Home' Trinidad and Tobago Guardian : February 27th 2014 Contents BG14 | COMMENTARY
BUSINESS GUARDIAN www.guardian.co.tt FEBRUARY 2014 • WEEK FOUR
This week marks the tenth
anniversary of this newspaper
column. In reviewing that very
first article, I found it a bit of
a coincidence that the ques-
tions that I am being faced with
today are the same questions that investors
were asking ten years ago.
To set the stage, appreciate the rally in the
T&T and US stock markets over the past couple
years. Recognise that especially during the last
year, much of the rally on the respective
exchanges have been fuelled by the expansion
of price to earnings multiples as opposed to
an acceleration in earnings growth.
Back then investors were asking whether on
account of the gains from the previous year,
they should sell out and book their profits,
hold on for potentially more gains or buy more
as the market keeps going up. Today, the ques-
tions are very similar, if not exactly the same.
Ten years ago, the T&T stock market was
posting a 13 per cent year to date gain by the
end of February 2004. This was coming off a
27 per cent gain in 2003. High levels of liquidity
then as is the case now fuelled the rally.
Back then I made the following point: "There
is a tendency by both new and seasoned
investors alike to forge a correlation between
the overall positive economic growth currently
being experienced with a bullish stock market.
Such an assertion is simplistic and ignores the
performance of the companies themselves.
History has taught us that stock markets are
fickle, they move up and down."
While markets in the US and here at home
have been rallying to new highs, economic
growth in both markets has been tepid, proving
the point that simply assuming a direct cor-
relation is simplistic. Ten years on, the lesson
is still the same. That lesson is to focus on
company performance as opposed to all the
economic noise that generally surrounds the
stock market. In the long run, it is the per-
formance of individual companies that count.
Back in 2003 the following points were made.
"It is therefore important that the wise
investor looks beyond the general economic
outlook to understand that the stock market
represents a view of corporate profitability at
a particular point in time.
"Corporate profitability represents a narrow
segment of the economy and therefore
requires a more detailed analysis. Similarly,
the price of a stock represents an outlook for
that individual company at a particular point
in time and this outlook may be based on
factors which may transcend the local econ-
"The cyclical nature of the stock market
generally arises out of the following scenario.
Initially, the stock market will rise based on
sound business fundamentals and good cor-
porate profits. Since all businesses exist for
trade, what this represent is a transfer of
wealth from consumers to shareholders.
"Over time this gives rise to an intangible
"wealth effect" in that shareholders now have
a higher net worth, which may give rise to
increased spending. If some of the cash flows
from this increased spending are channelled
back into the stock market, a virtuous infla-
tionary cycle develops, resulting in a rally,
which eventually is based, more on sentiment
than on true business fundamentals. However,
the wise investor should note that any rally
based even in part on sentiment would, at
some stage, see a market correction back to
its fundamental value, thus resulting in the
up and down cycle."
"Strong economic fundaments (especially
lower interest rates), good corporate profits
and, to some extent, sentiment, have all com-
bined to factor in the current rapid rise of
the T&T market."
Ten years on, the situation is very similar.
The current issue for investors is to try to
determine what lies ahead. The analysis
involves not so much a review of the headlines
which are often designed to instill fear and
panic but more substantive factors.
There is a role for understanding the marco
economic environment but as was suggested
before this may not correlate directly with
stock market performance.
The best correlation to investment returns
comes from a detailed analysis of company
performance. When this is done, even if a stock
price remains low relative to its performance,
you are still positioned with an undervalued
stock, so recognise the potential for outsized
returns some time in the future.
While many will be driven by the emotion
of the headlines or the comfort that is obtained
from following the crowd, ten years ago, the
following points were made which are still
"It is important that the wise investor under-
stand that long term success in the market
can only come from making rational investment
decisions. A share certificate is not the same
as a lottery ticket and should never be viewed
as such. The directors of the blue chip com-
panies on the local stock market and interna-
tional stock markets will not make a decision
to purchase a company based on a trend line.
So why would you want to do the same when
you are investing in those companies?"
"In the long run, stock tickers, graphs and
trend lines don t determine corporate prof-
itability. Rather, it has always been good cor-
porate returns and strong business fundamen-
tals in relation to macroeconomic conditions.
This is the basis upon which investment deci-
sions should be made and should be the main
determinant in purchasing shares in a company.
Any other view is speculative, which as already
discussed leads to volatility."
"Investors are advised to pay close attention
to the performance of companies that they
have invested in, monitor their financial results
and understand their business models. Factor
in the latest available information into these
business models to formulate a view of future
performance. If all of this seems to be beyond
you, consult and work closely with your invest-
ment adviser as they are best positioned to
understand the market."
Today we are faced with many question
marks over which direction the market may
go next, how long will the local rally last, at
what stage will we see a meaningful pull back
(ten per cent or more) in the US markets.
May I suggest that all this is simply noise.
It is much more prudent to focus on the stocks
that you own. If it is trading at a high price
to earnings multiple relative to the earnings
outlook, then you may want to invoke the old
rule about "selling high".
You may then want to seek out new oppor-
tunities that are trading at a lower multiple,
which means that the stock is cheaper. Once
again, you will be invoking the old rule of
All in all, it amounts to a discipline and so
long as you are consistent in applying this dis-
cipline, you will be fine.
The bottom line is the same as it was ten
years ago. Markets are volatile and there is
always a certain amount of noise about the
economy. If you focus on the noise instead of
the true measure of value, which is the worth
of the company based on its expected per-
formance, you will often be found wanting.
This is analogous to seeing a grocery with
construction work on the outside (troubled
economy), but 50 per cent discounts (stocks
on sale) on the inside. Will you pass it by or
step inside? Similarly, you can be presented
with the most wonderful showroom, but every-
thing in the store is overpriced. Would you
still buy or go elsewhere in search of value?
Investing is no different, the buying decisions
are exactly the same. Ten years ago, the land-
scape was very similar to what obtains now.
The lessons on offer then are still relevant
Please allow me to offer some words of
appreciation to all who have made this
ten-year journey possible. I thank my wife
for her patience, consideration and sup-
port because without that, I would not
have been able to churn these articles out
every week. I also thank my editor, Antho-
ny Wilson, for affording me the privilege,
and thanks to all the readers who have
interacted with me and made this such a
wonderful and enriching experience.
Ian Narine is a broker registered with
the Securities and Exchange Commission.
TIME STANDING STILL
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