Nairobi — Interest in the stock market has grown exponentially over the past year. Some private investors have put large amounts of money into stocks without realising the risks of doing this. Inevitably, warnings about risks have been ignored in the hope of better returns. The lucky few get better returns, but for many, the collapse and cessation of trading in Uchumi left their fingers burning.

We need to learn the lessons that this bad investment taught. That is the truth that fundamentals speak.

Granted, investing in the stock market is risky. However, some investors seem to have a larger appetite for risk because of the potential returns. But within that is the word "potential". This means that only in a few cases of taking more risk would there be a positive return.

Now, if you invested in Uchumi, ask yourself four questions on fundamentals: Was Uchumi making profits? Did it have a positive cash flow? Were there sufficient controls to ensure that cash generated from external sources was actually put to good use? Was its core business strengthening in the face of the competition?

In retrospect, it is too easy to say that it was a bad investment. But, if there were a turnaround, then the returns for the brave would have been huge. There are still other potentials in the market that are loss making and purely speculated on in the hope of future take over. If the picture succeeds, the returns will be great, but if the fundamentals speak through, you might not want to learn the lessons of risk management again.

The choice of taking on risk is a personal one. When companies collapse, there are warning signs, which we ignore at our own risk in the name of greater returns. Steady, long-term returns come through investing in steady, but lower risk shares.

(*) Ahmed Kassim Bharadia is Managing Director of Star Optics Ltd.