The best ideas come from local knowledge. This is one of the philosophies preached by Peter Lynch, one of the greatest investors of the modern era. My Lynch firmly believed that individual investors had advantages over professionals when it came to research, because unlike the latter, individuals had more freedom to act independently and explore the market without being tied down by outsiders such as committees, trustees and superiors.
This flexibility, according to Peter Lynch, gives the small investor an edge as they have a better ability and potential of discovering profitable investments. Because individual investors are out there in the real world spending money and seeing consumer tastes change first hand, unlike fund managers who only notice changing trends when the annual report comes out to late, the individual investor has the advantage as they can jump at an opportunity much faster than the professionals can.
This idea of local knowledge and invest in what you know preached by Lynch is a strategy for small investors. One company that I have found based on these principle is Zambeef (ZAM).
Zambeef is a Zambian integrated agri-businesses that specialises in the production, processing, distribution of dairy and meat products. It is listed, on the London Stock Exchange under the AIM. Because it is small cap AIM listed stock, it does not get much coverage and flies under the radar of many analysts. This is the perfect situation for a small investor like me. I hope that no one notices this business and means I can get an ownership stake in it for cheap.
I know that investing in emerging markets is risky as there is many extra risks involved compared to developed markets, such as political risk. But having lived in Zambia , it is one of the most peaceful countries with the friendliest of people. The political situation is very stable and very democratic with 5 different president since 1991. On the economic side, Zambia is booming. Zambia is Africa’s 10 fastest growing economy with GDP growing at 6.77% per annum. A report by KPMG further cemented Zambia’s economic credentials as it found Zambia to be the 8th best African for ease of doing money.
What makes Zambeef particularly fascinating is that it is dual listed on the Lusaka Stock Exchange (LUSE) and on the London Stock Exchange (AIM). This is interesting because the prices you can acquire the same ownership stake in this company are different on the LUSE and on the AIM. On the LUSE in Zambia, where Zambeef is a major company and its stock is closely followed by analysts there, the price per share of Zambeef is much more expensive than it is on the AIM. This gives us a perfect arbitrage opportunity.
When I first decided to invest in Zambeef in May of this year, the Stock on the LUSE was trading at 3.10 ZMW, which was equivalent to about £0,26. On the AIM, I bought the stock for £0,115 (11.50p) . This means that by buying Zambeef on the AIM, I was getting a discount of about £0.145 or 14.5p per stock. If the stock price on the AIM just had to climb to the equivalent it is quoted for on the LUSE, I will get a return of 126% just for spotting a price differential opportunity.
Now don’t get me wrong, I did not buy this stock just because it was cheaper in one market than another. As a long term investor, I need to look past the short term arbitrage opportunity and look at the long term fundamentals of the company. Having lived in Zambia for a period of my life as mentioned above, I know the capabilities Zambeef has a regional food producer in a part of the world that is fast growing. Zambeef is a very good defensive stock with huge headwinds in its favour. The management team is excellent and the cel of the company, Carl Irwin has won numerous awards including the African Entrepreneur of the Year in 2013.
The company also has a P/B ratio of just under 0.29 when looking at it in £ sterling terms. This means that for every £0.29 you invest, the company has £1 in book value. This is huge for a company of this type.
There is no better investment approach than buying assets for less than their real value (margin of safety).
I invested just above £1,290 in the company which gave me 10, 979 shares in the company.
After the buying the stock, the stock climbed to £0.16 (16p) before retreating during the August Market Crash. At this same time, the Zambian Kwacha (ZMW) also faced possibly the worst period of performance in its history, depreciating by a whopping 40%. Even for an emerging market like Zambia, that is huge. The depreciation was caused by a number of factors such as the possibility of US interest rate rises, electricity shortages, fall in global copper prices and excessive borrowing by the Zambian government. The Zambian Kwacha has started appreciating again relative to other currencies as the government has taken steps to mitigate exchange losses.
