Business Start small, think big How can individual investors with limited resources get into the stock market? James Fuller discovers Caribbean financial firms ready to help By James Fuller | Issue 80 (July/August 2006) 0 Comments Illustration by Russel HalfhidePhotograph courtesy the Sol GroupIllustration by Russel Halfhide If bull and bear are nothing but animal names to you, the likelihood is you’ve never considered investing in the stock market. For many, the stock exchange conjures up images of puce-faced men gesticulating at screens full of flashing numbers while frantically waving slips of paper above their heads and yelling, “Sell, sell, sell!” The seemingly impenetrable jargon of the equity market and fantastic stories of fortunes won and lost in a day combine to make the world of stocks and shares seem an exciting but intimidating one. Industry experts in Trinidad and Tobago are quick to point out the reality is much more mundane, but that, for the investor who follows a few simple rules, the stock market still outperforms nearly all other investments. But is it a place for the small investor, the man with just a few hundred dollars left over at the end of each month? K. Michael Daniell, chairman of Funds International, says as long as you take a disciplined approach, it undoubtedly is. “There are two things a small investor should know,” he says. “The first is to be aware of the associated risk of investing in equities, and the second is that you should always have an investment strategy with a medium- to long-term outlook.” It is this long-term perspective which is key. “Many investors believe they can come to the stock market, invest for six months, make a quick profit and get out,” says Daniell. “This is not the way to approach it. I have stocks which I’ve had for ten to fifteen years, and over that period of time they’ve gone up by three to four hundred per cent. You should always view it as at least a five- to ten-year investment.” He adds that this strategy should be borne in mind when the shares are performing badly, and warns against panic selling. “Buy it and put it away,” he says emphatically. “One of the things I tell people is that if you bought a house for a $100 and straight away it went down to $50, you wouldn’t sell it. It’s a long-term investment; it’s the same with shares. “Actually, the T&T market is in a bear cycle [i.e. is falling in value; a “bull” is a rising market] right now, and that’s when people should be buying, not selling. If you take the long-term view, there are shares in solid blue-chip companies available now which will be worth one to two hundred per cent more in three to five years time.” This long-term perspective should impact on the companies invested in as well, and the advice here is to select blue-chip companies which you’re certain will still be around five, ten, fifteen years down the line. “Buying from blue-chip firms like the banks, the major institutions, the big manufacturers, you benefit in two ways. There’s both capital appreciation [the actual increase in value of the share] as well as the annual dividend [firms releasing a proportion of their annual profits to their shareholders]. You win from both points of view like that.” If you’re thinking the stock market is for you, the first thing to consider is how much you can afford to invest, once all of your other commitments are met. The second, says Daniell, is to establish a regular savings plan — for example, a fixed monthly amount paid into a separate account — which can then be used to buy shares at the appropriate time. Mr Daniell, who has been chairman of Funds International for ten years, emphasises once more that discipline is needed here, and once you have a savings plan in place, to stick to it. MORE LIKE THIS: Peepal Tree Press spreads its branchesInvesting in the stock market is remarkably simple, as Adrian Manmohan, head of operations at WISE (West Indies Stockbrokers Limited), explains. “What you have to do to buy shares is come to one of the stock broking firms — there are six in Trinidad — and provide two pieces of ID and fill out some forms. Then we can buy shares on the stock market on your behalf. It’s that easy.” The normal minimum investment at WISE is TT$10,000 — which can be paid in three instalments — but they do take on first-time investors with as little as TT$2,000. There is a commission charge of 1.5 per cent which, on a TT$2,000 transaction, would work out to TT$30. Manmohan also advises the establishment of a separate account which acts as a source of funds when a good opportunity arises. “We then get in touch when we think there’s a good stock or an IPO [initial public offering]. The stock market is all about timing,” he explains. One of the biggest risks you can take with the stock market is to put all your funds into a very small number of stocks. By doing this, you’re exposing yourself to the volatility of the market and the results can be disastrous. “Don’t put all your money on one stock, saying, ‘This is the horse which will win the race’,” says Daniell. “Diversify as much as possible across all sectors. A prudent investor would not buy one share, but will hold a portfolio of shares.” By holding shares in a larger number of stocks, you are preparing yourself for a less bumpy ride. The results of any companies doing badly can be offset by the more successful ones. If you don’t have enough money to buy shares in ten or twelve companies, there is another way into the market for the smaller investor: mutual funds. As the name suggests, mutual funds pool the money of a number of investors so that together they can trade on the stock exchange with greater purchasing power. “These pooled funds often accumulate millions of dollars and can then go to the market and buy in a big way,” says Daniell. Though not offering the returns of direct share investment, Daniell says mutual funds still offer those with more limited means a profitable way of getting involved in the stock market. “For the small investor, buying into an equity-based mutual fund would be a better investment than putting their money in a fixed deposit account.” Daniell is bullish about the potential of the stock market for the investor who follows the rules. He cites three examples of a TT$20,000 lump sum invested in three different ways over a twenty-year period to support his standpoint. “Firstly, a TT$20,000 investment in a fixed deposit at four per cent for twenty years (1986 to 2005), would have been worth TT$43,820 at the end of 2005. “TT$20,000 in the Unit Trust Corporation’s Growth and Income fund, over the same period, would have been worth TT$378,208. MORE LIKE THIS: Making