This week leg­endary in­vestor War­ren Buf­fet was quot­ed to have said: “if you in­vest­ed $10,000 in the S&P 500 in 1942, you’d have $51 mil­lion to­day.”

The S&P 500 stock in­dex mea­sures the val­ue of stocks of the 500 largest cor­po­ra­tions by mar­ket cap­i­tal­i­sa­tion list­ed on the New York Stock Ex­change or Nas­daq Com­pos­ite. Buf­fet has al­so been quot­ed as say­ing “if you don’t find a way to make mon­ey while you sleep, you will work un­til you die.” With these stark re­al­i­ties, why is it that more peo­ple do not look at the stock mar­ket as a ve­hi­cle for long-term in­vest­ment and sav­ing?

There are two types of in­vest­ing: pas­sive and ac­tive.

The dis­cus­sion over which is bet­ter has been go­ing on since the dawn of time but pas­sive in­vest­ing is the in­dex in­vest­ing ad­vo­cat­ed by War­ren Buf­fet and oth­ers for peo­ple who want to in­vest but don’t con­sid­er them­selves so­phis­ti­cat­ed in­vestors.

Here are some de­f­i­n­i­tions: ac­tive in­vest­ing, as its name im­plies, takes a hands-on ap­proach and re­quires that some­one act in the role of port­fo­lio man­ag­er.

The goal of ac­tive mon­ey man­age­ment is to beat the stock mar­ket’s av­er­age re­turns and take full ad­van­tage of short-term price fluc­tu­a­tions. It in­volves a much deep­er analy­sis and the ex­per­tise to know when to piv­ot in­to or out of a par­tic­u­lar stock, bond or any as­set. A port­fo­lio man­ag­er usu­al­ly over­sees a team of an­a­lysts who look at qual­i­ta­tive and quan­ti­ta­tive fac­tors to de­ter­mine where and when that price will change.

A pas­sive in­vestor in­vests for the long haul. Pas­sive in­vestors lim­it the amount of buy­ing and sell­ing with­in their port­fo­lios, mak­ing this a very cost-ef­fec­tive way to in­vest.

The strat­e­gy re­quires a buy-and-hold men­tal­i­ty. That means re­sist­ing the temp­ta­tion to re­act or an­tic­i­pate the stock mar­ket’s every move. The in­dex funds that fol­low these port­fo­lios au­to­mat­i­cal­ly switch up their hold­ings by sell­ing the stock that’s leav­ing and buy­ing the stock that’s be­com­ing part of the in­dex.

A com­pa­ny be­com­ing big enough to be­come part of the S&P 500 guar­an­tees that the stock will be­come a core hold­ing in thou­sands of ma­jor funds. Suc­cess­ful pas­sive in­vestors ig­nore short-term set­backs—even sharp down­turns.

(https://www.in­vesto­pe­dia.com/news/ac­tive-vs-pas­sive-in­vest­ing/)

What many may not re­alise is that right here in the Caribbean re­gion, in 2018, Ja­maica is cred­it­ed with hav­ing “the world’s best-per­form­ing stock mar­ket.” The T&T Stock Ex­change (TTSE) has al­so per­formed quite well over time.

Ac­cord­ing to a re­cent Cen­tral Bank bul­letin, in the sec­ond half of 2018 the ma­jor Com­pos­ite Price In­dex (CPI) grew by 5.4 per cent, with to­tal mar­ket cap­i­tal­i­sa­tion grow­ing to $126.7 bil­lion. The ex­pan­sion of the CPI was dri­ven by a 21.8 per cent jump in the cross list­ed in­dex (CLI), stem­ming from share price in­creas­es in two ma­jor re­gion­al bank­ing and non-bank­ing fi­nance sec­tor stocks.

Con­sid­er­ing the re­gion­al ex­changes, the Ja­maica Stock Ex­change (JSE) and Bar­ba­dos Stock Ex­change (BSE) record­ed in­creas­es of 24.2 per cent and 15.5 per cent, re­spec­tive­ly over Ju­ly to De­cem­ber 2018. Far bet­ter re­turns than any sav­ings ac­count could pro­vide.

(https://www.cen­tral-bank.org.tt/sites/de­fault/files/re­ports/eco­nom­ic-bul­letin-jan­u­ary-2019.pdf)

In cross-list­ed ac­tiv­i­ty, we saw 35 of a 56.5 per cent in­crease in the share price of the re­gion­al NCB Fi­nan­cial Group Ltd (NCBFG) at­trib­uted to high­er fi­nan­cial year end prof­its and earn­ings per share, in ad­di­tion to the suc­cess­ful set­tle­ment dis­cus­sion and re­vised of­fer and take-over bid for Guardian Hold­ings Ltd.

The Man­u­fac­tur­ing I sub-in­dex al­so im­proved over the pe­ri­od, ex­pand­ing by 1.3 per cent. Good, but let’s look at Ja­maica close­ly; a re­gion­al mar­ket to which lo­cal in­vestors al­so have ac­cess.

Re­cent­ly, Ja­maica earned the des­ig­na­tion of be­ing the world’s best-per­form­ing stock mar­ket. A Bloomberg Busi­ness­week ar­ti­cle de­clared:

“In 2018 the na­tion’s main in­dex rose 29 per cent in US dol­lar terms, the most among 94 na­tion­al bench­marks tracked by Bloomberg. Its out­per­for­mance over the past five years is even more strik­ing. Ja­maican stocks have surged al­most 300 per cent, more than qua­dru­pling the next-best-per­form­ing na­tion­al bench­mark and sep­tu­pling the S&P 500’s ad­vance.”

