We are currently in a period on the ZSE that has been characterised by the entry of many retail investors. There are many factors to thank for this but the development of platforms like Ctrade and also ZSE direct is definitely contributing to this retail investor influx. If you identify as a new entrant to the market today we’re going to share a few tips that you will hopefully find very useful. As someone with both academic and practical experience, the idea is to give you applicable tips. And just before we start I’d like to point out that to me and hence in this article the distinction between trading and investing is academic, the goal is to buy shares at one price and sell them in future for a (hopefully much) higher price.
We’re big fans of reading here at StartupBiz, regular readers will be aware of this. There’s a wealth of knowledge contained in books that would be very hard to acquire in any other manner whether due to cost or time constraints. So read books on investing and finances. One thing I will encourage you to do is to learn to distinguish principles from methods. Many books are written for the American market for example and will make references to specific products, tools and rules that apply in the US which may not apply to all markets. What you should endeavour to learn from books like this is the ultimate principle as opposed to the method. Don’t just stop at books, read articles (like this one) and others that cover the ZSE. You can always find good articles in our ZSE section and also have a look at these useful resources for ZSE investors.
Find a mentor and community
Finding a good mentor and community can also help you along on the journey. Having someone who has walked the walk particularly someone who has been exposed to the idiosyncrasies of our market and understands them is a big help. Be careful when choosing this person, a lot of people will promise a lot of things but few will deliver. Just as important as a mentor is a community. We recently shared tips from our community for those interested in the ZSE. A community of like-minded people will help you share ideas and also help with some of the heavy lifting.
Keep a Diary
One of my preferred strategies for trading is news trading. It is incredibly effective in the Zimbabwean context. You can read this article about stock trading strategies to get clarity on what it involves but the basic idea is that share prices tend to react to news around the underlying businesses or companies. The diary is a simple but effective idea that trains your mind to keep track of developments around a company. Understanding the underlying company and what is happening around it will do you a world of good. It is a simple format that you can replicate on many apps or paper though digital is better as it is ongoing. It allows you to keep short form notes of developments.
Don’t bottom feed
I ask for a little patience with me as you read this paragraph. Bottom feeding is the act of looking for the lowest priced item, in this case, counters and buy those. As someone new to the market this has its appeal but it is a very bad idea. Now, this is the point where someone is going to say the counters that have brought the biggest capital gains this year started 2021 among the lowest priced counters. I’ll give you that, however, if you picked counters solely based on being lowest priced you would’ve picked perennial underperformer ZECO. The goal is to buy good companies or underpriced counters with a lot of potential upside. You will need to look at a lot more than the price to determine this.
Keep emotions out of it
It may sound crazy at first but it is very easy to get emotionally entangled with stocks. The advice many people are given when they start their journeys is to invest in a company with products they use daily or frequently. Sounds smart, you use it daily, other people use it daily, how can you lose? Very easily actually. It’s commonplace for people to develop an emotional attachment to companies they are invested in, this is not a psychological problem but rather a natural product of the process. You have to convince yourself to place your hear earned money into the companies shares so reversing that isn’t easy. Sadly the market doesn’t work based on your emotions about the company. The market cares about the underlying business, the performance of the counter as an investment or a combination of the two.
Don’t endure losses
I’ve made money mistakes along the way as most if not all people will. One thing I have never regretted is taking action when things are not going my way. Even when you have bought a good company it’s conceivable that the share price can take a hit at times. One thing I would strongly urge you to learn to do is to cut your losses early. There are many reasons why it’s important to do this. Firstly holding on to a sinking ship will only extend your pain. Secondly cutting your losses early will give you peace of mind and preserve your mental health. Finally, I will use a hypothetical example to show that cutting your losses early makes you stronger. Assume you held 20 000 shares of Deltanet (not a real company) which were valued at $5 each. Suddenly the price of Deltanet starts to crash. You quickly decide it is far better to cash out quickly and manage to sell at $4. The shares of Deltanet continue to fall until they rebound at $2. You wait a little while to see if the rebound is real and after a while buy back in at $2.80. A little quick math will tell you that when you sell your 20 000 shares at $4 you receive $80 000 (exclusive of costs). Holding your $80000 and then buying at $2.80 gives you 28 871 shares of Deltanet. Assuming Deltanet price fully recovers you would’ve boosted your investment by $42 857 (8571 additional shares times $5). Even if totally lose faith in Deltanet you could invest the money in a better performing counter.
Avoid diversifying badly
Diversifying is a buzzword of many in investment and trading circles. I’ve seen many instances where people laud diversifying to the point where they make it out as if it improves the performance of their portfolios. In reality, at best, diversification spreads risk. It doesn’t minimise or mitigate it, it simply gives you a different source of risk. That doesn’t make it useless but we need to approach it properly. Spreading your money around a bunch of companies or sectors is not enough. If your goal is to neutralise shocks then you need to make sure the companies involved are divergent. Diversifying for the sake of it is risky and if you select your companies well enough, you won’t need to diversify.