There are many people who have sought my views about where the stock market is headed. This article attempts to answer many of these questions.
Let me begin with my experience of the 2005 crisis. This is the mother of all crises. I was in my office trading with gusto. An investor walked in. He had Rs9,000 with him and he wanted to speculate. I called my assistant and told him, “Take his Rs9,000 and order a dinner for this evening. He wants to lose the money, let’s make it a pleasant experience for all of us.”
Then horror of horrors, I got a call from a cousin, who said, “Iqbal Bha, sell everything. The big boy has called and instructed me to sell. The market is going to collapse. He will engineer the collapse.”
I sold everything, all my holdings and the holdings of my clients. The juggernaut had arrived. There would be fatalities everywhere.
Of course, in the background was an investor threatening me with the wrath of the Securities and Exchange Commission of Pakistan (SECP) chairman. It is horrible to recollect that the chairman was guilty of riding two horses at the same time. He was an adviser to the PM and also chairman of the SECP.
How is this dichotomy possible to reconcile? Strange things happen in the realm of regulation. There are no limits to this. We are an inventive nation.
Suffice it to say that I escaped narrowly being summoned by the chairman and I was spared a dressing down. I was lucky.
Now let me address the investors’ concern today – do not forget that every crisis is born of the previous crisis. It is a chain. This is why I have always wanted to avoid any crisis. I have opted for being very conservative. I have opted for being safe rather than sorry.
This is why I find the textbook, “The Intelligent Investor” by Benjamin Graham such an inspiration. I find it such a valuable guide. Let me summarise the main theme. Invest in value, invest for long-term – is the advice. “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.”
This was drilled into me by my great teacher, my guru, Leroy Shattuck. “Seek value,” he said. Therein you will find your safety.
Less volatile and risky
It is important to understand the 1/3 – 2/3 rule. Dedicate 2/3 of your portfolio to blue-chip shares. What is blue chip? They are less volatile and therefore less risky than other investments. (The name blue chip came about because in the game of poker the blue chips have the highest value.) This is the value side of it and with the remaining 1/3 you can speculate.
Now I pose you a practical problem, the blue-chip shares are shares that you want to leave for your heirs. They do not belong to you. It is like going into a museum. You can admire what is there but you cannot take it away.
Let me quote an example of a middle-aged woman who was my student in evening classes at the Institute of Business Administration (IBA). One day she said to me, “My father has passed away. He has left me an investment of hundred-thousand shares of Rafhan Maize. Professor, shall I sell them? I need money.”
I said to her, “Do that and you will be out of my class. These shares don’t belong to you. They belong to your children and their children. Admire them and place them back in safe deposit.”
In 2002, it was trading at the market value of around Rs300. In the trading session on August 15, 2014, it closed at Rs10,400. Its 52-week high was Rs12,600.
Similarly, shares of Mitchell’s Fruit Farms were trading above Rs70 in 2002 and above Rs90 in 2004. The session on August 15 this year closed at Rs571, but below the 52-week high of Rs948.
Forget about diversification
The success ratio of oil and gas discoveries in Pakistan is one of the best as is evident from the rate of 1:3. This is where the advice of the proponents of diversification falls on his face.
“Conventional wisdom is not to put all of your eggs in one basket. 80/20 wisdom is to choose a basket carefully, load all your eggs into it and then watch it like a hawk,” says Richard Koch in the 80/20 principle.
Therefore, forget about diversification, chase value. The mother of all investments today would be OGDC, followed by Mari Petroleum, Pakistan Petroleum Limited, Attock Petroleum Limited and National Refinery Limited.
The writer is the chairman of Ace Securities
Published in The Express Tribune, August 25th, 2014.
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To the point article. Good job. I don't think its easy to follow Benjamin Graham's approach if you are trading on the KSE. There are huge amounts of manipulation done from time to time and unless we have strict regulations which are enforced, I will rather invest somewhere else and sleep peacefully
Good article, but it is always easier said than done, it is not always easy for investors to control their nerves when there is volatility in market. The KSE has massive potential for gaining new investors but we need to introduce new products such as options which would allow better risk management during volatile periods.