I HAVE laboured previously on employing saving as a precursor to any financial management system. However, under the current global economic environment, interest rates are rock bottom and in some countries they are less than the prevailing inflation rate.

Rather than just leave your money loafing and rapidly losing value in some savings account, there is need to timeously convert the savings you accrue into investment. This week we focus on the adrenaline aspect of any investment portfolio, namely stock market investments.

My introduction to the stock market goes way back to 1995 when public companies were listed. My first portfolio was made up of Dairiboard Zimbabwe, CBZ Bank and Cottco (now AICO) which I all bought on their first listing on the Zimbabwe Stock Exchange. The performance in those early years was tremendous and contributed to my fascination and love affair with markets.

It is, however, very dangerous and reckless to enter a stock market without an investment strategy, philosophy and specific objects or targets. Following the herds may appear secure and comforting but can lead to tremendous losses and grief.

The Zimbabwean stock market started to enter rapid escalation late in 2006, cascading and peaking into a crescendo in 2008. The abnormal socio-economic conditions prevailing then converted the market from an investment destination into a speculative gambling den where even the hwindis, guma-gumas, hobhos and street hustlers were making money.

People were selling chicken in the morning and buying shares in the afternoon which were sold the following week to purchase foreign currency on the street. Alarm bells should start to ring when any investment starts to appear too easy.

One way to tell if you are turning into a gambler is if you buy stocks without research based on either gut feeling or a tip you heard at a dinner table. Or if all you care about is hitting the big time and you do not have a specific investment horizon, and when your share loses ground, you buy more of that stock just to recover your losses or prove to yourself that you were right in the first place.

ZSE became a poisoned chalice with many investors still avoiding it like a plaque. I used to convert my portfolio to US$ using the Old Mutual rate to try to determine the actual value of my holding. Many investors are still between 30 to 70% below their peak values and ruing the day they decided to put their money on the market.

As long as you do not actually sell your shares at the low rates, your losses remain paper loss. The last two years has purged the mainly short term speculators and rent seekers and the ZSE seems ready now for genuine investors.

A genuine investor does not always have to follow the buy and sell signals of stock brokers. Remember stock brokers are by their nature traders. They make their living by buying and selling so at any particular time they will always recommend that you buy or sell some shares. Many of them give very sound advice but it must always be consumed with a pinch of salt as it is part of their daily bread.

When investing on the stock market, one should be prepared to hold onto their investments for a long period as the stock market is a long term investment vehicle. Conservative investors carry out thorough research before acquiring assets thus achieving a medium to long–term holding on investments despite short-term fluctuations.

They achieve stability by building a well-diversified portfolio that consists of quality assets. They adhere to a well-documented trading system that not only ensures timely purchase of investments but also guides in the termination of investments when the required rate of return has achieved or when investments fail to live up to expected performance.

One investment philosophy revolves around the concept of growth at a reasonable price. This involves investing in growth-oriented stocks, which are available at attractive relative valuations. Others identify and invest in businesses that have a sustainable competitive advantage, profitable and clear business model, proven track record of consistent earnings growth and capable management with clear strategies.

It is always better to invest with a medium term view, with an investment horizon of at least two years. Issues like liquidity, debt, cash generation capacity, and share price valuation of the target company should be considered in the investment matrix.

When I look at the current ZSE companies, there are probably about 10 or so companies that I would consider for worthwhile long term investment at very competitive prices. The majority are still mediocre. Some companies used to hide under the excuse of the trading environment now they are being forced to invent new excuses.

Part of the poor performances coming out of some ZSE-listed companies can be attributed to poor management and insufficient technical skills.  Some managers camouflage their incompetence by ensuring that their boards are populated with the usual suspects who happen to be their golfing buddies. There are some board members who are just happy to be on a company board but add very little value and do not boost the strategic intent of the company.

I read a lot of annual reports of ZSE listed companies and the usual song is that all resolutions were passed without amendment in spite of the companies’ poor performance. Fortunately for ZSE directors, shareholder activism is entirely absent on this market. There are companies who do not know the meaning of the word dividend anymore and part of the problem is minority shareholders who totally ignore AGMs. We have not used the proxy vote effectively.

As Zimbabweans in the diaspora look at ways to pool investments together to participate in the economy back home, it would be important to be involved in the decision making processes for listed companies you are invested in rather than being passive investors.

Long term investors consider themselves part owners in the actual companies they are invested in and they have low trading (buying and selling) activity as they usually have a three to five-year horizon. They invest in stocks where share price growth tracks earnings growth and they consider the company’s financial history as well as prospects for the future. They consider qualitative factors in the investment decision like pricing power, competitive advantage and quality of the product or service offered.

Company stocks should be a significant part of every investment portfolio but the extent and nature of involvement should depend on every individual investor’s risk profile and the specific medium to long term objectives of those involved.

The events that occurred with BP and the previous global financial crisis amplified the fact that risks involved are real and management of risk should be part of your investment philosophy.