A share is not just an instrument that generates dividends and can be sold.
It is part ownership of a business.
As an Investor:
When You buy a share,
It should not be because of expected favorable movements in the share price (that is speculation).
As a shareholder you own a piece of the company,
Are able to vote on policies, on the appointment and dismissals of directors.
And therefore shares should be bought for what they actually produce (earnings, dividends etc).
There’s more to life than studying price charts and assessing whether the share is over or under bought.
A company is like a toddler in the hands of its owners.
It needs cuddling, nurturing, and good governance from the board of directors.
A shareholder needs to be concerned with how management runs the company.
In whose best interest are they running the company for?
The shareholders or themselves?
Hence, you should only have shares in companies with managements that are competent and honest people.
Take a look at Steinhoff...
Once admired retail giant on the JSE.
This is a case of taking on too much debt.
The board of directors embarked on a buying spree of under performing foreign companies (Conforama and US-based Mattress firm among others).
Ironically this was done to boost earnings.
These acquisitions were financed by large amounts of debt.
In 2019 the company had renegotiate with creditors to suspend payments on its plus 9 billion Euros debt as it could not keep up with making payments.
This is where shareholder activism comes in.
As a shareholder, it is your duty to keep a check on management that they don’t lose sight of who they are working for (You),
That they don’t expose the company to unnecessarily high risks and invest in poorly performing companies.
Auditors are only there to certify financial statements.
For companies with Management that does not act in shareholders’ interest,
You should pull out Your money.
The below is some of the things investors gain an understanding of prior to buying:
The company’s past earnings history
This is an indication of how much earnings the company is likely to earn going forward.
Management’s ability to reinvest those earnings and generate more earnings, or to return them to shareholders.
The company’s ability to pay its debts (current and past record).
Companies that can’t generate money from their operations and regularly turn to shareholders for financial aid destroy shareholder value, and should be approached with caution.
Presence of rivals.
The laws and regulation that govern the company’s industry and compliance with them.
Whether there are significant barriers to entry to the company’s industry.
Entry into the telecoms industry requires lots of infrastructure and expensive spectrum licences. This can help to reduce competition.
Little attention is given to how much the share price will perform in the coming months.
Companies that consistently produce good earnings and have good managements in place, and pay their debts will over time also advance in share price.
Hence buying a share should not be a mere matter of looking at price charts,
But rather, an analysis of its financial position, whether it can pay its debts, its earnings history, management...
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