METHOD TO THE MADNESS

Last week insurer NIC’s shares went on sale. The company is now owned 40 percent by the Ugandan public with the remaining 60 percent owned by Nigerian insurer IGI.

The company’s listing on the Uganda Securities Exchange (USE) brings to seven the number of local companies listed on the exchange. Five other Kenyan companies are cross listed on the exchange.

Its one of Uganda’s best kept secrets but in the ten years of its existence real money has been made on the USE.

Outsiders to the process view the business of shares as gambling but there is method to the madness and money can be made intentionally.

Benjamin Graham an investor and don at New York’s Columbia University, is the acknowledged father of security analysis. His protégés include Warren Buffet the third richest man in the world, who credits the late Graham on setting him straight on investing in shares.

Graham’s major contribution to share investing was his assertion that in the short term the stock exchange was a voting machine but in the long term it was a weighing machine, meaning that on a day to day basis share prices are often like a popularity contest moving according to the level of fear or greed in the market but in the long term the company’s health or lack of thereof, will be reflected in the share price.

With that in mind Graham counseled that to make a profit one should only buy shares that were discounted against their intrinsic value. The market is not efficient and Graham’s investment philosophy was centered on taking advantage of these inefficiencies – you buy when t he market underprices shares and sell when shares become over priced.

But just as important is the much forgotten fact that shares are not just a price but are parts of the larger company, and the fortunes of the company are eventually reflected in the share price.

If Graham showed that there was method to the madness Buffet showed that one can profit enormously from the market.







Buffet now 78 who bought his first share at 11, says that to invest successfully one needs to know two things: how to value companies and how to react to the market fluctuations.

What might be a turnoff for many people when it comes to investing on the stock exchange is that in a good company most of the gains would be paper profits. Dividend payouts are rarely above five percent of the share price and these only come once year or sometimes never – Buffet’s company has only paid a dividend once since he took it over.

And because of this cash mentality people forgo the huge share price increase being earned on the exchange.

But for people who cannot spare time from their everyday jobs to run businesses share investing is a useful way to grow assets either as a long term strategy or as a way of raising capital to eventually go into business.

Of course there are no guarantees and you can lose money on the stock exchange. But research done around the world show that shares show the best return of any class of assets over the long term.

If hat is so one wonders why more people are not involved in shares.

Apart from the cash mentality investing in shares takes away from the proprietary pride that comes with starting, running and owning a business.

By buying a share you are hiring existing management, benefiting from a mature brand and taking advantage of an established market share. So the sexiness of taking your children and showing them your company is lost and thus part of the unattractiveness of share market.

But for the few who seat down to analyse the issue dispassionately, share investing has been very lucrative business and will continue to do so as long as the economy keeps growing and companies along with it.

Published April 2010, New Vision