When it comes to investing, the vast majority of Pakistanis think of gold, real estate and, occasionally, foreign currencies as investments. Some investors who are slightly more sophisticated may think of government bonds. Only a few dare to put their money in stocks. But the fact remains: stocks are the best long-term investment and offer some of the best opportunities for increasing one’s personal wealth.
My previous article was about the fundamentals of personal finance. This article will lay out some of the ground rules of investing (a subset of personal finance) before moving on to the case for why (and how) you should invest in stocks.
If the purpose of saving is to transfer one’s present earnings into the ability to spend money in the future, the purpose of investing is to ensure that the value of one’s savings do not get eroded by inflation and indeed grow faster than inflation.
Since 1987, the average annual inflation rate in Pakistan is 9.4 per cent, according to data from the Pakistan Bureau of Statistics. While the past does not predict the future, it does provide a useful benchmark. Any investment that you are considering should have the ability to beat that 9.4pc benchmark over a sustained period of time.
On that count, foreign currencies make no sense, yielding only about a 6pc return for the past 15 years. Gold does a little better at 15.6pc per year during that period. Oil had returns of about 22.9pc, but stocks outperformed all of these asset classes with a 24.5pc per year average return (measured by the benchmark KSE-100 index).
To put this in simpler terms: if you had invested Rs10,000 each in 1999 in dollars, gold, oil and stocks, the account with dollars would be worth Rs19,702 today, the one with gold would be worth Rs93,790, the one with oil would be worth Rs205,598 and the one with stocks would be worth Rs284,701. Which would you prefer?
(Real estate as a class of investment is difficult to measure, owing to a lack of reliable data about land prices in Pakistan. It will be the subject of future columns.)
‘So what?’ you might be tempted to say. Why should I invest in stocks? Because investing in stocks is the only way you can buy an ownership stake in companies that will form the backbone of the future growth of the Pakistani economy. Put another way: investing in stocks is a way to invest in the future of Pakistan.
Here is how I explained stock investing to my father.
“Baba, tell me of a trend you see in the economy,” I asked him.
He thought a few minutes and then said: “More people are using broadband internet.”
“Okay, good. So if you think that trend will continue, which publicly listed company do you think will stand to benefit the most from that trend? The answer is PTCL. So if you think more people will continue to sign up for broadband internet and that many of them will do so through PTCL, you should buy PTCL stock.”
He then asked me a different question: “Okay, but how can I invest in the boom in the lawn sector? Sana Safinaz and all the other major designers are not listed companies. Some of them are not even registered.”
My response: “Yes, but some listed companies do have a lawn business. For example, Gul Ahmed is one of the oldest brand names in the lawn industry and has benefited from the rise in interest in lawn. It is also publicly listed, so you can buy their stock.”
In other words, investing in stocks is about observing changes in people’s behaviour and then researching which companies are providing the goods and services that will serve that change in behaviour. This is not always easy, but if you are like me, it can be a lot of fun, and may end up being quite lucrative.
This brings us to the next logical question: how does one go about investing in stocks? Well, for starters, you need to open an account at a brokerage firm. (You cannot buy and sell stocks through a bank.)
Brokerage firms are companies that have a license to execute trades on the Karachi Stock Exchange and there are 300 of them. How to select a good brokerage firm and how to open an account is the subject of the next article (two weeks from now), but in the meantime, I would recommend focusing your attention on firms that allow you to trade online and have a good research presence.
Companies such as KASB Securities, Foundation Securities, Elixir Securities, AKD Securities, BMA Capital, JS Global Capital and a few others provide you with research and investment ideas, as well as the ability to trade online through software, and in some cases even through mobile apps.
Of course, not everyone has the time to keep on researching stocks and ideas for investment. And some people may not have enough money to buy several different stocks to build a diversified portfolio. In that case, I would recommend investing in mutual funds.
Mutual funds are pools of investment set up by asset management companies that have a trained investment staff to do the research for you. They take investments from a large number of investors and pool them together to manage a diversified portfolio of investments in exchange for a small fee. It is a good way for people with as little as Rs5,000 to invest in the market without having to worry about doing their own research. It is also an easy way to regularly set money aside for savings.
It is possible to invest in mutual funds directly but it can also be done through an account at a brokerage firm. In two weeks, we will discuss how to select where to open an account, how to open it and other logistical details.
Published in Dawn, Sunday Magazine, May 18th, 2014