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The stock market is for long-term investment

Saturday August 17 2019

investment

Capital gains means that unit price of a share goes up over time. PHOTO | FILE | NATION MEDIA GROUP 

BETT KINYATTI
By BETT KINYATTI
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Investing in the stock market needs time and patience for the gains of the shares to be realised, says Bett Kinyatti.

My chama invested in the stock market in the tail end of 2014. We were 10 members at the time.

We had invited a freelance financial consultant to one of our quarterly meetings. He had worked with an investment bank for over a decade, rode a motorbike and spoke in the bass of James Earl Jones, the actor.

He charged us a small fee to tell us how to invest in the stock market.

He made a strong case and emphasised that it’s a long-term investment plan. He said, “It’ll take years before you see some real value on your returns. You have to be patient and keep putting in more money, little by little. Diversify and invest in the East Africa market.”

So, we did. We invested Sh600,000 in the Nairobi, Kampala and Kigali stock exchange.

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PALTRY DIVIDENDS

We spread the cash out across the markets — Sh360,000 went to Nairobi Securities Exchange (NSE), Sh100,000 to Uganda Securities Exchange (USE) and Sh140,000 to Rwanda Stock Exchange (RSE).

It was a few weeks to Valentine’s Day in 2015 when we completed all the paperwork. We were in good time to get annual dividends for that financial year.

In 2016, the dividend cheques for NSE began to trickle into the post office mail. Our investment banker wired the USE and RSE dividends to our bank account.

The amounts were laughable and insulting: In 2015, for our Sh600,000 investment in the stock market, my chama of 10 members made in dividend income a total of Sh23,085. I won’t even bother telling you how much we made in 2016.

This investment didn’t make any sense to us. If we split the dividend income among the 10 of us, whatever we’d take home each year would just be enough for soup, not a full lunch. You couldn’t even bring a date.

IMPATIENCE

My chama liquidated the entire portfolio in 2017. And guess what? We realised a net loss. The market value for all the shares — except two — was lower than what we’d purchased them for.

The bottom line is, my chama’s two-year investment in the East African stock market had translated to paltry dividends and Sh145,000 loss in value.

We redirected our cash to another investment and vowed not to invest in the financial market again. We didn’t understand why other investors would take their cash there, in the first place.

That was in 2017. It wasn’t until early this year, while researching for a story, that I realised the folly of our ways.

As a chama, we’d been impatient, short-sighted and naive. We’d sorely missed the point: The stock market isn’t for dividend income, it’s for capital gains.

Capital gains means that unit price of a share goes up over time.

SHARES

Let’s take Safaricom shares, one of the shares my Chama invested in. When Safaricom first floated its shares in June 2008, the share price was Sh5. When trading closed on August 9, 2019, the share price was Sh27.30.

If my chama had invested in 30,000 Safaricom shares in 2008 (at Sh150,000), then as at August 9, 2019, the value of our portfolio would be Sh819,000.

That’s an increase of 450 per cent. I don’t know which other investment would return such gains over 11 years.

Safaricom is an outlier, most shares don’t gain by such astronomical leaps. The average gain is between five to 20 per cent.

Then there are the shares that lose value over time, then regain it. Like KQ, Sameer Africa and Kenya Re. Others lose value and just keep losing, Uchumi and Mumias Sugar shares.

SMART INVESTMENT

Let’s take Kenya Re shares. During their public offering in July 2007, the share price was Sh9.50. When trading closed on April 12, 2019, it was Sh11, and on August 9, 2019, it was Sh3.31.

Had my Chama invested in 10,000 shares in 2007 (at Sh95,000), the value of our portfolio in April would have been Sh110,000, then down to Sh33,100 in August.

My chama knows to invest smarter. I’m thinking we’ll invest in two select shares from only the NSE. Then we’ll sit on that portfolio for at least a decade.

At the very least, we’ll make some consistent income from the dividends to take ourselves to a fancy three-course lunch.

The writer is a certified accountant with ACCA and former financial auditor

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