The stock price for Zambeef fell quick and fast over period of about a month and stabilised around 6p. The stock on the LUSE is 3.09 ZMW which equates to 20p (Exchange rate of 15ZMW = £1).
So if the current price had to go from 6p to 20p you are set to gain 233%. And this for me is a conservative estimate. This is because I believe the stock on the LUSE is undervalued as well. (Many stocks on the LUSE are undervalued as government bonds pay 22% interest per annum. Why would anybody invest in stocks on the LUSE when they get 22% a year risk free.)
For many small investors, seeing a stock they are invested in fall quick and fast will make them panic and temp them to sell. They act out of emotion rather than rationality.
The rapid decline in the share price of Zambeef does not phase me. This is because I know Zambeef is a real company with real assets and earnings as opposed to just a ticker flashing on a screen, as most traders would like to think. When I buy shares in a company, I go in with the mindset of a business owner and not a stock trader.
If you’re going to invest in the markets, no matter the stock, you must train your mind to be mentally strong. As a long term investor, short term price fluctuations should not bother you. In fact, short term price drops are advantageous to you as you can acquire a bigger stake in a company than you could have if the price was higher. Remember, it’s all about the long term and the future benefits; ignore market fluctuations. As Warren Buffet Says, “The lower prices go, as long as you know the company you’re investing in, the better it is for a buyer. Down days always make me feel good.”
So I bought an extra £1400 worth of shares in November 2015. At this price, I got 23,167 shares in the company.
I still believe the company is a very good one with strong fundamentals. Even though the Zambian Kwacha depreciation this year will hurt Zambeef, I believe that the stock is oversold.
The Annual Report for Zambeef for the year end September 2015 just came out last week and the performance is impressive. Net cash inflow from operating activities during the period increased by 171% in USD, there has been significant debt reduction in the group and operating profits have increased by by 140% in USD. The only negative was exchange losses which led to a loss overall.
Never invest out of emotion
If I could, I would invest a lot more money in Zambeef as I believe it is deeply undervalued. But my investment plan is stopping me. My investment plan states that I should invest 90% of my portfolio in a dividend paying stocks. As Zambeef is non divided paying, it can take up only a maximum of 10% of my portfolio.
This demonstrates the importance of an investment plan. It avoids me from getting carried away just in case I may be proved wronged. Just look what happened to the investors of GTAT. They thought they were buying into a sure thing, leading many to buy on margin and it eventually lead to many losing everything. A whole portfolio wiped out by one recklessness mistake.
I do not want to suffer the same fate as the investors of GTAT. That is why I will stick to my investment manual no matter how good the opportunity with Zambeef my seem. They will always be other companies like Zambeef in the future. My job at this early stage is to build strong foundation of solid dividend paying stocks. One my portfolio is big enough and these solid dividend payers provide me with safety, I can go more ‘all in’ with smaller companies I believe to be undervalued in the future.
The key here is to avoid acting impulsively. Many of the biggest mistakes that investors have made throughout history have come from acting emotionally without thinking through the details rationally. Have an investment plan. This will get rid of the emotions and bring in rationality.
How to start investing in individual stocks
As mentioned in a previous post about my first foray into investing, the key to getting started is just that, getting started. If you don’t have much funds, that’s ok. Brokerage fees are cheap these days and you can start with as little as a few hundred pounds without worrying about commissions eating too much into your returns. Start by looking for a good Online broker, for new investors I would recommend Hargreaves Lansdown. And then just do it. Get your feet wet. Buy that first index fund, mutual fund or stock.
There is no reason to be scared when it comes to investing. But if you do want to get over your fear, it is best to start with small amounts of money to learn the investing ropes. Online brokers like Degiro allow you to invest for as little as £1.95 per transaction. Use discount brokers like Degiro, and look to invest in a company that you already understand and buy products from. The best way to learn to invest is to get started.
Remember that the most important thing is to never invest in a company you do not understand. If you are unable to understand the business model, how the company generates its revenue and earnings, the best thing for you to do is stay away.