This is what the bottom
of the stock market looks like…

The citizen - DSE records zero trading

Last Friday, zero shares traded on the Dar es Salaam Stock Exchange. The same day, the NASDAQ in the USA traded 6,572,850,000 shares – an all-time high.

I believe one of these statistics signals an opportunity, near the bottom. The other signals danger, and may be the harbinger of an impending top.

But that’s just my opinion. Others will vehemently disagree.

Successful stock market investing comes in many forms. There is no right or wrong way. They key is finding a system that you’re comfortable with and which works for you. See The Winning Investment Habits of Warren Buffett and George Soros, the book I helped my friend Mark Tier write for more.

You can buy high and hope your stocks keep going even higher. Broadly speaking, that would describe a “momentum,” or “growth” strategy. It’s one that most people piling into US stocks or ETFs are following right now, whether they know it or not. Bitcoin has been another asset class that worked fantastically well for momentum traders who got their timing right.

But, most of the stocks or index funds that are popular right now are trading at large multiples of likely future earnings. And, their valuations are near historic highs, just like those I witnessed at previous cycle tops during my career – in 1999, and 2007.

Said another way, the expected future “earnings yield,” or annual earnings you’ll pocket from the stocks in the index, divided by the total price you pay for the index, is near an all-time low.

Here’s the S&P 500 Earnings yield. At 4% it’s the worst expected return in 20 years. Somewhere about 6%, or 50% higher than now, would be more normal.

S&P 500 Index - Forward Earnings Yield chart

An alternative investment strategy is one where you buy low and aim to one day sell high. That’s broadly speaking what “value” investors like me aim to do.

For value investors, above all, the key is buying low. The intellectual father of value investing Benjamin Graham called this the “margin of safety.”

It’s how I control my risk. Ultimately, the only variables that matter in investing are:

  • The price you pay
  • The price you sell at
  • How long you have to hold

The only thing I can control among these three is the price I pay. By definition, I can’t know beforehand where the price is going to go, or the price I will have the chance to sell at. So, paying as low a price as possible on entry instead, to limit my downside risk, is what I’m focused on.

Specifically, I want to buy a collection of assets owned by a company and steered by a competent and ethical management team to generate cash flow at:

  1. Well below what I estimate the fair market value of those assets (less any outstanding liabilities) to be.
  2. Well below what I believe the discounted future value of the cash flow generated by those assets might be.
  3. At a multiple of the future earnings potential that is historically low, meaning there is a good possibility for that multiple (the P/E) that other investors are willing to pay will also expand in future.

Right now, in the US markets generally, it is extremely difficult to find any investment that meets the above value criteria, except in certain out-of-favour industry sectors, such as coal mining and shipping stocks.

US markets are currently enjoying a bout of renewed euphoria, with trading volumes last Friday on the NASDAQ, for instance, hitting all-time highs.

In the sub-Saharan African markets I’m focusing on, it’s the exact opposite.

As the headline in The Citizen above shows, on Friday June 5, not one single share traded on the Dar es Salaam Stock Exchange (DSE).

Also, for the whole week last week, just US$281 worth of shares traded on the Uganda Securities Exchange. And on the Rwandan stock market it was US$5,598 for the week.

You get the idea. Investors have completely lost interest in these markets and capitulated, amid the bearish sentiment.

This is a momentum investor’s nightmare. But it can be a value investor’s dream.

And this is why I think the timing is perfect to start an African investment fund now. It means I can complete the first part of the value investor’s task… buying low.

Then, in time, as sentiment turns, and sub-Saharan African economies continue to expand and do well – remember, six of the world’s ten fastest growing economies are in this region – other investors will return. They always do. It’s the way markets work. And, I will eventually sell high.

I have no idea when that might be. And, a key characteristic of successful value investors is to have lots of patience, which almost always gets rewarded.

In the meantime,

I can buy African businesses so cheaply now, even if their share prices do very little for years, we’ll still make great money from the dividends

I wrote a couple of weeks ago about Twiga Cement, my own biggest holding in Tanzania, which recently posted strong 2019 results. It currently yields over 13%.

I also wrote about the DSE itself. The DSE last week published its own annual report and proposed a dividend of 74.46 Tanzanian shillings for the financial year 2019 after a solid set of results. That’s better than an 8% dividend yield.

NMB, Tanzania’s biggest bank, reported a 52% increase in profits for 2019 and boosted its dividend by 45% from 66 Tanzanian shillings per share to 96 Tanzanian shillings per share.

CRDB, NMB’s largest competitor, saw earnings jump 87% in 2019. It’s paying a dividend 112.5% higher than in 2018, up from 8 to 17 Tanzanian shillings per share. That’s a yield of 11.7%.

Sure, conditions in the Tanzanian economy are not perfect. They have been better at times. But as these company results show, they are not nearly as dire as the complete apathy towards the stock market would seem to be signaling.

For me, this is one of those rare times in my investing career where:

  • I have a non-consensus view
  • My view is backed up by the data I’ve analyzed
  • I believe there is a very high probability that it’s the market that’s wrong and me that’s right.

What’s more, we’re right at the bottom of the market. So, the upside could be huge.

How much more hated and unpopular among mainstream investors could the Tanzanian stock market be than trading ZERO VOLUME on the same day the NASDAQ in the United States traded its highest volumes ever?

Now, you may be wondering, if there is no trading volume, how can we buy any Tanzanian shares?

Not a problem. There are many shares being offered at low prices by the broker I use. There’s just no one stepping up to the plate to buy them. That’s where my proposed African Lions Fund intends to step in.

As I’ve said in prior articles, if you want to do it yourself, I’m also more than happy to share my broking contacts. However, most of the discounted blocks currently available are for large, bulk orders only – the kind of orders the fund will be able to place.

Until next time,

Good investing!

Tim Staermose
Global Value Hunter

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