Money in the Sun“But TT$20,000 in Republic Bank shares in 1986 — which would’ve bought 20,000 shares at TT$1 each — would have been worth TT$1.8 million at the end of 2005. Also dividends over the period would have been approximately TT$300,000. “As one can see, there is a greater benefit to buying directly into shares. So, the savvy investor would buy shares directly and maintain a portfolio of a number of shares in different companies.” The figures can undoubtedly look good, but as Adrian Manmohan at WISE reiterates, you should always be aware of the risks as well. “We show people the benefits of being in the stock market, but also the risks. When talking about it, we do emphasise the risk of it, because obviously sometimes stocks will go down as well as up. “We don’t want to make people think they’re going to be winning all the time — but, that said, over the long term the stock market really is one of the best performers there is.” Funds International: helping you set goals In the ever-changing financial landscape, your financial future depends on how much you save and how well you make investment decisions over time. Excessive consumer spending and debt accumulation inhibit your ability to save and threatens your financial security now and in the future. It is therefore a good idea to set investment goals and decide how to achieve them — for example, acquiring a house, university expenses, or retirement and estate planning. It is also important to review your investment strategy on an on-going basis. Investing your money is generally a matter of weighing three factors: risk, return, and time. Risk is a way to describe the fluctuations (or volatility) in the rate of return and the degree to which the rate of return will go up or down. Return is the earnings and gains on your capital over a measured period of time. Time is the length of time an investor plans to maintain an investment; it helps to evaluate the appropriateness of an investment’s level of risk and return. Finally, an investor should look at diversification as part of his or her investment strategy. This could include investments across a spectrum of asset classes (i.e. stocks, bonds, mutual funds, etc), domiciled both locally and internationally, and in varying currencies. Funds International Limited is registered with the Trinidad and Tobago Securities and Exchange Commission (under the Securities Industry Act 1995) as Investment Advisers. We have provided investment advice and portfolio management services to high-net-worth and corporate clients, both locally and regionally, for the last ten years. We have also developed a pension administration software package for the administration of pension plans. West Indies Stockbrokers (WISE): getting people involved The Caribbean has traditionally been known for its warmth, friendly people, and idyllic beaches. However, we also have a vibrant financial services industry, which includes not only the offshore banking sector but a formidable wealth management sector. We are continually striving to have more people invest in the equity market. In Trinidad and Tobago, the equity market is currently in a bear cycle, which, for the new investor, can translate into a profitable opportunity. We encourage investors domiciled outside the Caribbean to take a second look at our market. To our domestic investors — especially those who have benefited from recent tax breaks — we urge you to consider investing in our equity market. You may be asking yourself what is so special about the Trinidad and Tobago equity market. Over the period 2000 to 2005, the local All Trinidad and Tobago Index’s annual compounded rate of growth was 21.84%. There have been some individual stocks which have more than tripled over the period. There were also some losers. However, on average, the market outperformed all other types of investment. Thus, for investors with a medium- to long-term horizon, the equity market may be an ideal investment. MORE LIKE THIS: Castor oil, pleaseThe market is currently in a bear run, which means that prices are declining. For the year to March 24, 2006, the All T&T Index declined by 10.12%. We believe this presents an opportunity to pick up some quality stocks at discounted prices. As with all investments, there is some element of risk. However, to mitigate this risk, you should seek the advice of a WISE broker. We have the most experienced staff and control a lion’s share of the Trinidad and Tobago market. The main point to remember, though, if you have never invested in the market, is that the current bear run on the Trinidad and Tobago equity market provides an ideal entry point. “Being involved in the community is central to Sol’s vision” The Sol Group of Companies The Sol Group is the Caribbean’s largest independent oil company. Sol acquired Shell’s commercial and retail operations, with a network of 125 Shell branded outlets, in thirteen territories across the Caribbean, South America, and Central America, in February 2005. Since then Sol has supplied fuels, Shell lubricants, bitumen, and liquid petroleum gas (LPG) to its customers and continues its retail operations under the Shell brand. Sol has a regional focus that is unique. The company is run by local offices that can make key decisions in order to be a customer-centred organisation that is highly responsive. Sol recognises that each country has its own culture and values and therefore executive control at the local level fosters close relationships with each community and its stakeholders. As a Caribbean-owned company, it has a truly Caribbean spirit, and being involved in the communities in which it operates is central to Sol’s vision. Sol sponsors numerous activities across the Caribbean, including sporting events such as the St Maarten Boat Show and car rallies in Barbados, Guyana, and Suriname, and cultural events such as the 2006 Barbados Jazz Festival. Sol has invested in environmental projects in the region, such as a clean-up operation in St Maarten and a turtle conservation project in Guyana, and intends to extend its activities further as it develops its corporate social responsibility policy. As Sol continues into its second year of operations, it has successfully established itself in what has been one of the most challenging periods for the oil industry worldwide, with oil prices rising in 2005 to unprecedented levels. And, in true CARICOM spirit, Sol is working with governments around the region on solutions to minimise the impact of these price fluctuations. It is best said by Stewart Gill, Executive Director: “We are well on the way to achieving our vision of becoming the region’s leading energy company”.