PRESERVING & GROWING YOUR SAVINGS
NADEEM NAQVI, MANGING
DIRECTOR, KARACHI STOCK EXCHANGE
Oct 22 - 28, 2012
Preserving and growing your savings. That is, or should be, the primary objective of investing, whether you are an individual or an institution. There is no fail-safe formula for successful investing. Yet there are as many successful investors as there are unsuccessful investors. There are several elements that can be identified in the success of investors, luck being one of them. But luck is not the only one or even the most important element in investment success. In my view, the single most important factor in successful investing is your mind-set. How you think; what is your thinking-habit; how your brain perceives reality and responds to it. .
Among many traits that have been written about successful investors (or successful people in general) one stands out: INDEPENDENT THINKING. The ability to not be overly influenced by conventional wisdom, consensus views or popular themes. Rather, to be able to stand back, look at unfolding realities in the eye, and apply a disciplined and rigorous thinking effort to match your investment objectives with the opportunities available in front of you at a given point in time. And here comes into play the most critical and difficult decision-making dynamics: If there is no match between your investment objectives and investment opportunities present, then do not invest (for the sake of investing). Sit back and continue to remain alert for the investment opportunity that matches with your investment objective. Remain in touch with the market place, keep scanning, and ......wait. Opportunities become visible when you are actively looking out for them. That is how the brain works.
Test this for yourself. When you go out next, start looking for a specific coloured car of a specific make and model (e.g. a metallic-rust orange coloured Suzuki). Keep your mind alert to this particular car. You will be surprised how many you will start noticing all of a sudden. Our brain has a habit of falling into thinking patterns. When you consciously change that pattern, the brain begins to focus on what you want it to focus upon and this is where 'independent thinking' plays a crucial role in your investment success. Independent thinking involves developing a mind-set, a mental habit that breaks the tendency for immediate, knee-jerk reaction to what you see before yourself and immediately make a judgment. Independent thinking means not jumping to immediate conclusions without first assessing most of the facts. For example, if someone tells you, "sell this stock because foreign investors are selling it", rather than picking up the phone and asking your stock broker to sell the stock, step back for a moment and ask, "If I were to buy this stock today will it fulfill my key investment objectives?" If the answer is YES, then investigate further as to why someone else is selling it. It could be that there is redemption pressure on the foreign fund so it is being forced to sell, rather than any fundamental change in the stock (underlying company's) situation; it could be that the foreign fund manager's portfolio has crossed the limit of how much weight his/her portfolio can have in a particular country so he/she has to sell some stocks to get back to target weight. There could be several reasons why a foreign fund may sell a stock that has nothing to do with the underlying company's future performance. So jumping onto the band wagon of what others are doing may not be what is best for you given your situation and investment objectives.
This brings us to the question of "what is my investment objective?" The big answer, as noted in the beginning, is "to preserve and grow my savings". Within this however, are many crucial details that your mind needs in order to arrive at the answer most appropriate to you personally. These include: What is my investment horizon (for what period of time am I willing and able to hold on to my investment(s))?; How much risk of loss of principal and return can I afford, given my age, earning and saving capacity (or income), other financial commitments, my family situation and life style, etc. This is an assessment of your risk tolerance at a given point in your life-cycle; Is there a likelihood that I might have to suddenly liquidate some or all of my investments if a sudden need (e.g. : life threatening medical emergency) arises or a specific event happens? (e.g. : daughter gets partial scholarship for higher education in three years with the family required to partially support her for two years); Are there any specific Constraints that will apply in my selection of investments (e.g. I will only invest in Shariah compliant assets; I will not invest in auto-sector because I work in the auto sector from which I get my income so I don't want to put all my eggs in one basket (sector), etc.); Are there any taxation aspects that impact my investment objective? E.g. Dividends are taxed at 10% while there is no capital gains tax for investment in stocks held for more than one year. An objective analysis of the above issues will help your mind decide about key aspects of investing: How much to invest? for how long? in which type of asset classes? And importantly, under what circumstances to shift your investment from one asset class to another (i.e. at the simplest level, between cash, fixed-income and equities). In my humble view, the above exercise is essential for anyone thinking of or planning to engage seriously in looking after their savings and wealth.
The foregoing was essentially focused upon individual investors: for institutional investors such as mutual-funds, pension-funds, charitable endowment funds, insurance companies, banks and other business/corporate enterprises the basic principles remain the same. There are two key differences between the individual investor and the institutional investor. The individual investor is responsible (mostly) for his/her own decisions. The institutional investor however, is usually responsible for managing others' money/savings. As such, the standard of responsibility and care is set much higher for the institutional investor (i.e. the fiduciary duty).
The second difference is that the sub set of objectives for the institutional investors are likely to be more complex than for the individuals. For example, institutional investors have to operate under many regulations, standards and constraints that typically may not apply to individual investors. This has an effect on every aspect of institutional investors' decision making process from objective-setting, to asset class selection and portfolio construction, to investment performance measurement & monitoring and portfolio adjustments.
From first principles let us fast-forward to investing in equity (stock) market in Pakistan. To look ahead we need to have a sense as to where we are coming from. Using KSE-100 as a proxy, the annualized return of the Pakistan equity market has been 29% over approximately 12 years.
This compares favorably with returns on other financial assets such as bank deposits, government bonds, national savings schemes and even gold. Over this period, equity market returns, although more volatile on a year-to-year basis, have been able to match inflation and thus preserve the real value of savings more than other financial assets in Pakistan. That is why anyone who wants to manage their savings and wealth seriously, should not ignore the stock market for atleast a portion of their total financial savings portfolio. .
Going forward, the Karachi Stock Exchange is in advanced stages of launching new products such as Exchange Traded Funds, Market-Making facilities for Cash Settled Index and Stock Futures as well as Options contracts which will open exciting new horizons for investors.
The publication you are holding in your hands now, "KSE-100 Index: Fundamental Guide", is a valuable and useful tool for investors who wish to seriously engage in and manage their investments, whether from a short term (trading) perspective or over the longer term. This is a comprehensive and data rich document with valuable information and analysis of KSE-100 sectors and companies. I am confident that you, as a serious investor, will find it useful.