2013: The year to apply Noah's Rule

It is that time of the year again, when everything ceases to make sense. Everything stops being the normal that we know it as. This is the time that you have your friends calling and informing you that they want to change their lifestyle and would be glad if their contact with you and your bad habits would be minimised. Others enthusiastically tell all and sundry that they have stopped partaking of the wise waters; some will swear that they will never go anywhere near a ‘43g sugar' carbonated soft drink, whilst a few would have made decisions to become vegetarians or fruitarians. All these resolutions made in the name of healthy living and changing course. Some even take it a step further and join the nearest gym and/or jogging club. Using terms popularised by Governor Gideon Gono, in his early days at 80 Samora Machel Avenue; most people would be determined that 2013 will not be "business as usual" and "failure is not an option".
 
Most churches, especially Pentecostals have a 10 day fasting period, giving an opportunity for their members to mend their relationships and establish 2013 covenants with their God. The beginning of the year is a time when people renew their love for God, and will be praying hard and profusely that the new direction that they are embarking on will be acceptable before their maker and will thus have his blessing. In other words, January is a normal time for all the fake and false but well meaning promises, some of them implemented with such zeal that everything becomes abnormal. By mid-February, however, it will be business as usual for the majority of these ‘resolutionists' or ‘good intentionists'.
 
Resolutionistic exercises are not confined to matters of religion and physical wellness but also extend to the business realm. Most companies and business executives would have, by this time, taken a weekend out, for a strategic planning seminar and January becomes the first month of implementation of the new business strategy. Well. Good luck.
 
Stock market investors also take part in this sometimes futile soul searching and forward planning exercise. Their resolution is usually the simplest and shortest; to make money in 2013. Profits will be the outcome of a successful manoeuvre of picking winners and dumping losers. Thus, the first step involves a review of the portfolio return stacked against the performance of the overall market in 2012. One then tries to see how and where they got it wrong. There are many ways in which one ends up travelling on the shortest route to losing money. In most instances one's investment advisor/manager or stockbroker is usually at the centre of it. Either one could have listened to the wrong advice from the trusted advisor or could have ignored the same, taking a contrarian view as it were which turns out to be wrong. Either way, the advisor is involved.
 
In the old days, by the time schools opened in January, most brokers would have dispatched their strategy notes and stock picks for the year. The most important ones that investors used to wait for, were from the likes of Fleming Martin Edwards (Imara), Msasa Stockbrokers (later called Interfin Securities), HSBC, Sagit Stockbrokers and Bard Stockbrokers (ABC). Brokers no longer do strategy notes or road shows for that matter and investors are now left to their own devices in terms of January trading and portfolio restructuring.
 
Invariably, however, the strategy notes had an almost similar line up of money makers, which normally comprised the then blue chip stocks and a few second tier stocks. What would differ would be the rationale and price targets or valuations. Blue chips at the turn of the millennium were Barclays; Dela; Cottco (oh yes); Meikles; NMB; Old Mutual; Innscor and Trust. The then favourite second tiers were Econet; Hippo; PPC; SeedCo; Tanganda and THZ.
 
How things have changed since then, with the fall from grace of Cottco (now Aico Africa); Trust; NMB as well as Meikles and the phenomenal rise of Econet; Hippo; OK Zimbabwe and SeedCo. The economic and consequently management and shareholder problems that resulted in the downgrading of the 2 banks, especially post December 2003 are well documented. On the other hand, the troubles which resulted in Meikles being what it is today are also part of Zimbabwe's corporate history.
 
Aico is the latest casualty; shedding off the blue chip status; being relegated to the second tier and the probability is high that it will find itself in the third league by the end of 2013. The main drag on the group is the huge hole (over $45 mln) that somebody managed to drill into Cottco's balance sheet around 2008/9. Since then, the battle has been how to fill this black hole. If Cynthia Carroll could be fired by Anglo American Corporation for mis-timing the commodity boom cycle, what then does one say about the management team at Aico, which missed the boom in cotton lint prices? The lint price rally could have been an opportune time to close the hole through a rights issue at around 19c/share.
 
There is market consensus, though, that the problem is not a management one, but a shareholder one. NSSA as the anchor shareholder, for an unexplained reason seems not keen to support a rights issue for Aivo, notwithstanding that the authority has underwritten almost all the capital raises since February 2009, most of which have lost the money. NSSA even went to the extraordinary extent of overpaying for ReNaissance Merchant Bank and Afre.
 
When Pat Devenish was appointed CEO in early 2010, we were asked for an opinion on whether or not he is good for the business. We had this to say;
 
"It is difficult to give an opinion on Pat Devenish's suitability for the Aico business, as this depends 96% on the support he will get from shareholders in as far as raising capital is concerned. The truth is that without shareholder support or raising capital, no one is good for Aico. What we are very confident of, though, is that Pat will be good for the share price. The market likes him and this should see the price push up. Sell at 25c or higher."
 
Whilst we were not prophetic, the passage of time has vindicated us, as the capital raising is yet to be done.
 
Finally, according to the Imara Edwards Securities price sheet published on 31 December 2012, the most money was made in Falgold and Astra both of which chalked up 200% gains, most probably on corporate activity. Falgold also ran on the back of superb financial results, being the only profitable listed mining counter. It also won the best mining counter in one of the award events in 2012.  These, not so popular stocks far outpaced BAT which came a distant third with a 146% gain on the year. At one point BAT was 187% up before the highly politically charged espionage allegations hit the headlines. Ariston (116%) came out fourth and completing the top five was Afre with a 73% 2012 share price return.
 
How many of these top five performers did you have in your portfolio and what was their weighting? Alternatively, how many of these were on the buy list provided by your stockbroker at any point during the course of 2012?
 
Overall, 2012 saw 20 advances and 47 declines. Most of the modern day blue chips were positive, whilst 2011's best performers Fidelity and Turnall regressed.
 
Now as investors scratch their heads trying to pick winners, the same logic as in the past still holds. Buy blue chips to defend the portfolio against losses and take bets on a few second tier stocks to drive returns. Investors should, however, be reminded of black swan events and the need to comply with Noah's Rule; ‘predicting rain does not count; building an ark does'.
 
Happy investing in 2013!

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