By Admire Mavolwane
INVESTING on the stock market, particularly the local one, is not for the faint-hearted and it appears most punters who should be aware of this
precept are not.
Even those with weak nerves cannot resist the temptation of making a quick buck that they believe can be made in shares.
As a self-reassurance measure, most of them seem to have adopted a “simple” trading strategy which enables them to make some money although not maximising on the profits.
The strategy is to follow the trend by buying when prices go up and selling when prices go down.
This strategy if adopted by a large number of investors creates a phenomenon described by Wall Street whizzes as the “impala mentality”. It also breeds a positive feedback that leads the market to accelerate its movement, soaring or nose-diving, in which case of course it crashes.
The folly of this strategy lies in its simplicity, as making money on the stock market is not that easy. There are no guarantees that scrip will be available when one needs to buy the shares on their way up and neither is there an assurance that there will be takers for the stock when one needs to exit.
This leaves individuals, mostly speculators, at the mercy of professional fund managers, many of whom employ contrarian strategies of selling when the stock is on the ascendance — known in the industry as taking profits -— and buying when prices have come down by a “determined” amount.
While great strides have been made in eliminating ignorance and superstition in medicine and in weather forecasting, there is still a long way to go in reducing the naivety associated with making mounds of cash through the stock market.
Neither has the tendency by investors to wait for official confirmation of statistics such as inflation been eradicated.
Prior to the recent fiscal policy, the market was lethargic with analysts pointing to poor fundamentals vis-à-vis price controls, reduced company profits and general uncertainty.
In the aftermath of the fiscal policy investors are pointing to the huge inflationary pressures likely to be stoked by the $37,1 trillion supplementary budget, with some detractors indicating that the actual bill will amount to the $255 trillion that line ministries had requested.
The equation is said to be out by a wide margin, as revenue collections are likely to be depressed due to lower-than-expected company profitability, reduced collections of stamp duty and withholding taxes arising out of the depressed trading volumes on the ZSE in July and August, foregone PAYE emanating from the tax bracket creep announced recently and consequences of the Statutory Instrument 157A of 2007 which imposes a freeze on salary increases.
Investors seemed to have reached an unholy conclusion as to how this funding gap will be bridged. They then sought refuge in shares in their quest to be a step ahead of anticipated future inflation.
But the question is who did not know this, when as early as April, it was being stated that a supplementary budget was in the offing and it would exceed the original budget by a wide margin?
The rush into shares brought forth by this sudden acquisition of wisdom saw the market gaining 12,29% the previous Friday, Monday, 14,89% and Tuesday, 18,67% to reach an all-time high of 68 108 881,90 points before the selling started on Wednesday pushing the market 3,10% down.
Large parcels were exchanging hands showing that there could have been a lot of institutional selling. Yesterday the selling turned wholesale and those whose strategy is to buy on the way up were caught again as the industrial index lost 7,59% to close at 60 989 737,03 points.
Investors are now waiting — yet again -— for the monetary policy statement. In the meantime a number of punters are nursing their wounds. One hopes they do not have to wait long before the market goes for another run.
One stock that has been a disappointment is Zimre Property Investments (ZPI) which has been trading at around the IPO price of $1 500. Most investors have taken a position to sell the moment the counter goes to $2 000.
However, experience shows that no downtrodden stock ever returns to the level which investors have decided they will sell. Thus the stock is probably doomed to several weeks of teetering below $1 900 before it probably somersaults to $1 300. This painful process can take a while.
World renowned investment banks have dedicated Mergers and Acquisition teams who breathe and sleep deals. The banks make their money from taking a percentage fee based on the value of the deal. Thus the mooted US$93,4 billion Barclays/ABN deal has many salivating.
The same however could not be said of the Cottco/IDC/Olivine Industries deal.
When Heinz Corporation partnered government in October 1982 to buy out the company from the Margolis Family, it invested US$13,5 million for a 51% stake. So in essence Olivine Industries was valued at roughly US$26 million. According to a report on Zimbabwe by Eurostat published in 1990, by 1988 Heinz’s investment was worth US$79 million.
In its 1988 annual report, Heinz indicated that it planned to expand its investments to US$263 million by 1994. In an apparent fulfillment of the promise, Chegutu Canners was established in 1992.
In the 2004 annual report, the United States-based corporation valued its investments at US$110 million and in 2006, the Heinz board decided to write off the US$111 million valuation that it had ascribed to its Zimbabwean interests.
It is not surprising for some that Heinz let go of its investment at only US$7 million, particularly since the investment had been written off anyway. Added to this, Heinz with a market capitalisation of US$14,7 billion, receiving US$7 million for an investment that had been written off is neither here nor there.
The question that arises surely is why would IDC sell the 49% stake it had acquired from Heinz for US$6,8 million, when it can be reasonably assumed that the stake could have commanded a value as high as US$55 million? Obviously we cannot begrudge Cottco, with a OMIR market capitalisation of US$60 million on August 31, acquiring an asset worth that much for only US$6,8 million. Investors seem to have concluded that Cottco is now acquisitions “savvy” hence the re-rating of the company on the ZSE.
Mergers and acquisitions whizkids from institutions like Lazard or Goldmann Sachs will attest that IDC could have extracted more US dollars out of Cottco, unless of course there are other facultative considerations behind the transactions which are not in the public domain.