eBusiness Weekly
A few weeks ago, I wrote that it is not advisable to be buying high-flying Zimbabwe Stock Exchange-listed stocks when they are way past their intrinsic valuations unless their fundamentals support the premium share prices.
However, as each day passed, that advice looked like it was from someone who does not understand how stock markets work.
The high-flying stocks, most of them, penny stocks, continued with their bullish trend.
Some stocks, known for years to be penny stocks, soon became mid-cap stocks.
Their valuations becoming more than companies that in reality, by the size of operations and by the size of assets, are much bigger.
Getbucks’ valuation, for example, at some point was now bigger than the valuations of NMB Bank and ZB Financial Holdings, combined.
Only an amateur investor would not see that something was amiss, but surprisingly, the stocks went on to break records. At some point, their year-to-date gains reached 12 476 percent (Getbucks) and 14 256 percent (Unifreight).
Understandably in such crazy liquidity-driven markets, prices can move ahead of fundamentals, but rarely by the magnitude, we have seen on the Zimbabwe Stock Exchange.
Nothing would stop them. That’s what amateur investors thought. In the investment world, they say, the higher the return, the higher the risk. One has to understand that concept. But many didn’t.
At its peak price of $15,72 some investors were buying Getbucks. Fortunately, they were not many. Only four trades were recorded at that peak. Given the value of just $7 860 on the day, it is probably retail investors who bought. The amateur investors, or should we call them “pigs”.
Pigs are investors who assume high degrees of risk, or overlook risk entirely, with a singular focus on short-term profit.
They make rash investment decisions or buy stocks without conducting enough or any research. As a result, pigs tend to lose money and potentially a lot of it — hence the adage they get “slaughtered”.
From that peak value of $18,2 billion, Getbucks has since tumbled to $11,59 billion as of Wednesday.
On that day, only $15 950 worth of shares changed hands with eight trades being recorded. It is possible that many who might want to sell now could be trapped. It is now a hot stock and there is obviously selling pressure.
The market could be in correction mode now. It might come off by between 10 to 15 percent.
But penny stocks are coming off by bigger margins. Between Wednesday last week and Wednesday this week, Getbucks had lost a massive 36 percent, the bulk of that in just a few days.
starafrica, GB Holdings, Willdale had lost 30,35 percent, 19,36 percent and 14,14 percent respectively.
Unifreight and Medtech, however, still marched on, up 25,18 percent and 18,40 percent respectively for the week to Wednesday.
But what was driving
these stocks?
Liquidity, inflation, speculation, momentum, and of course inexperience.
Liquidity and inflation have the same effect. When there is high level of liquidity or inflation and there are limited investment options, then even assets with weaker fundamentals will find takers.
Some would make speculative buys, but often such stocks gain momentum as some mistake the share price gains as a sign of good things to come.
Penny share prices have a psychological effect on investors who think they are cheap.
An inexperienced eye would just look at the share price and not at the total valuation.
Some amateur investors do not even consider the net asset value of the share or the level of earnings, which normally determine the price one pays. All they see is a cheap stock for the taking.
But as they increase their buying, at higher prices, they are taking more risks.
That risk can be minimised if liquidity remains elevated increasing effective demand for stocks.
Currently, the central bank has a loose monetary policy, with Reserve Money targeted to grow by 20 percent per quarter.
This past June, total Reserve Money reached a record high of $24,45 billion.
Negative real interest rates currently prevailing in the market mean those with cash will not take it to the bank for the purpose of earning income. It is not worth it.
In fact, market players would take more loans.
That money, in the hands of individuals and institutions, would likely be invested in stocks.
Already in the first six months of the year, $21 billion has found its way into the market.
The whole of last year, only $17,3 billion was invested. The previous year, it was just $2 billion.
Liquidity is what is driving stocks. Even those with weak fundamentals.
However, for now, the market is under correction and pigs are getting slaughtered.
Although it shall rise again, as it always does, there is no guarantee that penny stocks like Getbucks will go back to their previous highs in the near future.
Those who bought at peak can start counting their losses.
