The Untold Reality: Trading on the ZSE Can Be Highly Profitable!

As a young, energetic, and impressionable individual, I have explored countless ways to make a dollar out of few cents. I have ventured into various projects within my areas of interest, but in some instances, I had to throw in the towel after realizing the significant cost required (as school fees) before realizing meaningful returns on my initial investment. After conducting thorough due diligence, I found that investing in companies with proven expertise in the fields I'm passionate in was a smarter choice. By allowing the experts to do what they know best with your stake in their business, as an investor, you stand a chance to benefit through capital gains and dividend payouts without the stress of handling day-to-day operations of the business.

In recent years, the term "entrepreneurship" has become increasingly popular, especially in our homeland and obviously for good reasons. This is regardless of the fact that many individuals lack the entrepreneurial traits required to make it in the marketplace, and as a result, they often fail to sweat their money, largely due to self-centred reasons. Too often, individuals are more interested in being called a business owner or CEO of a particular small venture, even though they are struggling to navigate the complexities of running that business.

Statistics show that 90% of startups fail within the first five years, yet people continue launching businesses in hopes of being a part of the successful 10%. Interestingly if we are to juxtapose, many market participants tend to blame the markets when they incur losses, yet only a small number manage to position themselves among those who trade profitably, much like the few entrepreneurs who ultimately succeed. If we examine the situation more closely, we can see that there are plenty of opportunities within our local capital markets for investors to achieve significant gains.

There has been much discussion about the Zimbabwe Stock Exchange's perennial underperformance in recent years, and more recently, attention has been focused on how share prices on our local bourse are tracking the widening parallel market premium. However, little has been said about how some counters have achieved substantial real capital gains, even after accounting for inflation and exchange rate fluctuations. Feel free to factor in your different inflation and exchange rates on the returns below to come up with real returns. If you are generous enough, you will see how profitable most companies were from April to date. Below is a graphical presentation showcasing the top 20 gainers on the Zimbabwe Stock Exchange, April to date:

What’s particularly interesting about the top gainers is that they include a mix of large caps, medium caps, and small caps, offering balanced upside potential for both retail and institutional investors. On a typical day, more than 60% of daily trades on the ZSE consist of Delta and Econet shares, with institutional investors driving the large volumes exchanged, making these two the most liquid stocks on the local bourse. Additionally, counters like Tigere REITs are fairly liquid and often see significant volumes traded. In contrast, small caps tend to be less liquid, but with thorough research, investors can achieve exceptional capital gains. This space often appeals to young, dynamic retail investors who actively monitor the performance of these stocks and take advantage of new opportunities as they arise.

This article aims to explore why investors, traders, or speculators often struggle to realize gains and will offer insights on how one can achieve profitable trading on the ZSE. After reviewing the top performers on the ZSE, the key question arises: why are so many investors failing to capitalize on the market's upside potential? Here are some of the reasons:

• Failure to structure a detailed investment policy statement (IPS)

An investment policy statement outlines an investor’s financial goals and investment objectives, while detailing the roles and responsibilities of everyone involved in managing the portfolio. Investors' risk tolerance varies due to factors such as their financial situation, future goals, cognitive biases, and differing investment timeframes. As Warren Buffett aptly stated, "risk is doing something you do not know." Many investors fall prey to herd mentality, of buying shares simply because others are buying and selling when others are selling, without considering whether these actions align with their own investment objectives. It’s perfectly fine to have differing views from other investors, provided you have a sound rationale for your buy, hold, or sell decision. For it to be a market, it is defined by the interaction between at least two people, one being a bullish investor and the other holding a bearish view.

• The absence of an investment thesis

Last year, the Zimbabwe Stock Exchange underperformed, ending with a market capitalization of around US$1.3 billion. While many investors were exiting the market due to emotional reactions, others saw an opportunity in the same bear market and purchased shares of blue chips that were undervalued. For example Delta Shares were trading at around 37 US cents per share in December 2023, a heavy discount to its intrinsic value. Investors who initially developed an investment thesis, set out a clear exit strategy, and planned to hold their portfolios for at least until June 2024, had more than a 100% return in real terms through capital gains. In late June, the government repealed SI 96 of 2022, reducing capital gains withholding tax to 2%. This, along with increased market liquidity, triggered a bull run, causing share prices to surge. This highlights how profitable trading on the ZSE can be with a well-defined thesis and exit strategy. Currently, the bourse is valued at over US$3 billion, despite the migration of counters like Edgars, the cessation of trading for Truworth, and the absence of new listings this year.

• Inability to periodically rebalance the portfolio

It's widely recognized that trading is largely psychological, and investors should avoid reacting too frequently to price swings, as this can lead to emotional decisions that undermine their investment strategy. Additionally, fluctuations in share prices can alter investors' initial risk tolerance and financial goals. Therefore, periodically rebalancing portfolios is essential to maintain alignment with the investment policy statement (IPS). Rebalancing involves selling shares of underperforming counters, whether individually or in sectors expected to lag over an investor’s timeframe, and buying shares of those with stronger prospects, based on sectoral projections or a positive company trajectory. On the Zimbabwe Stock Exchange, regular portfolio rebalancing is particularly important because macroeconomic factors such as foreign exchange distortions, inflation, policy changes, and climate variations can significantly influence share prices, and this may lead to deviations from the initial risk-return matrix outlined in the Investment Policy Statement (IPS). These mentioned factors present both opportunities and risks, depending on how investors choose to respond to systemic challenges.

Conclusion:

Savings and investments are often viewed with skepticism by many people in our homeland, and for justifiable reasons. Some are still holding on to the effects of the 2008 hyperinflation crisis, which caused significant losses in their portfolios through pension funds. Others have fallen victim to pyramid schemes that once promised them quick and substantial returns. Additionally, the general public are plagued with low salaries that hardly allow for any thoughts of saving or investing. Consequently, retail investor participation in our local capital markets remains minimal. However, as Elon Musk once stated, if something is important enough, a person will make the effort to pursue it. Unfortunately, this mindset has not been applied into the aspect of investments by many, as very few retail investors have automated a portion of their salaries for monthly investments, because retail investors can start investing with as little as $10. This article aims to illuminate the often-overlooked realities of markets like the Zimbabwe Stock Exchange.