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Uganda: Riding Out the Stock Market Storm
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The Monitor (Kampala)
COLUMN
29 April 2008
Posted to the web 28 April 2008
Edgar Rutaagi
Kampala
Stock markets like other businesses and life on a whole fluctuate. There are the ups and there are the downs, which renders stock markets volatile, a scenario that is worse in highly developed stock markets.
Safaricom has attracted a lot of enthusiasm and as the offer closes, millions will have staked large sums of money with all sorts of expectations, speculators particularly hope to cash in big and the overall hope is that this very luscious stock plays out well in the coming months for people to make their killings.
The stock market is no stranger to rough times and often investors find themselves in sticky situations sometimes almost regretting their investment choice. How then do you deal with that period when your stock is not performing well?
Various factors will influence the down ward trend of a company's stock prices even blue chip companies. These include but are not limited to declining performance perhaps in sales which translates into reduced revenue and profit.
A decline in sales might be triggered off by a sudden shift in tastes and preferences, tumultuous economic times characterised by unemployment, hiked consumer goods prices, which affects purchasing power.
The reasons are numerous but whatever the reason, the implication is a lower return on investment. When a company is not doing well, often costs have to be cut; the inclination will be to plow back profits and therefore no dividend payment, which dampens investor confidence. Country/political risk is indeed a factor particularly in emerging Africa which is often marred by political upheaval.
Primarily, this is a challenge most common to the long term investor who commits money for longer periods perhaps well over five years and is therefore bound to see the cyclical path companies often take. By general standards, the short/immediate term investor's outlook is a maximum of 12 months while the medium term investor will take it to about five years and the long term investor could virtually marry the company going for as long as 35 years.
Whatever the period of time, your stock is not necessarily prone to stock market uncertainties and turbulence. Any serious investor must therefore view his investment like a core business and approach his investment with the right mind set and acumen. Tough times always call for equally tough people because the first option on the table is to hang in there and weather the storm.
In business and life in general, these episodes do exist but you don't just call it quits and bail out but rather you have the choice to stick through the rough times and come out better and stronger. The same goes for the stock markets.
It is an opportunity for you to re-evaluate and weigh any available options so that you can make the best of the challenge at hand. It is therefore important that as you watch your stock prices drop, you don't rush to cash out but think through your investment and a decision to hang in there will eventually have you see your stock rise to glory again.
Thinking through your position gives you the opportunity to evaluate the option of selling so as to minimise your losses. Exiting the market may sometimes be the wise thing to do even when it means that you are relinquishing your stake in a company. However, the reality that markets are cyclical means that the long term investor has the benefit of seeing his investment through tough times which investment is tagged to a company that might have hit a rough patch but will soon bounce back and as such have its stock back on the radar.
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Chances are that a company could actually go downhill and eventually collapse which justifies the decision to bail out at the earliest opportunity after all you will have the opportunity to buy back into the company when the firm is doing better.
The third option is to take on a more risk diverse risk investment strategy at the onset in form of portfolio investment where you spread out your risk into a vast array of investment vehicles. A portfolio might look something like this; investment in 3 or 4 different stocks (equity), debt that could include 2 running treasury bills and perhaps one government bond and another corporate bond.
Others include insurance policies and property which generally appreciates over time. Where you find it difficult to make these choices yourself, unit trusts managed by professional fund managers under the watchful eye of trustees will do the job well for you allowing you to minimize your risk that a fall in a particular stock is offset by a rise in another.
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