performance of the local stock market over the past few months
has been described by many commentators as a measured
Of course this correction may have seemed anything but measured
depending on the stocks you held in your portfolio.
Take for example RBTT which in terms of an overall trend moved
from a 52-week high of $45.50 to a 52-week low of $36.37 in
a matter of weeks. This represented a loss of value of 25.1
per cent despite posting pre tax profits of over $1 billon.
In fact that decline in RBTTs share price amounted in
a decrease in the companys market capitalisation from
$15.591 billion to $12.463, a staggering $3.1 billion.
Guardian Holdings was another one of the major declines losing
12.2 per cent of its value after posting its 52-week high
of $46.00 on May 13. NCB Jamaica, CCMB, JMMB, CCN, Sagicor
and Neal and Massy also caused concern among investors as
these companies share prices declined.
However, the story was not only one of gloom as persons invested
in NEL, Ansa Finance, Prestige Holdings and Angostura were
no doubt smiling as Prestige Holdings share price increased
by 15 per cent and the other three generated gains in excess
of 20 per cent over a eight to ten-week period.
It is the gains in this area of the market that offset the
more publicised declines overall resulting in a very measured
stock market decline.
There are two lessons to be noted here. One is that it is
possible to make money in any market once you are in the right
stocks at the right time.
Last year stocks such as CCMB and Neal and Massy were the
stars of the show. In the early part of this year GHL and
RBTT produced good rallies. These shares went into a bit of
a decline and others stepped forward to post strong gains.
However, being in the right stock at the right time in many
instances amounts to trying to time the market and in one
such as ours which is not very liquid this is often easier
said than done.
In fact, market timing in our local environment can often
times become an exercise in speculation if you are not careful.
The second lesson is, in fact, the more pertinent one and
has to do with the value of diversification.
There is a view among some that the most successful investors,
the Warren Buffets of this world, have become successful
not through diversification but by taking concentrated positions
in selected stocks which over time appreciated in value many
times over creating significant wealth for these investors.
This type of approach has some merit depending on your financial
circumstances and the level of risk that you can undertake.
However this approach would not have gone down too well with
someone who had put all their eggs in the Enron, Worldcom
or even BWIA basket.
The point is that for the average investor diversifying your
portfolio is not some textbook guideline but a real and important
tool on the road to the most basic investment objectivethat
of preservation of capital.
Before you start to seek out growth you have to establish
a sound enough base to minimise the risk that your capital
will be eroded.
That is why people who are looking to start investing for
the first time and have relatively small sums of money at
their disposal would probably be better served starting out
with a mutual fund.
Of course it all depends on your particular circumstances
such as your age, savings potential and your tolerance to
risk but generally speaking it is always better to start from
a position where your funds can be professionally managed
as part of a diversified portfolio.
Once you are comfortable in this regard and you have a better
understanding of what is involved you can then progress to
taking up more concentrated positions by investing directly
in selected stocks that you think may perform well over your
investment horizon. It is at this point in time that you should
venture directly into the stock market.
Not for the feint-hearted
It is often said that the stock market is for the rich, and
the above discussion may have reinforced that view for some.
If that is the case, then you have missed the point.
The risks of investing in stocks with a short time horizon
are quite high. You should have appreciated this from the
opening discussion which described some share price declines
over the recent past.
A wealthier person may have a greater tolerance for such risks,
someone of more modest means may be more risk-averse.
The point here is that for the average investor there may
be additional risk management steps to be taken before getting
into the stock market. It does not mean that you should not
be there at all.
The events of the past few months should really bring home
the value of diversification.
Almost all the stocks in the banking sector have underperformed
the market during this time but the manufacturing and trading
sectors have done reasonably well.
Losses in say RBTT or GHL would have been offset by gains
in NEL or Angostura.
Similarly even if you have a preference for a particular sector
then diversification within that sector is also helpful.
The gains in Ansa Finance compared to the general underperformance
of other financial services stocks highlights this point.
The local stock market is quite small and there are quite
a few cross relationships between companies.
If you are not careful to recognise these cross relationships
you can end up holding a reasonable portfolio of stocks without
achieving too much diversification.
There are cross shareholdings between GHL and RBTT such that
the performance of one companys share price may impact
on the performance of the other. A similar situation exists
with BS&T and Neal and Massy.
In addition there are three companies from the Ansa McAl Group
listed on the exchange and TCL also has a subsidiary in the
form of Readymix.
In addition the performance of NFM will have some impact on
the performance of NEL.
Another factor that will impact on the performance of your
equity investments is the process used to select stocks for
It is clear that a lot of local investors trade on momentum
rather than a companys future earnings potential.
To confirm this one only needs to look at the recent trading
pattern of RBTT which traded at its then 52-week low of $39.00
from January 28 to March 23. Once the share price started
to move it climbed 16.6 per cent to a 52-week high in under
two months only to post another 52-week low one month later.
These movements suggest an element of momentum trading as
opposed to a view on the companys future prospects.
The 80 cent increase in the share price last week Wednesday
suggests that the roller coaster may be on its way up again.
Another good example of momentum trading is CCN.
On April 6, CCNs share price stood at $12.25 and there
were no sellers in sight.
The mismatch between demand and supply was so great that by
May 18 the share had climbed 75 per cent to $21.50. However,
just as suddenly the share turned around and started to decline,
closing last week at $17.96.
There was no new information coming to the market over this
period yet investors were not prepared to sell CCN at this
same price a few weeks ago but now seem willing to do so.
The point here is that while trading on the momentum of the
stock or the market as a whole does sometimes have its merits,
it is better, at least from a risk management perspective
to have some appreciation of the future prospects of the company
you are invested in as well as its fundamental value in relation
to its current share price.
At present investors trading on momentum seem willing to part
with shares in GHL even though the company is trading at a
price to earnings (P/E) multiple of 10.67 times forecasted
The focus seems to be on trying to trade at or below the rights
issue price rather than on the fundamental value of these
As I indicated earlier momentum also seems to be at play with
RBTTs share price.
As at March 31, RBTTs investment in GHL was valued at
approximately $2.32 per share. Based on the March 31 accounts
71 per cent of this amount is still unrealised in the balance
sheet, yet this fact seems to be largely ignored by investors
following a trend and prepared to sell the share a P/E of
13.90 times historic earnings.
Developing an understanding of fundamental value either on
your own accord or through discussions with your financial
adviser will allow you to take advantage of opportunities
when a share becomes oversold or to stay away when it seems
Hopefully the experience of the past couple of months would
have brought this point home.Ian Narine can be contacted at
[email protected] or at
The contents of this article are not to be used or considered
as an offer to sell or a solicitation of an offer to buy.
The information contained above has been obtained from, and
any opinions therein are based upon, sources believed to be
reliable. WISE makes no representation as to its accuracy
or completeness and it should not be relied upon as such.
All opinions and estimates therein reflect the judgement of
the author and are subject to change without notice.
WISE is a subsidiary of RBTT.