When it comes to in­vest­ing, the vast ma­jor­i­ty of Pakistanis think of gold, re­al es­tate and, oc­ca­sion­al­ly, for­eign cur­ren­cies as in­vest­ments. Some in­vest­ors who are slight­ly more so­phis­ti­ca­ted may think of gov­ern­ment bonds. Only a few dare to put their mon­ey in stocks. But the fact re­mains: stocks are the best long-term in­vest­ment and of­fer some of the best op­por­tu­ni­ties for in­creas­ing one’s per­son­al wealth.

My pre­vi­ous ar­ti­cle was about the fun­da­men­tals of per­son­al fi­nance. This ar­ti­cle will lay out some of the ground rules of in­vest­ing (a sub­set of per­son­al fi­nance) be­fore mov­ing on to the case for why (and how) you should in­vest in stocks.

If the pur­pose of sav­ing is to trans­fer one’s pres­ent earn­ings in­to the abil­i­ty to spend mon­ey in the fu­ture, the pur­pose of in­vest­ing is to en­sure that the val­ue of one’s sav­ings do not get ero­ded by in­fla­tion and in­deed grow fast­er than in­fla­tion.

Since 1987, the aver­age an­nu­al in­fla­tion rate in Pakistan is 9.4 per cent, ac­cord­ing to da­ta from the Pakistan Bureau of Statistics. While the past does not pre­dict the fu­ture, it does pro­vide a use­ful bench­mark. Any in­vest­ment that you are con­sid­er­ing should have the abil­i­ty to beat that 9.4pc bench­mark over a sus­tained pe­ri­od of time.

On that count, for­eign cur­ren­cies make no sense, yield­ing on­ly about a 6pc re­turn for the past 15 years. Gold does a lit­tle bet­ter at 15.6pc per year dur­ing that pe­ri­od. Oil had re­turns of about 22.9pc, but stocks out­per­formed all of these as­set classes with a 24.5pc per year aver­age re­turn (meas­ured by the bench­mark KSE-100 in­dex).

To put this in sim­pler terms: if you had in­ves­ted Rs10,000 each in 1999 in dol­lars, gold, oil and stocks, the ac­count with dol­lars would be worth Rs19,702 to­day, the one with gold would be worth Rs93,790, the one with oil would be worth Rs205,598 and the one with stocks would be worth Rs284,701. Which would you pre­fer?

(Real es­tate as a class of in­vest­ment is dif­fi­cult to meas­ure, ow­ing to a lack of re­li­a­ble da­ta about land pri­ces in Pakistan. It will be the sub­ject of fu­ture col­umns.)

‘So what?’ you might be temp­ted to say. Why should I in­vest in stocks? Because in­vest­ing in stocks is the on­ly way you can buy an own­er­ship stake in com­pa­nies that will form the back­bone of the fu­ture growth of the Pakistani econ­o­my. Put an­oth­er way: in­vest­ing in stocks is a way to in­vest in the fu­ture of Pakistan.

Here is how I ex­plained stock in­vest­ing to my fa­ther.

“Baba, tell me of a trend you see in the econ­o­my,” I asked him.

He thought a few mi­nutes and then said: “More peo­ple are us­ing broad­band in­ter­net.”

“Okay, good. So if you think that trend will con­tin­ue, which pub­lic­ly lis­ted com­pa­ny do you think will stand to ben­e­fit the most from that trend? The an­swer is PTCL. So if you think more peo­ple will con­tin­ue to sign up for broad­band in­ter­net and that many of them will do so through PTCL, you should buy PTCL stock.”

He then asked me a dif­fer­ent ques­tion: “Okay, but how can I in­vest in the boom in the lawn sec­tor? Sana Safinaz and all the oth­er ma­jor de­sign­ers are not lis­ted com­pa­nies. Some of them are not even reg­is­tered.”

My re­sponse: “Yes, but some lis­ted com­pa­nies do have a lawn busi­ness. For ex­am­ple, Gul Ahmed is one of the old­est brand names in the lawn in­dus­try and has bene­fi­ted from the rise in in­ter­est in lawn. It is al­so pub­lic­ly lis­ted, so you can buy their stock.”

In oth­er words, in­vest­ing in stocks is about ob­serv­ing changes in peo­ple’s be­hav­iour and then re­search­ing which com­pa­nies are pro­vid­ing the goods and serv­ices that will serve that change in be­hav­iour. This is not al­ways easy, but if you are like me, it can be a lot of fun, and may end up be­ing quite lu­cra­tive.

This brings us to the next log­i­cal ques­tion: how does one go about in­vest­ing in stocks? Well, for start­ers, you need to open an ac­count at a bro­ker­age firm. (You can­not buy and sell stocks through a bank.)

Brokerage firms are com­pa­nies that have a li­cense to ex­e­cute trades on the Karachi Stock Exchange and there are 300 of them. How to se­lect a good bro­ker­age firm and how to open an ac­count is the sub­ject of the next ar­ti­cle (two weeks from now), but in the mean­time, I would rec­om­mend fo­cus­ing your at­ten­tion on firms that al­low you to trade on­line and have a good re­search pres­ence.

Companies such as KASB Securities, Foundation Securities, Elixir Securities, AKD Securities, BMA Capital, JS Global Capital and a few oth­ers pro­vide you with re­search and in­vest­ment ideas, as well as the abil­i­ty to trade on­line through soft­ware, and in some ca­ses even through mo­bile apps.

Of course, not ev­ery­one has the time to keep on re­search­ing stocks and ideas for in­vest­ment. And some peo­ple may not have enough mon­ey to buy sev­er­al dif­fer­ent stocks to build a di­ver­si­fied port­fo­lio. In that case, I would rec­om­mend in­vest­ing in mu­tu­al funds.

Mutual funds are pools of in­vest­ment set up by as­set man­age­ment com­pa­nies that have a trained in­vest­ment staff to do the re­search for you. They take in­vest­ments from a large num­ber of in­vest­ors and pool them to­geth­er to man­age a di­ver­si­fied port­fo­lio of in­vest­ments in ex­change for a small fee. It is a good way for peo­ple with as lit­tle as Rs5,000 to in­vest in the mar­ket with­out hav­ing to wor­ry about do­ing their own re­search. It is al­so an easy way to reg­u­lar­ly set mon­ey aside for sav­ings.

It is pos­si­ble to in­vest in mu­tu­al funds di­rect­ly but it can al­so be done through an ac­count at a bro­ker­age firm. In two weeks, we will dis­cuss how to se­lect where to open an ac­count, how to open it and oth­er lo­gis­ti­cal de­tails.

Published in Dawn, Sunday Magazine, May 18th, 2014