Stock Market Rally: The curse of averages

15 Apr, 2022 - 09:04 0 Views
Stock Market Rally: The curse of averages

eBusiness Weekly

Kudzanai Sharara
Taking Stock

As of Tuesday April 12, 2022, all major Zimbabwe Stock Exchange indices were trading in the positive territory.

The ZSE All Share Index, which encompasses all listed stocks, was up an impressive 78,32 percent year- to-date.

This strong year-to-date performance is ahead of year-to-date inflation of 19,83 percent as at end of March 2022.

And on a year-on-year basis, the ZSE has gained 269 percent which is ahead of March annual inflation of 72,7 percent.

The strong gains are also ahead of year-to-date currency depreciation of approximately 45 percent.
On the face of it this makes the stock market very attractive to investors. Not only is the overall market performance helping investors hedge against inflation and currency depreciation, but it’s also giving attractive positive returns.

However, the 78,32 percent year- to-date gain or the 269 percent year-on-year gain represents a market average.

An average is a number at the “centre” of a raw of numbers. This means half the raw numbers are ahead of this average while another half is behind this average (if we imagine the row of the numbers in a straight line).

Looking at the market’s performance using an average, masks some serious underperformance by some counters.

This is what I call the “curse” of averages.

The overall market’s rally is obviously masking the losses being recorded elsewhere.
Spare a thought for those who bought into Unifreight post its 2021 rally. The transport and logistics company was last year’s top riser with a 16 011,1 percent while CBZ was 2020’s top riser with a more than 12 000 percent gain.

Novice investors could easily look at such performances and decide to invest some dollars into such companies. But past years’ performance does not guarantee future years’ performance.
More than three months into the year, Unifreight has only gained 5,9 percent and with year-to-date inflation at 19,83 and a currency depreciation of 45 percent, those who invested in the counter at the beginning of the year are suffering from unrealized negative real returns.

They are not the only ones. As of Tuesday, the ZSE had at least 17 counters that had failed to beat inflation and had also suffered from currency depreciation.

Of the 17 stocks, 11 are languishing in the negative territory.
Medtech leads the fallers with a heavy 43,3 percent year-to-date loss followed GB Holdings which is 31,6 percent in the red. ZB Financial Holdings is another heavy loser after dropping 20,8 percent.
Positive market news is always accompanied by investor frenzy but quite often the stock selection rule book is thrown out of the window.

Fear of Missing Out (FOMO) usually take precedence over proper quality of the underlying business and the price paid. However, fundamentals of the business and the price paid must always go hand in hand.
One of Warren Buffet’s famous investment quotes reads: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Some companies might be wonderful but overpriced, while others might be cheap but also with poor fundamentals.

Identifying high quality companies and knowing what to pay for them allows the investor to pick companies that are most likely to appreciate significantly in value.

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