a financial illiteracy consumer to make clear decisions. In the mix, is also a number of financial intermediaries and supporting institutions in the ecosystem – banks, stock and insurance brokers, credit card companies, mobile network operators, financial and investment advisors, other financial services companies, etc — these are all vying for financial assets creating confusion for a not so financial literate consumer.
In conclusion – I have tried to paint a picture of where we are and how crucial it is to become a financial literacy society. The bottom line is, any improvement in the financial literacy will have a profound impact on financial consumers and their ability to provide for the future. As we have seen above, recent trends make it so imperative that financial consumers understand basic finance because we are being asked to shoulder more of the burden of savings, investment and retirement decisions while we decipher more complex financial products and options.