Stock markets all over the world are very popular as they offer investment opportunities for organisations and individuals alike. Zimbabwe is very much part of the world in this regard with stock markets being so popular here we have 3 of them. With stock markets come investors of all types. From the institutions, the sophisticated investors and retail investors. One thing you will never find in short supply are people dishing out stock market wisdom. The problem is some of this wisdom can be greatly misunderstood. Let’s look at some concepts that have been gravely misunderstood over the years.
Fair value vs target price
Sorry to start this with some heavy concepts but the stock market isn’t a place for play. There is often some confusion between what analysts give out as the fair value of a share and the target price of a share. The two may both be based on looking at the expected future cash flow but they differ in perspective. Fair value is an estimate of the fair amount one should pay for the company today while the target price is usually an expected value shortly (up to 12 months) of the company. When reading analyst comments always be certain which one you’re looking at.
Net Asset Value vs company valuation
Net asset value is an accounting measure of the sum of the companies assets less its liabilities. This ascertains the value of all the company owns assuming all had to be settled today. Company valuation takes many forms but most methods use some kind of discounted cash flow. They look at the future earning ability of the company to put value to its future earnings.
What goes down must come up…
This belief is not limited to stock market thinking. It’s something that we seem to hold on to as human beings that things have seasons and when something is going down it will eventually come back up. Do not believe the hype. On the stock market, things go down for a reason or rather many reasons. One must first discern these reasons and then look at the possibility of them being a turnaround before one can assume that what goes down must come up. Many cases can be cited where this has not been held.
And vice versa
The reverse of the above thinking is “what goes up must come down” and people try to apply this to the stock market as well. And while you may want to point to the case of Getbucks on the ZSE in 2021 I will point to National Foods, Innscor and more. Many have been caught with their pants down waiting for a dip that never came. There is no guarantee that anything that went up will come down on the stock market.
Volatility vs Risk
People tend to confuse risk and volatility on the stock market. They cannot entirely be blamed for this because of the measures used for our investments. I will simply look at the value of my investment which is determined by the price per share and number of shares. If we hold the number of shares the price is the issue. Price goes up, the value goes up and vice versa. So if I invest in something that goes up and down frequently my value changes frequently and that is volatility. Risk on the other hand is the possibility of downside loss with enduring impact. Just because an investment is volatile does not equal it being risky.
Buying troubled companies
This is a perfect follow up to the volatility vs risk conversation. It’s commonplace for people to try to look for bargains in the market. Shares with low prices and wait for the price to grow. That’s alright. What people fail to understand is there is a difference between a troubled counter (share) and a troubled company. A troubled company has troubles in a fundamental area like governance or business operations while a troubled share has a troubled price with good business fundamentals. Knowing the difference will save you a lot of trouble.
Buy low, sell high
The concept of “buy low sell high” itself isn’t complicated. You just have to follow the plain meaning of instructions. It does get a bit more complicated when you add the state of the Zimbabwean dollar, our functional currency into things. I have seen many people new to the stock market assuming that the historical all-time high of a ZSE counter means that is a high point. It was a high point, historically and that is all. The ZSE keeps up with any change in currency value on any market so a previous all-time high eroded by exchange rate value means nothing and shouldn’t be factored into the buy low sell high thinking. A company that can continue to grow its earnings will continue to grow its price. A company that does so consistently is low today and will be high in the future.
Are there any other stock market concepts that you find or have found confusing?