Top 3 lessons: Investing in the Egyptian market

I started investing in the Egyptian stock market over 5 years ago. At that point in time, I had already traded stocks listed in the United States and Germany and decided to shift my positions to Egypt. After completing an internship program at EFG Hermes, I opened a trading account. Since then I have learned many lessons about investing in the Egyptian market and wanted to share them with you.

Source: EFG Hermes

LESSON 1: stay up to date

This might seem straightforward and does not only apply to Egypt. Companies do not operate in a vacuum which simply means that they are affected by economic and political factors.

Let’s say you decide to invest in an Egyptian bank. In that case, you should not only understand the bank’s financial health but you must also be aware of the regulations that affect banks -including changes and introduction of new regulations-, the current interest rate environment, foreign investments in government bonds -a drop could lead to crowding out of the private sector which happened in 2016 and had an extremely negative effect on Egyptian banks– etc.

My advise to Egyptian investors

1- Subscribe to Enterprise for daily news and trends that move markets and set the corporate agenda in Egypt.

2- Read, read read! Read books, articles and publications. Books I’d highly recommend are: The Intelligent Investor by Benjamin Graham and Valuation by Tim Koller. Articles I’d highly recommend are: Investing is an art not a science, Accounting loopholes and EGX 30 companies. Other great sources for publications are CAPMAS and CBE’s website among others.

3- Don’t start with real money! Start by using a trading simulation. ‘Thndr‘ is an application that allows investors to buy & sell stocks on the EGX. It offers both a simulation and real-money trading.

Lesson 2: Don’t let your emotions control your decisions

In 2015, one of the biggest real estate developers in the Middle East was issuing its shares on the EGX. People were extremely optimistic and analysts kept rising their target prices. Tempted by those people, I decided to participate in the IPO. Although I did take a look at the companies financials, the main reason I invested was because of people’s optimism. The stock IPO was priced at slightly below 4 EGP/share. When the market opened the stock slightly increased and then fell. It kept falling for the next year and I ended up selling at around 2.5 EGP/share. I was greedy, did not do my homework and ended up losing a lot. I hope you learn from my mistake!

As an investor, your goal is to have a sound intellectual framework for making investment decisions that is not corroded by your emotions. If you are unable to control your emotions, you’ll most likely sell when markets are falling -people are afraid- and buy when markets are rising -people are confident-. In other words, you’ll probably end up selling low and buying high. And this is exactly the opposite of what you’re supposed to do. I know it’s extremely hard -if not impossible- to completely separate your emotions from trading but its arguably the most important aspect of investing.

At the peak of the coronavirus crisis, EFG Hermes (HRHO.CA) which is one of the leading investment banks in the MENA region reached a low of 6.5 EGP/share. This prices the investment bank at a valuation lower than the money it has in the bank. Currently, Hermes is trading at around 13 EGP/share. This taught me that when people are uncertain and afraid, stocks are usually priced at unreasonably low prices and that’s the perfect timing!

LESSON 3: INVEST IN WHAT YOU UNDERSTAND

Warren Buffet famously advises investors to know invest in their circle of competence. Your circle of competence includes the stocks and industries where you have the deepest understanding. This makes sure that you limit your investments in areas where you have a limited understanding and focus on areas where you have the greatest familiarity and expertise.

Here is a list of all companies in the EGX 30 along with their industry classification, business description, Revenues and Profits. Take a look at the different sectors and decide which ones you will focus on.

What an investor needs is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence.

Warrwn Buffet (1996 letter to Berkshire Hathaway)

Final Remarks

The world of investing is complex and if you want to make money, you’ll need to work hard. Generally, information are already reflected in the market price of a stock. This makes it extremely difficult to buy stocks at a bargain. But this doesn’t mean it is impossible!

From the bottom of my heart, I wish you the best of luck and hope you found this article useful.

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