This week legendary investor Warren Buffet was quoted to have said: “if you invested $10,000 in the S&P 500 in 1942, you’d have $51 million today.”
The S&P 500 stock index measures the value of stocks of the 500 largest corporations by market capitalisation listed on the New York Stock Exchange or Nasdaq Composite. Buffet has also been quoted as saying “if you don’t find a way to make money while you sleep, you will work until you die.” With these stark realities, why is it that more people do not look at the stock market as a vehicle for long-term investment and saving?
There are two types of investing: passive and active.
The discussion over which is better has been going on since the dawn of time but passive investing is the index investing advocated by Warren Buffet and others for people who want to invest but don’t consider themselves sophisticated investors.
Here are some definitions: active investing, as its name implies, takes a hands-on approach and requires that someone act in the role of portfolio manager.
The goal of active money management is to beat the stock market’s average returns and take full advantage of short-term price fluctuations. It involves a much deeper analysis and the expertise to know when to pivot into or out of a particular stock, bond or any asset. A portfolio manager usually oversees a team of analysts who look at qualitative and quantitative factors to determine where and when that price will change.
A passive investor invests for the long haul. Passive investors limit the amount of buying and selling within their portfolios, making this a very cost-effective way to invest.
The strategy requires a buy-and-hold mentality. That means resisting the temptation to react or anticipate the stock market’s every move. The index funds that follow these portfolios automatically switch up their holdings by selling the stock that’s leaving and buying the stock that’s becoming part of the index.
A company becoming big enough to become part of the S&P 500 guarantees that the stock will become a core holding in thousands of major funds. Successful passive investors ignore short-term setbacks—even sharp downturns.
What many may not realise is that right here in the Caribbean region, in 2018, Jamaica is credited with having “the world’s best-performing stock market.” The T&T Stock Exchange (TTSE) has also performed quite well over time.
According to a recent Central Bank bulletin, in the second half of 2018 the major Composite Price Index (CPI) grew by 5.4 per cent, with total market capitalisation growing to $126.7 billion. The expansion of the CPI was driven by a 21.8 per cent jump in the cross listed index (CLI), stemming from share price increases in two major regional banking and non-banking finance sector stocks.
Considering the regional exchanges, the Jamaica Stock Exchange (JSE) and Barbados Stock Exchange (BSE) recorded increases of 24.2 per cent and 15.5 per cent, respectively over July to December 2018. Far better returns than any savings account could provide.
In cross-listed activity, we saw 35 of a 56.5 per cent increase in the share price of the regional NCB Financial Group Ltd (NCBFG) attributed to higher financial year end profits and earnings per share, in addition to the successful settlement discussion and revised offer and take-over bid for Guardian Holdings Ltd.
The Manufacturing I sub-index also improved over the period, expanding by 1.3 per cent. Good, but let’s look at Jamaica closely; a regional market to which local investors also have access.
Recently, Jamaica earned the designation of being the world’s best-performing stock market. A Bloomberg Businessweek article declared:
“In 2018 the nation’s main index rose 29 per cent in US dollar terms, the most among 94 national benchmarks tracked by Bloomberg. Its outperformance over the past five years is even more striking. Jamaican stocks have surged almost 300 per cent, more than quadrupling the next-best-performing national benchmark and septupling the S&P 500’s advance.”
Businessweek goes on to give some explanation for these gains.
“Real growth in Jamaica has averaged less than one per cent the past four years, and it’s expected to come in at 1.7 per cent for 2018. It doesn’t take much investment to make a tiny market boom, and the total value of the 37 stocks in the main Jamaica index is less than $11 billion, smaller than the valuation of Chipotle Mexican Grill Inc. But it’s also a story about Kingston’s nascent attempts to reinvent itself as a financial hub.
Making local and regional investors more comfortable investing in the TTSE will go a long way in improving performance and market capitalisation.
“Over the past decade, Jamaica’s financial sector assets have tripled and the number of institutions has grown eightfold, according to International Monetary Fund figures.
“While Kingston still regularly appears on global lists of dangerous cities, the World Bank now ranks Jamaica as the sixth-best nation in terms of ease of starting a business. And the share of Jamaicans with brokerage accounts has gone from less than five per cent to more than 10 per cent in the past decade.” Wake up T&T.
“Jamaica has also had some luck. The global economy keeps humming along, and hurricanes have spared the island the worst of their wrath in recent years. The result is a whiff of optimism in Kingston that things might be turning a corner.”
Comfort and optimism in the local economy play an important role in attracting investment, local and international, in the stock market. This cannot be ignored and our politicians would be wise to keep that in mind when discussing local economic matters publicly.
As of August 2018, the TTSE Market Capitalisation was estimated at $120 billion (US$17.7 billion), with conglomerates and financial institutions accounting for the vast majority of value.
The companies with the greatest capitalisation on the exchange are Republic Bank (RBL) and First Caribbean International Bank (FCIB). Other large players include: West Indian Tobacco (WCO), Scotiabank T&T (SBTT), National Enterprises Ltd (NEL), ANSA McAL (AMCL), First Citizen’s (FIRST), National Commercial Bank of Jamaica Ltd (NCBJ), T&T Natural Gas Company Ltd (TTNGL) and Massy Holdings (MASSY).
What is of concern is the lack of access to the energy sector to local investors although it is the main driver of the T&T economy. National Enterprises (NEL) and T&T National Gas Ltd (TTNGL) do offer some exposure—NEL is a government holding company which holds the state-owned shares of the National Gas Company of T&T, Atlantic LNG (T&T), TRINGEN (ammonia production) and the National Flour Mills (NFM).
Government should strongly consider listing the newly formed Paria Fuel Trading and Heritage Petroleum companies as well. It is one way to productively reward citizens and other investors from the country’s oil and gas largess while commodity sales funded subsidies are being systematically repealed.
The TTSE would also be extremely helpful to more sophisticated investors with the provision of equity betas for the calculation of equity values by more sophisticated investors.
A beta coefficient is a measure of the volatility, or systematic risk, of an individual stock in comparison to the unsystematic risk of the entire market. Beta is used in the capital asset pricing model (CAPM), which calculates the expected return of an asset using beta and expected market returns.
Should you invest in the stock market, local or otherwise?
That is a decision best left up to you. One should call their local bank, credit union or investment house and have a frank discussion about their financial goals and options.
Arm yourself with information. Keep in mind, most people will not save or cost cut themselves to wealth and over time broad market stock investments have steadily outperformed savings accounts. You can’t win the game if you don’t play.