You would be forgiven for believing that buying shares is a get-rich-quick scheme. In recent years in Malawi shares have been heavily underpriced when they’re brought to market in an initial public offering (IPO); this means that there have been more people wanting to buy shares than there are shares available.
What happens when demand is so high relative to supply?
If a company wants to have 100,000 shares listed on the Malawi Stock Exchange they would offer them at a fixed price. If they receive demand for more shares than this the price will stay the same and the number of shares also stays the same so some people don't get any or get less than what they want.
Note that if there is a "greenshoe option" in the share offering documentation then they can issue up to 20% more shares but they cannot change the price once orders are being received.
Once the offering is closed the shares become available to buy and sell on the open market. Those people that didn't get as many shares as they wanted are free to buy from those that did. What's the result of this? An increase in share price.
Basic economics dictates that when demand rises, prices rise. So after a share offering that has been underpriced it is not uncommon to see the price shoot up. I heard of one woman in Malawi borrowing money to buy shares in an IPO and then selling them within a week with enough profit to buy a car AND repay the lender!
By the same token, however, once the initial buying and selling frenzy is over the share price settles down to an equilibrium price. Once the share price reaches this level it can stay there for a prolonged period of time because, for the most part, the share dealing market in Malawi turns over very low volumes.
If you bought when the market was high you may have to hold onto a loss position for a long time.
Secondly, shares may come down in price because a large shareholder decides to sell. For instance when the Malawian economy is doing badly large international shareholders cut their losses by selling their entire portfolio.
What should you do if you're in a loss-making same position?
1. If you don't need the money desperately, hold onto the position until the shares move up in price. The Malawi Stock Exchange can email daily or weekly updates to you so you can keep up to date with pricing.
2. If you think the company is definitely on its way to financial ruin, cut your losses and sell. It's better to recover some of your money than to lose all of it.
When you’ve been holding a losing stock for a while the temptation to sell very high but try to be as rational as possible. I bought Apple Inc. shares at $78 in 2006; in late 2008 / early 2009 the share took a beating and was treading well below previous highs of $200. I decided that the I’d sell as soon as the stock price hit 280 and that’s what I did feeling very proud that I had more than trebled my money since 2006 – I have lived to regret the decision ever since: the share price continued its upward streak for years and traded as high as 700 in late 2012!
"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever." Warren Buffet
How Does Buying Shares Make Money?
Have you been wanting to buy shares but haven’t done so because you want to have a better understanding of how they work? Then this article is written just for you: A share is a unit of ownership in a company.
When a company lists on the Malawi Stock Exchange (MSEX) they offer the market a fixed number of shares at a given price.
People who want to buy the shares submit their firm interest by stating how many shares they want to buy and providing a cheque to that value.
If Mandasi Okoma Ltd decided to list 100, 000 shares at a value MWK500 each it would mean the company is valued at MWK50,000,000 (100,000 x MWK500).
If you wanted a 0.1% ownership in the company you would buy 100 shares for MWK50,000 (100,000 shares x 0.1% x MWK500). You are now one of the owners of the company. So, how do you make money? There are two ways.
Firstly, periodically the company shares some of its profits with its shareholders via the payment of a dividend. When you work, you earn a salary; when you lend, you earn interest; when you buy shares, you earn a dividend.
This then becomes an (additional) source of income for you. Some retired people in the developed world with large, well-diversified portfolios live primarily off dividends with no need for another source of income. Wouldn’t that be nice?
Secondly, you get capital growth. What does this mean?
If the company you have invested in does well, that is, it grows its customer base and starts to earn more revenue then it becomes more valuable.
In the above example the company starts off with a value of MWK500 per share. If the value increases over a period of time to say, MWK600 per share, then your MWK50,000 investment becomes worth MWK60,000. You make a profit of MWK10,000.
What are some of the issues you might encounter in dealing shares?
1. You don't get allocated as many shares as you want.
If there are more people wanting to buy shares than the number of shares available then you might not get any shares at all or you'll get allocated less than what you tendered for. The company selling 100,000 shares may get payments equivalent to 200,000 shares. We say the share offering is “oversubscribed” to define this situation of excess demand. In that case, the company’s investment bankers might give everyone half of what they asked for. However, that’s not usually how it works.
If the share offering is "oversubscribed" those that want a small amount will normally get all they ask for and big tickets will get cut by a large amount.
Why does this make sense?
Large shareholders carry a lot of power: they have more influence on corporate policy and if they decide to sell their holding all in one go, they would cause the share price to fall by a large amount. No company wants this, they would rather have many small shareholders than a few large ones.
2. Share prices can go down as well as up.
This is probably the biggest problem you'll face. When you buy shares and become a part owner in a company you can lose all your money. If something goes wrong lenders, such as banks, are paid back first and if there's nothing left to pay the shareholders then so be it. We'll discuss this in more detail next week.
"Rule No. 1: never lose money; rule No. 2: don't forget rule No. 1." Warren Buffett
Don’t Buy Second-hand Machines
Many a businessperson has made this error: buying second-hand (or used) products that later fail to meet expectations.