(https://www.bloomberg.com/news/fea­tures/2019-01-18/the-ja­maican-stock-ex­change-is-the-world-s-best-per­form­ing-mar­ket)

Busi­ness­week goes on to give some ex­pla­na­tion for these gains.

“Re­al growth in Ja­maica has av­er­aged less than one per cent the past four years, and it’s ex­pect­ed to come in at 1.7 per cent for 2018. It doesn’t take much in­vest­ment to make a tiny mar­ket boom, and the to­tal val­ue of the 37 stocks in the main Ja­maica in­dex is less than $11 bil­lion, small­er than the val­u­a­tion of Chipo­tle Mex­i­can Grill Inc. But it’s al­so a sto­ry about Kingston’s nascent at­tempts to rein­vent it­self as a fi­nan­cial hub.

Mak­ing lo­cal and re­gion­al in­vestors more com­fort­able in­vest­ing in the TTSE will go a long way in im­prov­ing per­for­mance and mar­ket cap­i­tal­i­sa­tion.

“Over the past decade, Ja­maica’s fi­nan­cial sec­tor as­sets have tripled and the num­ber of in­sti­tu­tions has grown eight­fold, ac­cord­ing to In­ter­na­tion­al Mon­e­tary Fund fig­ures.

“While Kingston still reg­u­lar­ly ap­pears on glob­al lists of dan­ger­ous cities, the World Bank now ranks Ja­maica as the sixth-best na­tion in terms of ease of start­ing a busi­ness. And the share of Ja­maicans with bro­ker­age ac­counts has gone from less than five per cent to more than 10 per cent in the past decade.” Wake up T&T.

“Ja­maica has al­so had some luck. The glob­al econ­o­my keeps hum­ming along, and hur­ri­canes have spared the is­land the worst of their wrath in re­cent years. The re­sult is a whiff of op­ti­mism in Kingston that things might be turn­ing a cor­ner.”

Com­fort and op­ti­mism in the lo­cal econ­o­my play an im­por­tant role in at­tract­ing in­vest­ment, lo­cal and in­ter­na­tion­al, in the stock mar­ket. This can­not be ig­nored and our politi­cians would be wise to keep that in mind when dis­cussing lo­cal eco­nom­ic mat­ters pub­licly.

As of Au­gust 2018, the TTSE Mar­ket Cap­i­tal­i­sa­tion was es­ti­mat­ed at $120 bil­lion (US$17.7 bil­lion), with con­glom­er­ates and fi­nan­cial in­sti­tu­tions ac­count­ing for the vast ma­jor­i­ty of val­ue.

The com­pa­nies with the great­est cap­i­tal­i­sa­tion on the ex­change are Re­pub­lic Bank (RBL) and First Caribbean In­ter­na­tion­al Bank (FCIB). Oth­er large play­ers in­clude: West In­di­an To­bac­co (WCO), Sco­tia­bank T&T (SBTT), Na­tion­al En­ter­pris­es Ltd (NEL), ANSA McAL (AM­CL), First Cit­i­zen’s (FIRST), Na­tion­al Com­mer­cial Bank of Ja­maica Ltd (NCBJ), T&T Nat­ur­al Gas Com­pa­ny Ltd (TTNGL) and Massy Hold­ings (MASSY).

What is of con­cern is the lack of ac­cess to the en­er­gy sec­tor to lo­cal in­vestors al­though it is the main dri­ver of the T&T econ­o­my. Na­tion­al En­ter­pris­es (NEL) and T&T Na­tion­al Gas Ltd (TTNGL) do of­fer some ex­po­sure—NEL is a gov­ern­ment hold­ing com­pa­ny which holds the state-owned shares of the Na­tion­al Gas Com­pa­ny of T&T, At­lantic LNG (T&T), TRIN­GEN (am­mo­nia pro­duc­tion) and the Na­tion­al Flour Mills (NFM).

Gov­ern­ment should strong­ly con­sid­er list­ing the new­ly formed Paria Fu­el Trad­ing and Her­itage Pe­tro­le­um com­pa­nies as well. It is one way to pro­duc­tive­ly re­ward cit­i­zens and oth­er in­vestors from the coun­try’s oil and gas largess while com­mod­i­ty sales fund­ed sub­si­dies are be­ing sys­tem­at­i­cal­ly re­pealed.

The TTSE would al­so be ex­treme­ly help­ful to more so­phis­ti­cat­ed in­vestors with the pro­vi­sion of eq­ui­ty be­tas for the cal­cu­la­tion of eq­ui­ty val­ues by more so­phis­ti­cat­ed in­vestors.

A be­ta co­ef­fi­cient is a mea­sure of the volatil­i­ty, or sys­tem­at­ic risk, of an in­di­vid­ual stock in com­par­i­son to the un­sys­tem­at­ic risk of the en­tire mar­ket. Be­ta is used in the cap­i­tal as­set pric­ing mod­el (CAPM), which cal­cu­lates the ex­pect­ed re­turn of an as­set us­ing be­ta and ex­pect­ed mar­ket re­turns.

(https://www.in­vesto­pe­dia.com/terms/b/be­ta.asp)

Should you in­vest in the stock mar­ket, lo­cal or oth­er­wise?

That is a de­ci­sion best left up to you. One should call their lo­cal bank, cred­it union or in­vest­ment house and have a frank dis­cus­sion about their fi­nan­cial goals and op­tions.

Arm your­self with in­for­ma­tion. Keep in mind, most peo­ple will not save or cost cut them­selves to wealth and over time broad mar­ket stock in­vest­ments have steadi­ly out­per­formed sav­ings ac­counts. You can’t win the game if you don’t play.