Deon McLennon, Guest Writer
Imagine a race from Kingston to Negril that starts in Half-Way Tree, St. Andrew, during peak traffic hours. One racer sees a bicycle competitor speeding by between the cars in the stop-and-go traffic. Becoming impatient, he jumps out of his car, and trades it for a bicycle. Once out of the congested streets of the city, other racers, still in their cars, pass him along the highway.
He quickly realises his short-term decision was hasty in light of his long-term goal of winning the race.
It may seem ridiculous for this racer to trade in his car for a bicycle, yet investors do the same thing every day. They lose sight of the strategy that it will take to accomplish their goals.
One of the best cars that you can use to drive to your goals in the long term is stocks.
This journey entails commitment to a sound investment plan, one that starts with proper stock allocation appropriate to your risk tolerance, over a length of time, such as five to 20 years.
More importantly though, long-term investing gives perspective and can keep you from making costly mistakes based on short-term perceptions.
Long-term investing in the stock market has proven to be one of the best ways to accumulate wealth.
The market might be sluggish now, falling about eight per cent between January and April, but its performance tends to be cyclical.
Right now, it is affected by weaker-than-anticipated corporate earnings and election uncertainties.
By showing patience and discipline (staying in the car), investors can take advantage of market rebounds, enjoy superior returns, and experience peace of mind.
Declines as well as advances should be expected as the market is cyclical. Its advances provide selling opportunities and its depressions provide purchasing opportunities, some of which currently include National Commercial Bank, Pan Caribbean Financial Services, Seprod and Jamaica Broilers.
Let us examine the history of the Kingston Wharves (KW) stock, a port company currently undergoing massive expansion to build up its market.
An investor - let's call him Captain Jacob - puts $100,000 in KW on January 2, 2001. He also invests $100,000 in a one-year certificate of deposit (CD) that mirrors the Bank of Jamaica's (BoJ) one-year rate at the time. His CD will be reinvested every year for one year at the prevailing one-year BoJ interest rate.
Six years later, on December 31, 2006, Captain Jacob compares his two investments.
The $100,000 he invested in the KW shares is now worth $567,138.32, a gain of $467,138.32 or 506 per cent; the CD is worth $261,471.77, a gain of $161,471.77 or 161 per cent.
Captain Jacob has clearly benefited from his long-term investment in Kingston Wharves.
In the first year of his investment, 2001, as well as in 2003, the value of his investment actually fell below the initial $100,000 he had invested.
However, he was disciplined, patient and stayed in his car. He had made a prudent long-term investment and was confident in his selection.
Long-term investment
You may need the advice of a licensed professional in your selection. Buy stocks of companies whose business you are comfortable with and hold them until your financial goal is realised.
In other words, own the businesses you are confident in and the ups and downs will not really matter. It is similar to not worrying about the price of the house you are living in going up or down, because you are very comfortable in your house and you know that the price will eventually appreciate.
Why did Captain Jacob pick KW? For years, he transported cargo to and from Jamaica. He understands how the ports work and how money is made there. As a result, he is confident about his investment in KW because he has a thorough knowledge of that business. He understands the components of its revenue streams, the terminal handling charges, stevedoring, the stripping and stuffing of containers, cold-storage charges and cargo-handling equipment rental.
He also believes that because of its geographical location and Jamaica's consumption of imports, that the company will be experiencing growth in the volume of its business for the foreseeable future.
He had discussions with his broker about the suitability of this investment in his portfolio, in terms of risk, time horizon, goals, as well as the fundamental, technical, financial and pricing aspects of purchasing this stock.
All of those factors were favourable and he proceeded with the investment.
After that, Captain Jacob, confident about his investment, simply stayed in his car and held his investment, despite the dips in 2001 and 2003 which allowed him to realise superior market returns.
The important point to note here is that when selecting your stocks, you must be 100 per cent satisfied with your selection, and this is where you may need the help of a licensed investor, not to pick the stocks for you, but to assist and guide you in the process.
Deon McLennon is a wealth adviser at NCB Capital Markets Limited. Email: mclennonda@jncb.com