Indeed, the temptation to go second-hand is high; more so if there is a large difference in price between the first-hand (new) product and the second-hand equivalent.
I've decided to dedicate an entire article to this topic because this is one of the lessons my father impressed upon me at a very young age. He said, "Heather, when I first went into business I bought second-hand machines and I lived to regret it." In fact, he used the Chichewa expression ndinachimina which is hard to translate into English; "I severely regretted it," is probably pretty close.
I'm not sure what the negative experience he had was but it must have been pretty bad because he seems to be near-allergic to second-hand things now. He thinks it's better to buy cheap but brand new clothing rather than designer labels second-hand.
I'll be the first to admit that I didn't fully take this advice on board: when I bought my first car I got a second-hand Peugeot that had 5,000 miles on board. The result, ndinachimina!
The car looked great on the outside and on the inside but little did I know that it had been involved in an accident only months earlier and after I bought it, the car blew a gasket within a couple of months. I paid to have the problem fixed. A few months later, it happened again!
These problems could have been avoided by buying brand new. I'm not saying that good quality second-hand products are not available, what I'm saying is they're hard to identify. I fell for that car because it was very well priced forgetting the old adage, "if it's too good to be true, it's almost certain that it is." But, how would I have known it was too good to be true? I wasn't a car dealer and I hadn't hired an expert to help me vet the car.
Indeed, if you're starting a new business it's impossible for you to know the type of problems an old machine might present. With a new machine you have a manufacturer's warranty to lean back on including the promise of parts if something breaks within the first twelve months.
If you're working and running the business part-time you'll probably be able to recover from buying poor quality machines but why walk into that problem in the first place?
What if you really can't afford to buy brand new, i.e. you definitely don't have the money and no-one will lend it to you? Well, reluctantly, you'll have to go for second-hand inputs. Tread with caution. Don't make the decision alone. Get the machine properly inspected by someone in the know. If this is not possible then share the data you're using to drive your decision with an objective and intelligent associate and see if they agree with your purchasing the said machine.
In summary, to start your business on the right footing: buy first hand machinery, period!
“Quality is never an accident; it is always the result of high intention, sincere effort, intelligent direction and skilful execution; it represents the wise choice of many alternatives.” William A Foster
After the series of articles written in January on idea generation your mind should be brimming with ideas that you want to monetise; the question is, how? In this article I will explain how you can get good quality machinery at a good price.
In one of my earlier businesses I sourced a machine very cheaply and got it imported into Malawi without ever speaking to the manufacturer on the telephone or even ever seeing him!!
Are you shocked? Don't be.
I have been chatting with suppliers based in China on and off since 2009 to get quotes for goods that I’d like to produce. The most important thing I’ve learnt when it comes to communication is that email is MUCH less complicated than speaking on the phone. The Chinese supplier can't refer to a phone conversation later whereas emails can be easily reread; this avoids massive communication breakdowns and ultimately mishaps.
First things first, where do I find these suppliers? Alibaba.com.
I don't remember exactly how I initially found the site but it is a treasure trove for someone wanting to source a product or mass produce a new design. There are thousands of suppliers for everything so going through the vendor profiles can take ages.
Once you engage a supplier you will receive an email response to your inquiry from their business email rather than via alibaba.com so you don't have to worry about engaging a supplier and then having them disappear.
These are my top tips on sourcing via alibaba.com:
1. Keep it simple
Send emails in very simple language with a lot of detail so that it's very clear what you are trying to achieve.
2. Do not use SMS/text message shorthand at all.
If someone is using a translation device (which many suppliers on alibaba.com do), a wrongly spelt word won't be found or worse, it will be mistranslated. Even abbreviations like “don’t” should be avoided in favour of “do not”.
3. Ask a lot of questions.
This is necessary to ensure that you and the supplier fully understand what it is you want to buy.
4. Get a sample
If possible, get a sample sent to you before you make a large order. I recently paid $150 to get samples of combs. You might think that's too much but think of it as saving yourself $4850. Look at it this way: if you make a $5,000 order without seeing a sample, and find out you don't like it, that $150 would have looked like money well spent!
Getting samples will obviously take time and might lead to a delay in launching your business but it will prevent future headaches or costly mistakes.
Over thirty years ago my dad ordered a candle making machine only to find that the candles it produced were as small as his finger. The conventional candles at the time were much bigger and he thought he'd thrown away his money on starting a business that would go nowhere. He was in a state of total panic but fortunately for him this incident coincided with a Government ban on the importation of many goods including candles and the business took off.
He was lucky; it could just have easily gone the other way so I totally recommend ordering samples or if you're ordering something big ask the right questions. In my dad's case he could have inquired about the candle size but remember that this was before email. It would have meant an expensive ‘question and answer’ phone call or a letter that took forever to get there.
With these tips you should be well on your way to sourcing quality machinery and products.
"The single biggest problem in communication is the illusion that it has taken place." George Bernard Shaw
For 2 years until early 2014 I wrote a weekly personal finance and business column for Malawi's leading media house, The Times Group. The target is middle-class, working African women.
This is a reproduction of the articles that appeared in the weekend edition of Malawi News.